Whether you are new to the financial world or an experienced member, the rise of cryptocurrency has left many struggling to understand what this digital asset truly is.
Currently, the cryptocurrency market has a 1.6 billion (USD) market size with a projected future size of $2.2 billion.
Understanding this market can help you determine if putting money in is the right choice for you.
Regardless of if you’re trying to invest in cryptocurrency or if you are simply aiming to better understand it, learning everything there is to know about crypto can help foster future financial decisions.
What Is Cryptocurrency?
A cryptocurrency is a digital currency which is secured by something known as cryptography.
This is a form of mathematics that makes it nearly impossible to duplicate or double-spend cryptocurrency.
Each cryptocurrency, in most cases, is based on a network distributed across a large number of computers.
Cryptocurrencies are decentralized, meaning they aren’t issued by any central government authority or bank.
They are most often created and distributed on a peer-to-peer basis. These networks that cryptocurrencies form are based on the blockchain, which is a digital ledge that records the majority of cryptocurrency transactions.
Currently, tens of thousands of cryptocurrencies are in existence, but the larger names such as Bitcoin and Ethereum are most commonly seen and distributed.
How Does Cryptocurrency Work?
Cryptocurrency was founded under the idea that, using a peer-to-peer network, digital currencies could be transacted between parties instantly around the clock without needing a bank as an intermediary.
The blockchain itself is self-governing, securing each transaction when it occurs.
A combination of supply, demand, mining costs, competition, and media coverage are the primary driving forces behind a change in value for a specific cryptocurrency.
If that coin is tied to a certain technology of the blockchain, it may also move in value as that technology develops.
What Does Crypto Mining Mean?
One common term that comes up in relation to cryptocurrency is mining.
As you may have guessed, this doesn’t actually refer to the action of mining.
Rather, it refers to the way in which new cryptocurrency enters into circulation.
Mining is a computer process where a sophisticated hardware solves an extremely difficult mathematical problem.
Upon solving the problem, the block of cryptocurrency is received, and the process begins again.
However, this second problem is more difficult and time-consuming than the first, even for a computer.
This makes cryptocurrency mining a painstaking and expensive task that only occasionally results in reward.
For perspective, 10.5 million Bitcoin of the total 21 million were mined in the first three years of its existence.
However, this rate has slowed drastically, and the final Bitcoin is not estimated to be mined until the year 2140.
Why Is Cryptocurrency So Volatile?
Cryptocurrency is notoriously volatile, as evident by the extreme highs and sudden lows of Bitcoin. This volatility is actually be design.
Given the fact that there is no regulatory body for cryptocurrency, and the market as a whole is extremely speculative, cryptocurrencies are traded at a rate that is more unpredictable than standard stocks or bonds.
Additionally, given that the majority of coins are not based on a product, factors such as media hype and investor sentiments have a larger impact on the market.
Can You Invest In Cryptocurrency?
Before considering investing in cryptocurrency, it’s important to remember that while the rare person may have achieved wealth by having a coin before it took off, that doesn’t mean the same will happen to you.
Cryptocurrency is extremely volatile, even when investing in crypto ETFs, which is why all investors should thoroughly research a coins history before investing.
With that said, it is certainly possible to invest in cryptocurrency. Most investors choose to trade cryptocurrency by:
- Buying or selling directly in a spot market
- Investing indirectly in a futures market
- Using investment products that provide exposure to cryptocurrency
- Aiming to hold positions for years by investing in crypto index funds or ETFs
Key Principles Of Investing In Cryptocurrency
Before jumping into the cryptomarket, there are a few investing principles that all investors need to keep in mind:
1.) Only Put In What You’re Able To Lose
Given the volatile nature of cryptocurrency, remember that you should only put in enough money where if you lost it all, you wouldn’t be struggling to survive.
Especially if you aren’t too familiar with a coin you’re investing in, it’s best to start slowly with cryptocurrency so that volatile swings have less of an impact.
2.) High Volatility Means Decreased Odds Of Prediction
On the theme of volatility, it’s worth noting that higher volatility means make predictions is more difficult.
While some short- and long-term traders may have individual strategies for success in the stock market, cryptocurrency is too volatile to form any type of pattern.
This means that predicting the direction of a cryptocurrency coin is nearly impossible.
3.) Diversification Is A Key To Success
By learning how to build a diversified portfolio, ideally comprised of multiple asset classes, an investor can insulate themselves from large losses in one specific category.
After all, if the cryptomarket tanks completely, but it’s only 10% of your total investments, then you only lose 10%, rather than the entire portfolio.
4.) Dollar Cost Averaging Will Be Your Best Friend
Dollar cost averaging is the practice of depositing a smaller sum of money on a consistent basis into your investments.
By using this strategy, you can further reduce the impact day-to-day and month-to-month volatility have on your overall portfolio.
Diversify Your Portfolio With Digital Currency
Even after breaking down the basics of cryptocurrency, the topic can still be confusing.
Considering the fact that the cryptocurrency market is constantly changing, it’s only natural for new unknowns to arise as it continues to develop.
Stay on top of all things crypto in order to learn about these unknowns before the masses, so that you can better balance the crypto within your financial holdings.