Understanding Cryptocurrency as an Investment

If you are wondering what all the fuss is about concerning cryptocurrency,
you are not alone. Many people are debating whether these digital tokens are
really worth their time as a potential investment. They are also probably
wondering how some of the people who invested in the coins early got so rich
from it.

Cryptocurrency also scares people away because of the technological aspect of
it, and they also are concerned about some stories about criminals using the
coins. Yet people who haven’t done their research run the risk of missing out on
an investment that can really be helpful to them. They also don’t realize that
the coins, even though they have risen in value in the past, still have the
potential to go even higher in the future.

While some people are concerned about the uses of cryptocurrency in society,
some just want to know if it is something that they can include in their
portfolio. The coins possess both positives and negatives when it comes to
investment. It’s all about timing and choosing the right coins, along with
developing some effective strategies, to help you develop your investment in
cryptocurrency.

Explaining Cryptocurrency

Before you should even consider investing in cryptocurrency, it’s important
that you have at least a basic understanding of what it is. Essentially,
cryptocurrency is a form of digital currency that allows people to make
transactions without the need of a third party. When you think of all the people
that you have pay in your life to help you complete simple tasks, such as banks,
credit card companies, lawyers, and more, you can see how this might come in
handy.

Many people use cryptocurrencies to purchase things or pay and receive
payment within the digital realm. Small and big businesses alike have also
started to develop initiatives based around cryptocurrencies of all kinds. But
perhaps the facet of life for which it is used most right now is as an
investment vehicle, which makes it relatively unique among currencies.

How Cryptocurrency Works as an Investment

People may not realize it, but you can invest in any type of currency. That
is the whole basis of the foreign exchange market, as different currencies from
around the world rise and fall against each other incrementally. The big
difference in cryptocurrency values is that they rise and fall much more rapidly
and over a wider range of prices.

In fact, cryptocurrency, as an investment, most resembles stocks. You can get
paid in cryptocurrency one day and think that the value is stable at level. But
the next day, it could rise in price, giving you a sudden windfall. Or others
could sell the coins on a high level, forcing down the demand and causing a
price drop, which would lower the value of the payment that you received.

Those sudden price moves are part of the reason why cryptocurrency has not
yet been adopted on a widespread basis as a payment system. But savvy investors
understand that the potential of a big rise in the price of cryptocurrency as an
asset can make it great for a portfolio. Some even think that they can invest
only in cryptocurrency, so convinced are they that the coins will one day come
to dominate the realm of personal finance.

Bitcoin as the Most Popular Cryptocurrency

If you’ve heard of cryptocurrency, it’s likely that you’ve heard of Bitcoin.
The digital coins are the most popular form of crypto in the world, so much so
that many people think that Bitcoin and cryptocurrency are one and the same. At
times over the past few years, Bitcoin’s market share, which is determined by
the number of coins multiplied by their value, has risen over fifty percent of
the entire cryptocurrency market.

Part of the reason that Bitcoin has such a strong hold on the cryptocurrency
market is because it was the first of the digital coins. About a decade ago, it
was created by some developers who wanted to simplify the world of personal
finance and remove people’s dependency on banks and credit card companies. After
a relatively slow build, it shot up in prices to the point where the value rose
to over $20,000 per coin.

The price of Bitcoin then dropped considerably from that high point as an
inevitable backlash set in. Even though it has fallen from that peak, however,
it still dwarfs its price from just a few years back. And its potential as a
game-changer in finance, coupled with its steady progress towards being
legitimized by traditional trading markets, make it possible for the coins to
once again surge to their previous heights.

The Altcoins

In the wake of Bitcoin, many other cryptocurrencies began to spring up around
the world. These coins used the same technology as Bitcoin –

something called the blockchain. Without getting into technological jargon,
a blockchain is a way of verifying some action on a decentralized network of
computers without the need for a third party.

The beauty of the blockchain is that it can be used for far more applications
than just Bitcoin’s method of receiving and sending payments. It can be used for
gaming, gambling, contracts, supply chain management, record-keeping, and on and
on. The companies that build on the blockchain use their own coins as a way for
people to invest in their initiatives.

Many of these altcoins have risen to the point that they are becoming
well-known in society. Some, like Litecoin and Bitcoin Cash, attempt to do what
Bitcoin does, only better. Others, like Ethereum and Ripple, want to stray from
that and solve other societal problems. What they all have in common is that
they rise in value the more popular they become.

The Basics of Investing in Cryptocurrency

To invest in cryptocurrency, you first should try to obtain a digital wallet.
These wallets may be downloaded on your phone, or you can buy them as a piece of
hardware. Their main function is to store cryptocurrency so that you can use it
when needed to purchase things with it.

To gather the cryptocurrency, you generally need to find an outlet known as a
coin exchange. There are many of these in the market residing on the internet,
and they allow you to take so-called fiat money, such as American dollars, and
exchange it for cryptocurrency coins. These coins are then stored in your wallet
until the time you might need to use them in some way.

As far as how the values of the coins rise and fall, that is simple Economics
101 and the laws of supply and demand. If a lot of people are buying into a coin
that you have purchased, it will drive up the demand and the price of the coin
in turn. By contrast, people selling off the coins will increase supply, lessen
demand, and drive down the prices.

Investment Strategies for Cryptocurrency

Before you proceed with investing in cryptocurrency, you must understand that
all investments carry with them some risk. Even though you might be promised the
moon from people touting their coins, cryptocurrencies can always decline in
value, just as stocks, bonds, or any other investment might. As a result, you
should be prepared for this possibility and only invest the money that you can
afford to lose.

Cryptocurrency has great potential, and it can be utilized on its own or as
part of a portfolio with many other assets. The one thing that you have to be
prepared for, at least in the short term, is a lot of volatility. Volatility
means that the prices rise and fall, often unpredictably and in very dramatic
ways. The good thing is that there are ways to protect against and even use it
to your advantage.

The Buy and Hold Strategy

Volatility can be extremely problematic to those people who are thinking of
trying to time the cryptocurrency market and make a quick profit before they get
out. But for people considering an investment for the long term,
the buy and hold
strategy is quite effective. It is as simple as it sounds; instead of
trading actively with your coins, you simply buy them and put them away for
safekeeping.

By doing this, you are removing the worries that volatility might cause. This
is a strategy you should take if you really believe that, one day, we will all
be using cryptocurrency in our daily lives. If that occurs, the coins will be
far more valuable than they are today.

The Diversification Strategy

One of the things that has been noticed about cryptocurrency by investment
experts is that it tends to be unpredictable when compared to other assets. For
example, it is a general rule that, when the price of stocks goes up, the price
of bonds goes down, and vice versa. But there is no general rule when it comes
to the price movements of Bitcoin and the other cryptocurrencies, at least not
yet.

This makes it an ideal tool for the investment strategy known as
diversification. When you diversify your portfolio, you are buying a lot of
different types of assets from different sectors of the market. That prevents
you from taking a big loss if one or a few of your assets struggle. Since
cryptocurrency seems to act on its own accord, it makes it the perfect
counterbalance for many of the traditional assets with which most people are
familiar.

The Crypto-Only Portfolio Strategy

Many people are so taken by cryptocurrency that they only want to invest in
the digital coins and nothing else. Yet there should still be an element of
diversification in the portfolio, even if it only contains crypto. The good news
is that the realm of cryptocurrency has become so diverse that you can choose
several different coins that achieve the balance you need.

For example, you might be able to diversify by buying coins that differ in
terms of their market share. You could make sure to include some of the bigger
players in the market, such as Bitcoin and the top altcoins, as the stabilizing
factors. But then you could also buy some smaller tokens, ones which might not
cost as much and have much more room to grow.

Or you can choose coins that operate in different sectors of the market. You
can start with the coins that are meant to act solely as digital currency, but
then branch out to many different fields. Every day, there are more coins being
created that have many different purposes. You can diversify by simply spreading
out your investment capital over many of these diverse coins.

Analyzing Cryptocurrency Investments

Just as you might analyze stocks or bonds to see how much potential they
have, so too can you analyze cryptocurrency investments. You just have to choose
which technique suits you better. Perhaps even a combination of both of the
following methods can work for you.

Quantitative Analysis

If you choose this method, you will be focusing on the raw numbers. That
means you will be looking at the price charts of the different coins and trying
to spot trends. This can be difficult for some of the newer coins because there
is less of a sample size. But you should be able to proceed by judging the
movements of a specific coin and seeing if they are backed up with ample trading
volume, indicating a reliable trend.

Qualitative Analysis

This type of analysis focuses on the underlying instrument behind the coins.
It could be a company that issues the coins, or just the piece of technology on
which the coins are built. Checking out the white paper, which is a kind of
blueprint explaining the goals for a coin and the technology behind it, is a
good way to dig deep beneath the surface of a cryptocurrency coin.

Conclusion

As you can tell, investing in cryptocurrency does not require you to have a
deep understanding of the technology behind them. A basic understanding of what
they are and their future potential, coupled with an examination of how they act
as investments, can get you started. And that could be a rewarding investment
adventure.