Computer scientist and entrepreneur Paul Graham once said, “I am very intrigued by Bitcoin. It has all the signs. Paradigm shift, hackers love it, yet it is described as a toy. Just like microcomputers.”
Launched in 2009, Bitcoin is known to be one of the world's largest cryptocurrencies by market capitalisation. Eventually, thousands of such digital currencies were introduced including Ethereum, Litecoin, Cardano, Polkadot, etc.
The frenzy around investing in cryptocurrencies, especially among youngsters is evident; going by - its mention on American TV shows, tweets put out by business magnates like Elon Musk, as well as the several memes that have been floated around on social media with regard to it.
However, if you are thinking of placing your hard-earned money in these decentralised options because of the fear of missing out or the soaring prices at which they are traded, then think again. Any investment that is made with half-baked knowledge can turn out to be precarious.
So, here are some things you need to do before taking the leap.
Understand the basics
Cryptocurrencies are forms of digital money that are handled through private encrypted databases called blockchains, without the interference of the central bank or government. And, each of these blockchains can be considered like a set of blocks, which in turn have a bunch of transactions in them. Since all the computers display the public record of transactions created, saved and processed at any given point in time, they are fully transparent.
Cryptocurrencies can be bought and sold using a cryptocurrency wallet (usually in the form of an app or a vendor) which stores the encryption keys and also confirms the investor’s identity. Presently, there are over 10,000 different cryptocurrencies according to CoinMarketCap.com, a market research website. And many more are being generated by raising money through initial coin offerings, or ICOs. The total value of all cryptocurrencies as of May 27, 2021, was more than $1.7 trillion.
This is just the tip of the iceberg. There is a lot more to cryptocurrencies than this. Hence, it is important to figure out the fundamentals before going ahead.
Conduct in depth research
Before you decide to put your money into cryptocurrencies, it is important to fully comprehend how it works as well as the technology behind it. So, take time out to read and learn about it.
There are a slew of books, podcasts and online materials that can help you get familiar with the various types of currencies and the nitty-gritties of blockchain technology. ‘Do not judge a book by its cover.’ This popular adage is applicable here too. Cryptocurrencies might have trendy names and be trading in green, but, you cannot get lured by it without analysing its value proposition.
Buying currencies based on your instinct can make your money go extinct.
Ask yourself why you want to invest
There are a number of investment options available today, from equity, mutual funds, real estate, public provident funds to fixed deposits. So, why do you want to invest in digital currencies?
Is it just to experiment and get your hands dirty? Or, do you want to get into it because it's the talk of the town? Or do you think specific currencies will be able to help achieve your financial goal?
In order to have a sense of direction, it is imperative that you answer this for yourself.
Join an online community
One of the best ways to get a feel of the industry is to join a virtual community. Since the crypto market is very robust and dynamic, online groups help you stay up to date with all the news and trends.
From storage structure of blockchains, red flags to be wary of, developer activity behind the currency to price history and circulation supply, it is likely that you will find conversations floating around these topics within communities. Some of the most common platforms for this are Reddit, Telegram and Facebook.
Be wary of the volatility
The prices of currencies in the crypto market are sometimes erratic. One fine day, you may be on a pedestal and the very next morning, there is a probability for you to be down in the dumps. This is partly because it is unregulated, there is no FDIC insurance or a buyer of last resort.
However, incorporating a long term investment strategy is more effective because the creases tend to iron out eventually.
Just like other asset classes, even cryptocurrencies go through these four phases - Accumulation, Markup, Distribution and Markdown. But, some of the key factors which are known to affect the price of digital currencies include supply and demand dynamics, cost of mining or extracting them, mood of investors and the economic situation of the country. So, if at all you want to begin investing in this market, start small. Do not put in more than you can afford to lose.
Going through whitepapers is seen to be as stodgy as doing laundry. However, it is a crucial step to understand if the crypto you are looking to invest is legitimate and valuable.
Whitepapers are put together by the founders and developers of the cryptocurrency to provide investors with facts, diagrams, statistics, and quotes. They explain in detail about the purpose and technology behind the currency.
Though these documents might be a little technical, it is worth spending time to decode them.
Get to know the technological risks
Cryptocurrencies are gone forever if they are lost or stolen. So, you need to know the technological risks associated with it. Several fraudsters have committed scams and exploited investors in the past. You need to be doubly cautious at every step. Choosing renowned crypto wallets and not giving away your cryptographic keys to third parties is as essential as voting in a democratic country.
Be ready to invest time
For any kind of investment, it is important to track your gains and losses. The same goes for cryptocurrencies. Since there are so many digital currencies out there, it may get tricky to monitor your portfolio.
Investing in digital currencies is like a double-edged sword. It has a plethora of opportunities, but is ridden with perils at the same time. Buying into value and not hype - is the rule of thumb here.
Some resources to help you learn more about investing in cryptocurrencies: