How to Invest in Cryptocurrency
After the famous Bitcoin rally in 2017, the success stories about Bitcoin investors have become quite popular. They have influenced many people and inspired them to move into the world of cryptocurrency and try to invest in one or another coin.
If you are going to try your luck with investing in cryptocurrency, you might need some basic guidance on how to avoid the most evident mistakes and not lose all your money. To help you determine what coin is worth your attention, we have prepared a short guide on crypto investment for beginners.
Understand the Risk
In all the investment guides, you will find this tip at the end. We, however, would draw your attention to it from the very start for one simple reason: cryptocurrency is highly volatile. The prices might change drastically within a couple of minutes. These changes might have both a positive and a negative impact on your financial condition.
For example, have a look at Bitcoin. In December 2016, the price of one coin was just 750 USD, but within one year only, it rallied up to 20,000 USD. Those who have bought Bitcoin in 2016 could get an immense profit, and some of those who have owned the coins since long became millionaires. Inspired by the numerous stories of success, many people started buying Bitcoins. But then, the market took a dip. Many of those people who spent all their savings on purchasing the coins lost everything.
That’s why you shall understand clearly that cryptocurrency is a highly volatile and unpredictable asset. You shall calculate all the risks very carefully. Whatever happens and whatever the forecasts are, never invest all your money in crypto. There is a risk that the coin price might drop. Another risk is that your country might ban cryptocurrency. Whatever happens, you and your family shall be able to live properly even if you lose the coins. Thus, the first rule is to never invest in cryptocurrency the funds you cannot afford to lose.
Determine Whether the Coin Brings Value to the System
Bitcoin is not the only coin worth your attention. There are other options that might bring the wished result. Before buying a coin, check what potential the coin has and what value it brings to the system.
Take, for example, Ethereum. For the first time in the history of cryptocurrency, developers could build their own Dapps on the platform. Also, Smart Contracts that have changed the way the market functions were introduced by Ethereum. Even though now, the project is struggling with such an issue as scalability, it is also going to be solved with a full implementation of Ethereum 2.0.
Therefore, we can conclude that Ethereum has brought a significant value to the market, thus, this coin might be a proper option for investment.
Does the Project Need a Token?
There are projects that do an ICO just to raise funds. If you invest in such a token, you, most likely, aren’t going to get anything valuable. To avoid it, ask yourself whether the project needs to be on blockchain and whether it needs to have a token. If you reply “no” to at least one of these questions, we recommend you avoid investing in the project.
Determine the True Utility of a Token
There are cases when a project needs to be on the blockchain, and when it needs to have a token. However, the token`s true utility level can differ. The higher the true utility of a token is, the higher investing potential it has.
You can determine the true utility of a token based on the following characteristics:
A token can provide you with specific rights within the system where the token is used. For example, you can get a right to verify a transaction or to vote for a specific project within the system. For example, Ether functions like this.
A token can serve as a means of exchange between the users of a specific system.
A token can serve as currency adopted by a specific system. For Example, Ether is used by Ethereum, Lumen is a token used in the Stellar system, and similar.
A token can serve as a way to earn from the profit gained by a specific project. For example, if you invest in a project by purchasing tokens, when the project starts earning, you get your share based on the number of tokens you own.
A token can serve to provide users additional functionalities within the system. For example, in a web browser Brave, holders of Brave tokens BAT can implement specific functions based on the needs of users.
A token can perform the role of a currency. This is the case with Bitcoin.
The more roles a token performs, the more utility it has, and the better it is for you as a potential investor.
Look for the Signs of Scam
Along with projects with great potential you can also encounter many scams. Needless to mention that investing in them means losing your money. There are several features that indicate a scam project with certainty:
Always check the team behind every coin. For example, behind Ethereum, there is Enterprise Ethereum Alliance consisting of 30 founding members among which you can see such names as J.P. Morgan, Microsoft, National Bank of Canada, and similar.
But if on the company website, you see the names that aren’t known in the cryptocurrency world, and the photos are taken from a stock website, keep your money away from the project. Sometimes, scammers use the names and even photos of real people. And still, it is easy to find out whether the person is involved in the project or not. Find the team members on LinkedIn, any other professional network, on Google, and check whether they have something to do with the project.
Does the Project Have Signs of a Pyramid?
Here, everything is easy. If a service promises you earnings from the recruitment of other people, it is a pyramid. You shall distinguish this scheme from a well-developed affiliate program when you might get a %, a discount, or a specific amount of money for those who join the project based on your recommendation. It doesn’t have anything to do with investment, and you have a choice whether you join it or not.
When to Buy?
Know when to buy. While this tip might seem difficult to follow because cryptocurrency is pretty unpredictable, there are some common trading rules, and you`d better follow them if you don’t want to lose your investment:
Don’t buy coins at the peak of a bubble. After a sudden rise, the period of correction will follow. Most likely, your coins will drop in price.
“Never catch a falling knife” – every trader knows this principle. Never buy a coin whose price is falling.
Buy when the price is stable at a low level.
And finally, never hurry. Take your time to observe and to learn about a coin as much as you can. Observe the trend, check the price fluctuation range, find out which events have influenced the changes in price. Finally, invest only if you can explain how it all works to somebody who doesn’t understand anything in crypto.
Please keep in mind that the above information is based exclusively on our observations and is provided for informational purposes only. It doesn`t constitute any kind of financial advice nor represents an official forecast. Cryptocurrency is a highly volatile asset, and you are investing in it at your own risk.