- What is Cryptocurrency?
- Investing in Cryptocurrency
- What Cryptocurrency Should You Invest In?
Cryptocurrencies are seeing a massive surge in popularity. While they used to attract a very niche audience just a few years ago, today, everyone and their grandmother wants to learn how to invest. You probably can’t avoid seeing a news article about the latest Bitcoin price or stumbling upon investment advice on social media.
And the growth is not even close to being over. The global cryptocurrency market was valued at 332 million US dollars in 2017, has risen to 3.67 billion in 2020, and is projected to reach 394.60 billion by 2028.
So what does this all mean? Should you get involved? How do you get started investing in cryptocurrencies?
If you’re looking to get a better understanding of what cryptocurrencies are, how they work, and how to invest in cryptocurrency, then this guide to trading cryptocurrency is for you. Read on to find out how it works, what your options are, and the best and safest way to invest in digital currency.
While the decision to invest in cryptocurrency is ultimately up to you, it is our hope that you’ll walk away from this guide feeling more educated, empowered, and confident that you have everything you need to start investing.
What is Cryptocurrency? #
Cryptocurrency is a broad term for digital assets with transactions that are verified and records maintained by a decentralized blockchain system using cryptography, rather than by a centralized authority like a Visa credit card or a bank. Bitcoin is the most popular cryptocurrency today as a currency that functions as a store of value. One study from 2019 estimates ~100 million people currently hold Bitcoin.
Unlike traditional money, or ‘fiat’, which is printed and backed by a centralized government, cryptocurrency has no physical form and exists digitally on a blockchain as tokens.
Crypto is not yet a widely accepted form of money, but it gaining recognition as a real-world unit of account by some early adopters. Mark Cuban, owner of NBA franchise The Dallas Mavericks announced that the Mavs now accept the cryptocurrency Dogecoin for online tickets and merchandise purchases. And some centralized payment providers like PayPal now accept Bitcoin and other cryptocurrencies as forms of payment.
Just like stocks and bonds, cryptocurrencies can increase and decrease in value, depending on their demand in the market. This is why many people are interested in speculating on and investing in cryptocurrencies.
What Makes Cryptocurrencies Different From Fiat Money? #
Fiat money — money like the American (USD) or Canadian (CAD) dollar — is issued by the government, meaning there’s a central authority that controls its value, interest rates, and supply (how much is in circulation). Many view this degree of government involvement in the mechanics of the free market as manipulation and as an archaic (and futile) attempt to manage a vast and complex economic system. A noble intention at best, a catalyst of hyperinflation that makes wealth building very difficult for the average person, at worst.
Cryptocurrencies, on the other hand, are decentralized — all transactions are done peer-to-peer or through smart contracts and there’s no authority overseeing them. Many people consider this a massive advantage over traditional money because it gives them full control of their assets.
How Do Cryptocurrencies Work? #
When a new cryptocurrency transaction occurs, it gets added to a digital ledger of all other transactions on a decentralized network of computers called the blockchain. Computers or ‘nodes’ of blockchain can have varying degrees of centralization and decentralization and can be spread all across the world. Before a new transaction can be added to the blockchain, these nodes check the new data to be added or ‘block’, against each other’s records to verify it.
This makes the blockchain incredibly secure and virtually impossible to hack. If someone wanted to fake a transaction, they’d essentially need to hack 51% of the nodes in a network, which would be incredibly time-consuming and expensive to ever be worth it.
Investing in Cryptocurrency #
Before we dive into how to invest in cryptocurrency, it’s important to understand that there are good reasons to get involved, and there are poor ones. Remember that for every person who made an overnight fortune trading Bitcoin, there is someone who lost their entire life’s savings, so if you’re not willing or able to tolerate high-risk and extremely volatile investments with the potential for high rewards and losses, then cryptocurrency investing may not be for you.
However, if you’re genuinely curious about the possibility of cryptocurrencies forever changing the way we deal with finances and are willing to learn and able to manage the risk, then read on.
Good Reasons to Invest in Cryptocurrency #
- You believe that cryptocurrencies are the way of the future and will likely replace the traditional fiat money — if this happens, you want to be educated, prepared, and experienced.
- You support the social vision behind cryptocurrencies — that currency should be decentralized and under full control of the people who use it.
- You understand and appreciate how blockchain technology works — you value the peer-to-peer aspect of transactions, their security, and confidentiality.
Crypto Investment School: Learn how to invest in cryptocurrency, Bitcoin, and blockchain from industry-leading experts.
Is Cryptocurrency a Good Investment? #
The cryptocurrency markets are far more volatile than the stock markets. With less liquidity and more speculation than traditional financial markets, the value of any given cryptocurrency can rise and fall by 30% or more in a day. Not only that, crypto markets are open for trades 24/7, 365 days a year. There are no evenings or weekends off like the NASDAQ or LSE
If you’ve been hearing about cryptocurrencies a lot these days, you may feel like it’s a good opportunity to make a quick profit. But if you’re just jumping on the bandwagon and take no steps to educate yourself about how the technology and the market work, you risk losing money.
Let’s take a look at Bitcoin, for example — the first and by far most dominant crypto asset.
Early investors in Bitcoin have made millions of dollars in profits. In the span of just one year, Bitcoin’s price went from $7,000 USD in April 2020 to over $60,000 USD in April 2021! Now imagine what kinds of profits went into the pockets of people who bought Bitcoin back in 2013, when it was a mere $100 USD.
Though that sounds very exciting, it certainly is not the whole picture. Take a look at the entire graph, showing Bitcoin’s fluctuations in price between October 2013 and the end of May 2021. It’s not a straight upward climb.
Bitcoin’s price went from $18,000 in December 2017 to $3,000 in December 2018. And here’s an even quicker drop: if you were one of the people who got excited by all the growth Bitcoin experienced in early 2021, you would’ve seen it drop from $64,000 in April to $35,000 just one month later in May 2021.
The point here is this: cryptocurrency prices can be extremely volatile and impossible to predict in the short term. All it takes is an announcement from a large company or a tweet from Elon Musk, and the currency’s value can skyrocket or plummet in a matter of hours.
That’s why you should only ever risk as much money as you can afford. Like Wence Casares, CEO of Xapo sums it up in an AMA on bitcoin.com:
“I always tell them [my family] that the second most stupid thing they could do right now is to own a number of bitcoins they cannot afford to lose and the most stupid thing they could do would be to not own any.”
Before investing in cryptocurrencies, it’s absolutely imperative that you educate yourself so you can be equipped to make the right decision at the right time. Or as they say: DYOR – do your own research!
What Cryptocurrency Should You Invest In? #
First, Blockgeeks does not give financial advice, and second, never asks anyone else what to do with your money, least of all Google! Always educate yourself, understand the risks, the all possible outcomes, and don’t make any investments if you are not 100% comfortable with your decision.
That said, Bitcoin remains the undisputed king of cryptocurrencies — it’s been around the longest and has the largest market capitalization of over 674 billion USD (as of May 2021). Market capitalization is the total value of all tokens available or the price of each token multiplied by the number of tokens in circulation.
However, there are other cryptocurrencies to choose from, such as Ethereum, Cardano, Litecoin, and thousands of others. They all differ in price, availability, demand, transaction speed and fees, and the technology that supports them.
The website CoinMarketCap lists over 5,000 options in order of decreasing market capitalization. Here are the top 10 and their performance as of May 2021.
It doesn’t matter what the price of a given cryptocurrency is, you can always buy a fraction of a token. For example, if 1 Bitcoin costs $35,000 USD, you can always buy 0.0001 Bitcoin for the equivalent of $350 USD.
When researching tokens to invest in, you can take a look at CoinMarketCap to get a snapshot of the top performers, but your research should not stop there. In fact, that’s where the real work begins.
Read on to find out how to invest in cryptocurrency properly, and evaluate whether a cryptocurrency is worth investing in and how to avoid getting yourself into risky or fraudulent situations.
1. Read the Project’s Whitepaper #
When you’ve found a cryptocurrency you like, the first thing you need to do is read the whitepaper.
“A white paper is an authoritative report or guide that informs readers concisely about a complex issue and presents the issuing body’s philosophy on the matter. It is meant to help readers understand an issue, solve a problem, or make a decision.” (Wikipedia)
Reading the whitepaper will give you two tremendous benefits:
- You, as a potential investor, will learn everything you need to know about the cryptocurrency and the value that it’s bringing into the ecosystem.
- A poorly written whitepaper is often a sign that the project is not worth investing in. If the team behind the cryptocurrency can’t adequately explain the true utility of their token, then it’s probably not worth supporting.
2. Think About the Value that the Project is Bringing In #
Check to see whether the project is bringing in any practical utility into the ecosystem. The perfect example of this is Ethereum. There is a reason why it took off so fast — for the first time, developers around the world had a platform that they could use to build their own dapps – or decentralized applications – on a blockchain.
Along with that, keep in mind the issues that the crypto world is desperately looking to solve — privacy, scalability, and interoperability. A good way to go about your investment is to find the projects that are specifically working on solving these problems.
As of 2021, the players trying to solve these same problems and roll them all into their platform, or “Layer 1” network include:
- Binance Smart Chain
3. Evaluate the Project’s Tokenomics #
How do you make sure that you’d be getting good quality tokens?
William Mougayar outlines a great framework for evaluating a token based on three principles:
Each token role has its own purpose, as outlined below:
- Right: the token holder gets a certain amount of rights within the ecosystem, such as the right to vote.
- Value exchange: the token helps buyers and sellers trade value within the ecosystem.
- Toll: the token acts as a toll gateway in order for the holder to use certain functionalities of the system.
- Function: the token enables the holder to enrich the user experience inside the confines of the environment.
- Currency: the token stores value that can be used to conduct transactions both inside and outside the ecosystem.
- Earnings: the token provides an equitable distribution of profits or other related financial benefits among investors.
The following table provides examples of criteria to assess when evaluating a token:
So, how does this all help with evaluating token utility?
If you want to maximize the amount of utility that a token provides, then it needs to check off more than one of these roles. The more roles it serves, the more utility and value your token brings into the ecosystem. If the token’s role cannot be clearly explained, or if the token doesn’t serve at least two roles, then it has little to no utility and your best bet would be to consider another option.
Now, why shouldn’t you take a chance on tokens with no utility?
In order to answer that, we need to understand the concept of token velocity. Token velocity is an indication of how much people respect the value of that particular token. If people hold on to a token, then it has low velocity. On the other hand, if people quickly sell the token for another currency or fiat money, then that token has high velocity.
If you were to define token velocity in strictly mathematical terms, then it would look like this:
Token Velocity = Total Transactional Volume / Average Network Value
If we were to flip the formula then:
Now, that leads to two conclusions:
- Higher token velocity means lower average network value
- Higher transactional volume means higher token velocity
Ideally, you’ll want to invest in a project with tokens that have lots of utility, giving people a reason to hold on to them. This lowers the token’s velocity, in turn increasing the average network value.
4. Look Out For Obvious Signs of Scam #
Good coins have a transparent technical vision, an active development team, and a lively, enthusiastic community. Bad coins are not transparent, promote fuzzy technical advantages without explaining how to reach them, and have a community that is mostly focused on getting rich quickly. Perhaps the worst kind of cryptocurrencies is MLM coins like the now-infamous scam Bitconnect.