How Investing in Cryptocurrency Works - MagnifyMoney

How Investing in Cryptocurrency Works

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In 2017, Bitcoin went from being worth less than $1,000 to $20,000 per token. The meteoric rise of Bitcoin created an interest in cryptocurrencies that hasn’t disappeared altogether, even though this year’s gains for cryptocurrency investors have been much more modest than last year’s. As of this writing, Bitcoin is worth around $3,800 per token, and it still has the highest market capitalization of any cryptocurrency. But Bitcoin isn’t the only cryptocurrency out there — here’s what you need to know about cryptocurrency for beginners.

Cryptocurrency for beginners: What is it?

At its most basic level, a cryptocurrency is a digital token secured by cryptography. Because it’s a virtual currency, it’s bought and sold digitally. Many digital currencies are decentralized — a central bank doesn’t control them.

Cryptocurrencies are often based on blockchain technology, which acts as a digital ledger where transactions are recorded chronologically in “blocks” of information. Blockchain platforms are used for sending and receiving payments, executing contracts, managing supply chains, among other purposes.

“The most visible cryptocurrency is Bitcoin,” said Ashe Oro, cryptocurrency enthusiast and co-founder and CEO of cryptocurrency analytics company SteemSmarter. “However, there are hundreds of other cryptocurrencies available.”

Oro pointed out that companies can issue cryptocurrencies in exchange for money as a way to fund different ventures, as well as “mined” by using a particular computer process. However, he added, investors commonly buy cryptocurrencies on an exchange.

How is cryptocurrency traded?

“Just like you can buy a stock on an exchange like the New York Stock Exchange, it’s possible to purchase a cryptocurrency on an exchange like Coinbase,” said Oro, who also spent five years as the head of business development at Euro Pacific Bank.

In many cases, it’s merely a matter of setting up an account on the exchange and connecting a bank account or debit card. Cryptocurrency exchanges display the prices of each token and you can buy (or sell) them at that cost.

A major exchange like Coinbase offers a number of options similar to what you might see when you manage your portfolio using an online stock broker. You can keep your tokens in a portfolio on the website, set up automatic investing so you can buy over time, and set up withdrawals using time delay.

“In terms of cryptocurrency for beginners, Coinbase is a good place to start,” said Oro. “They even have insurance and an offline storage protocol for digital assets.”

If you want access to more obscure cryptocurrencies, other exchanges such as Binance may meet your needs. However, Oro warned, it makes sense to start off with an exchange like Coinbase that more closely mimics the stock buying and selling experience.

In addition to storing your cryptocurrency purchases on an exchange, you can also use a digital wallet. Your wallet is stored on your own computer, and you can only access it with the right key. Oro recommended the wallet offered by Exodus, since it’s compatible with a number of government-based currencies and cryptocurrencies.

“You can withdraw your tokens to your digital wallet from an exchange, much like making a bank withdrawal,” said Oro. “However, just like cash, once you have the tokens in your digital wallet, you’re responsible for them. You could lose them if your computer crashes without a backup.”

Some businesses are accepting cryptocurrency as forms of payment. Of course the possible volatility of cryptocurrency makes some small-business owners wary of this form of trade.

What can affect the price of cryptocurrency?

Cryptocurrency prices are often affected by utility, said Oro. He points out that the more useful a currency is, the more valuable it’s likely to be.

“Think about it,” Oro said. “Bitcoin was used to send secure payments around the world without worries about exchange rates and governments being involved. That utility made it valuable.”

Some currencies offer different uses beyond payment transactions. For example, some cryptocurrency enthusiasts see potential in Ethereum because its blockchain platform manages smart contracts.

However, prices are also influenced by speculation. In the 2017 runup, many investors saw that Bitcoin was becoming popular and they wanted a piece of the action. That kind of speculation can inflate the price of any cryptocurrency, Oro pointed out.

But even though cryptocurrencies are becoming more popular, Oro warned that it’s still relatively small potatoes when compared to other asset classes.

“Market caps are small enough that a fairly small number of heavily invested people could make moves that impact cryptocurrency prices in a major way,” Oro said. “Things can be quite volatile, especially with the less popular cryptocurrencies.”

Is cryptocurrency a good investment?

According to Oro, cryptocurrencies were a little less popular in 2018 than in 2017, but they are still picking up steam. “It’s more like things are settling down and people are actually starting to figure out how to invest in them like any other asset class,” he said.

“For many millennials, cryptocurrencies represent a chance to invest in something that isn’t stock,” Oro continues. “On top of that, some cryptos are still being used for exchange, and in some communities looking to live independently of government-controlled money systems, that can be attractive.”

When investing in cryptocurrency for beginners, Oro suggested looking at tokens that have future utility and potential. “You wouldn’t invest in a stock without evaluating it,” he points out. “It’s the same with cryptocurrencies. Really look at what it offers and pay attention to the community around it.”

Oro also warned about some of the risks of investing in cryptocurrencies. “At this point, there’s still a lot of speculation,” he said. “You could bet wrong and lose your investment. Don’t risk money you can’t afford to lose.”

Another risk is in your cryptocurrency wallet. If you keep your tokens in your wallet, you need to make sure you always have the key. “Forget your password and there’s no way to recover it,” said Oro. “And if your computer crashes, it’s all gone unless you’ve backed up your wallet.”

He also points out that if someone somehow gets access to your wallet, there’s no way to recover the money, any more than you could get back cash stolen out of your real-world wallet. That’s why Oro encourages novice cryptocurrency investors to use an exchange like Coinbase and keep the tokens there.

Should you invest in cryptocurrencies?

In the end, Oro said investing in cryptocurrencies can be a smart move, but you have to be careful. Carefully consider whether cryptocurrency investing makes sense for you, and choose tokens that you think are likely to perform well. Then, steel yourself for potential losses.

“If you can’t handle the 80% drops that can come in cryptocurrencies,” said Oro, “you’re not ready for the potential 500% gains.”