The rise of digital currencies like Bitcoin and Ethereum has taken over the headlines and captivated investors while making many early adopters very, very rich. Just as many people however, have lost money, especially considering that the price of Bitcoin surged to just under $20,000 at the end of 2017 only to drop below $4,000 a year later.
A single Bitcoin is worth over $30,000 as of this writing, but who knows where the price of Bitcoin and other digital currencies will go from here?
You may be wondering if you’ve missed the cryptocurrency boat completely, or if there’s still time to invest for profit. Although some say digital currencies will eventually fade away, others say it’s still in the early stages and opportunity for profit still abounds. Some economists and investment experts say Bitcoin, in particular, could be worth $200,000 to $300,000 by the end of 2023.
Before investing in cryptocurrency, you’ll need to compare all of the platforms that let you buy, sell, and trade cryptocurrencies. You should also decide how much of your portfolio to invest, considering the volatility cryptocurrencies have exhibited so far.
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Why Invest in Cryptocurrency?
Just a decade ago, investing part of your portfolio into cryptocurrency would’ve seemed unnecessarily risky. But these days, ignoring digital currencies presents just as much — if not more — risk to your short-term and long-term investing goals.
With many investment experts predicting an upcoming bear market that could last for years, cryptocurrencies are often seen as a better alternative — or at least one you can use to hedge your bets.
After all, investing in the stock market has seen enormous gains over the last decade, even after accounting for the temporary downturn due to COVID-19. Some say the gains we’ve seen in the Dow Jones Industrial Average and the S&P 500 can’t last, and that investing in cryptocurrency will help investors continue building wealth during the uncertain economic times ahead.
Should you invest in cryptocurrency? Below is a table of the main advantages and disadvantages you should be aware of.
How to Invest in Cryptocurrency
Investing in cryptocurrency is easy to do online and from the comfort of your home. All you have to do to get started is research the different types of cryptocurrency out there. From there, you can find a platform that lets you execute your purchases with minimal hassle or fees. One platform we recommend is eToro.
Here are some of the main digital currencies you should know about whether your goal is diversifying your portfolio, selling at a profit, or parking your crypto investment for the short-term.
Originally released as open-source software in 2009, Bitcoin (BTC) is the largest and best-known cryptocurrency that’s available today.
The basic characteristics of Bitcoin are that it only exists on the internet, it’s not issued by any government or central bank, and it’s limited to just 21 million units. However, each of those units can be divided into 100 million Satoshi.
The total amount of Satoshi that can be potentially created is – get this – 2.1 zillion – if you can imagine a number that large.
Although Bitcoin is the most popular of all cryptocurrencies, extreme volatility has been the name of the game so far. If you want to invest in Bitcoin, some of the platforms you can consider include Coinbase, Kraken, and Gemini.
Ethereum is the second-biggest cryptocurrency available today. This cryptocurrency got its start in Switzerland in 2015 but has since split into two separate blockchains. As a result, we now have Ethereum (ETH) and Ethereum Classic (ETC), which continues as the original.
Ethereum hasn’t gained nearly the level of acceptance or investor interest as Bitcoin, but that doesn’t make it any less important. The entire cryptocurrency phenomenon is in its infancy and is playing out in real-time.
Some experts believe it’s still possible for Ethereum, or even some other cryptocurrencies, to overtake Bitcoin and become the dominant cryptocurrency.
Like Bitcoin, Ethereum has seen plenty of volatility so far. Prices surged to over $1,400 in January of 2018 only to drop below $100 by the end of that year. As of this writing, Ethereum is currently worth around $1,800.
If you’re interested in Ethereum, you can invest using the same platforms as Bitcoin, including Coinbase.
Litecoin is another popular digital currency that’s based on blockchain technology and developed as a peer-to-peer currency for instant and low-cost payments to users around the world. Like other cryptos, Litecoin is also fully decentralized, meaning it’s not overseen by governments, banks, or central authorities.
Reportedly, the Litecoin blockchain can handle a higher transaction volume than Bitcoin. This might mean that, in the future, merchants who accept Litecoin as currency can get faster confirmation times and become more efficient.
Ultimately, the Litecoin network is prepared to produce 84 million Litecoins, which is 4x as many currency units as Bitcoin.
If you decide to invest in Litecoin, you can get started with Coinbase or Kraken, to name a few options.
Tether is another cryptocurrency. It’s considered a stable currency, which means it converts cash into digital currency with the goal of “tethering” value to the price of the USD. Every Tether token is also fully backed by reserves.
Like other cryptocurrencies, tether uses blockchain technology that’s protected with world-class security features. Proponents of Tether say that, since it’s a pegged 1-to-1 traditional currency, it’s best used to exchange currencies and make payments across myriad digital platforms and wallets. Tether is also frequently used as a place to park your cryptocurrency while you wait out market volatility.
Invest in Tether using platforms like Phemex or Kraken.
Founded by Charles Hoskins, one of the co-founders of Ethereum, Cardano is an open-source, proof-of-stake blockchain technology that was created in 2017. Using the symbol ADA, Cardano currently has the fourth-largest market cap of any cryptocurrency.
According to CoinMarketCap.com, more than 35 billion ADA are currently in circulation with a maximum supply of 45 billion. Built through experimentation and peer-reviewed research, Cardano claims to be a blockchain platform for “changemakers, innovators, and visionaries.”
Its technology aims to bring about global change through the use of the Ouroboros proof-of-stake protocol – a protocol designed to be scalable and secure while boasting four million times more energy efficiency than Bitcoin.
Cardano’s digital currency is available to users located anywhere in the world. The currency can be used to securely exchange value between parties while the Cardano blockchain permanently records every transaction.
At this time, there are several cryptocurrency exchanges that allow the buying and selling of Cardano for other cryptocurrencies. Some of the most popular exchanges include Binance, Huobi Global, HBTC, and ZG.com.
XRP was created by Ripple Labs in 2012 with the aim of facilitating real-time, cross-border payments for banks and financial institutions. Unlike many other cryptocurrencies, XRP was pre-mined with a supply of 100 billion tokens.
It doesn’t rely on the traditional proof-of-work mechanism like Bitcoin. Instead, it uses a unique consensus protocol that requires validators to agree on the order and validity of XRP transactions.
One of XRP’s major strengths is its ability to process transactions quickly and with minimal fees, making it attractive for international money transfers.
XRP has faced scrutiny and legal challenges, particularly from the U.S. Securities and Exchange Commission (SEC), which filed a lawsuit alleging that Ripple conducted an unregistered securities offering. This has significantly impacted XRP’s reputation and market performance. As of the moment, XRP cost more or less $0.50.
Dogecoin was introduced in December 2013 as a “meme coin,” featuring the Shiba Inu dog from the “Doge” meme as its logo. Despite its origins, it has developed a strong community and has been used in various charitable events and crowdfunding campaigns.
Unlike Bitcoin, Dogecoin does not have a maximum supply limit, with over 140 billion coins in circulation as of 2023, and is priced at $0.067.
Dogecoin’s price is highly volatile and is often influenced by social media and celebrity endorsements, most notably by Elon Musk. Historically, Dogecoin has had periods of little to no development, raising questions about its long-term viability.
Solana is a high-performance blockchain platform known for its fast transaction speeds and low transaction costs. It aims to provide scalable solutions for decentralized applications (dApps) and crypto projects.
Solana uses a unique consensus mechanism called Proof of History (PoH) in combination with Proof of Stake (PoS), which helps in achieving high throughput and low latency.
Solana supports smart contracts and has attracted a growing ecosystem of projects spanning DeFi, NFTs, Web3, and more. SOL is the native cryptocurrency of the Solana network, used for transaction fees and staking. It plays a crucial role in maintaining and operating the Solana network.
Solana has gained significant attention for its performance capabilities, especially in handling high transaction volumes without compromising security.
Risk Management Strategies
Investing in cryptocurrencies has become increasingly popular, but it’s important to recognize the substantial risks involved. The market is known for its high volatility, and while this can lead to significant gains, it can also result in dramatic losses. Here’s an expanded look at crucial risk management strategies to consider when investing in digital currencies:
1. Diversify Your Portfolio
- Understanding the Importance of Diversification: Just like with traditional investments, diversification is key in managing risk in your cryptocurrency portfolio. Avoid concentrating your capital in one cryptocurrency. By spreading your investment across different assets, you reduce the impact of a poor-performing asset on your overall portfolio.
- Choosing a Variety of Assets: Consider diversifying not just across different cryptocurrencies, but also across different types of digital assets, such as tokens, stablecoins, and altcoins. Each type of asset has its own risk and return profile, and diversifying across them can help in balancing the risk.
2. Start Small
- Managing Your Expectations: Cryptocurrencies can offer substantial returns, but they can also lead to significant losses. Start with a small investment that you can afford to lose, especially if you are new to the market.
- Avoiding the FOMO: The Fear Of Missing Out (FOMO) can lead investors to make impulsive decisions and invest more than they can afford to lose. Starting small helps in mitigating this risk.
3. Use Cold Storage
- Understanding Cold Storage: Cold storage refers to keeping your cryptocurrency holdings offline, which protects them from online hacking threats. This can be done through hardware wallets, paper wallets, or other offline storage methods.
- Balancing Accessibility and Security: While cold storage provides enhanced security, it also means that your assets are less accessible. Find a balance that suits your investment style and risk tolerance.
4. Stay Informed
- Keeping Up with Market Trends: The cryptocurrency market is highly influenced by news, social media, and market trends. Staying informed helps in making timely and educated decisions.
- Critical Evaluation of News Sources: Be cautious of where you get your information. The cryptocurrency space is rife with misinformation. Ensure you are using reliable sources and cross-reference news when possible.
5. Have an Exit Strategy
- Knowing When to Exit: Having a clear exit strategy is crucial. This could be a target price at which you want to sell or conditions under which you would want to cut your losses.
- Using Stop-Loss Orders: Utilize tools such as stop-loss orders to automatically sell your assets at a predetermined price, minimizing potential losses in rapid market downturns.
- Avoiding Emotional Decisions: The volatile nature of cryptocurrencies can lead to emotional trading. Having a predefined exit strategy helps in removing emotion from the decision-making process, leading to more rational decisions.
Consult With Investment Advisors
If you’re worried about getting started with cryptocurrency, you should know it’s perfectly normal to be wary. After all, cryptocurrencies have only appeared in the last decade, so there is no long history of performance to turn to as a guide. Not only that, but cryptocurrencies have reported some very serious security concerns and plenty of digital currencies have been hacked to the tune of millions of dollars over the years.
Before you invest in any cryptocurrency, it can help to speak with a financial advisor who is knowledgeable about digital currencies and how they can be used to diversify your portfolio. And if your current advisor isn’t interested in helping you get started with cryptocurrency, it may be time to find a new one.
The Bottom Line
Should you invest in cryptocurrency? At the end of the day, only you can decide whether you are ready to invest in crypto and try something new — or whether you just want to stay the course and invest in stocks, bonds, and other mainstream investment options.
If you decide to dive into cryptocurrency, I suggest spending some time learning about the types of digital currencies out there, how each one works, and the level of risk each one presents. There is no “right” or “wrong” way to invest in cryptocurrencies like Bitcoin and Ethereum, but you should make sure every decision you make is an informed one.
Keep reading: “Can a Crypto Savings Account Beat the Bank?”