Since Tesla’s revelation that it has invested US$1.5 billion in bitcoin, bitcoin prices have skyrocketed to all-time highs — and brought along a flood of crypto newcomers.
If you’re wondering how to start investing in crypto and avoid pitfalls, this guide is for you. Whether you’re starting from scratch or an experienced investor but new to crypto, on behalf of all of us at Forkast.News, welcome to our world! We invite you to begin your crypto journey with us.
Do note that we’re journalists, not certified investing professionals. Buying, selling or trading cryptocurrency is highly speculative and always carries a risk of loss. We can tell you what we know, but it’s ultimately up to you to consider your risk profile and decide how to invest wisely. Here are five things that every newbie cryptocurrency investor must know.
First things first: don’t get intimidated
While cryptocurrency investing comes with many decisions — which coin, what exchange, how much, when to buy or sell — the organic principles of supply and demand are the same. If you’re already investing in stocks, fine art, forex exchange, etc., then the transition to crypto is easy. The main differences are the admittedly steeper learning curve about cryptocurrency itself and the incredible diversity of crypto investment options.
But don’t feel intimidated. Start with research. The Forkast.News series, Blockchain Basics, is one way to get started, to help you understand the technology underlying cryptocurrency, learn some terminology, and catch you up to speed.
Another big tip: If you’re investing in crypto, look at the long term
Despite this week’s market frenzy over Tesla’s big bitcoin buy, you shouldn’t get too concerned about day-to-day price fluctuations in mainstay cryptocurrencies. Like any other investment, price and quantity change over time, with the market reacting accordingly. The crypto market is has been growing steadily during the coronavirus pandemic, despite uncertainty about the Biden administration’s stance on crypto.
Blockchain guru and billionaire entrepreneur Changpeng Zhao (also known as CZ) noted that, although the crypto market is certainly volatile, it’s still less volatile than some stocks. In an interview with Forkast.News before the news broke about Tesla investing in bitcoin, Zhao said, “Compared to other [assets], bitcoin is actually not that volatile now…. Bitcoin’s volatility is actually lower than, for example, even Tesla’s. Tesla is going up, really a lot. And then they have corrections, of course, then there’s volatility.”
By the way — Tesla’s stock started 2020 at $88.60 per share. At the time of writing in early 2021, it stands at $849.46. That’s a lot of volatility, but not much in terms of corrections. At least not yet.
Understand the premise
Before deciding whether to invest in cryptocurrency, you should get to know the underlying fundamentals of blockchain technology. It’s a digital form of currency backed by mathematical limits on supply, which is very different from government money that can be printed at will. Users with extensive software and powerful computers can create — or “mine” — cryptocurrency according to a set of rules, but they don’t manually set a crypto price or decide its value. Founders of widely known coins, such as Ethereum ETH’s Vitalik Buterin or Cardano ADA’s Charles Hoskinson, also don’t implement their cryptocurrency’s price. Crypto prices are determined by market demand and what buyers are willing to pay.
However, some alternative coins (often referred to as “alt-coin”) do rely upon companies or non-profit foundations for guidance or planning strategies. For example, Hoskinson’s blockchain company Cardano has a roadmap of technical developments and additional features to be implemented for the ADA coin on the Cardano blockchain.
It’s important to note that these sorts of relationships between corporate entities and their respective cryptocurrencies are becoming less common due to scrutiny by the Securities and Trade Commission (SEC). The commission regulates the U.S. investment community and is currently pursuing a lawsuit against Ripple for actions related to its XRP coin.
By the way, if you’d like a more technical description of blockchain technology, take a read of the Bitcoin white paper, which details in-depth proof-of-work systems and the technical design of the first blockchain.
Avoid unknown coins and collaborative trading
The easiest way to get scammed in the crypto world is to buy a fake crypto coin. If you’re purchasing a digital asset with uncertain backing or one that is only available through suspicious means, you’re likely to lose all of your investment. For example, ParagonCoin, Inc., an SEC-sanctioned company, offered misleading information regarding the value and the development of its cryptocurrency. Investors fled to authorities but got no quick answers and then set upon litigation in collaboration with the SEC.
Another common scam is to have someone invest on your behalf. Usually a spammer will send you an email or call you offering to sell you cryptocurrency. Regardless of the price, you should treat a crypto investment as a financial transaction between trusted parties.
Protect your crypto passwords
You should also note that blockchain transactions are usually not insured by financial institutions, governments or authorities. But some protection may be possible through an intermediary. MasterCard, for example, is planning to support cryptocurrencies directly on its network later this year in a way that the Wall Street Journal describes as offering “significant consumer protections, compliance protocols and other measures.”
Since a blockchain is a permanent log of transactions, actions such as deposits and withdrawals aren’t reversible. In other words, if you give someone cryptocurrency or if they steal it from you, it is impossible to get it back except if they give it back to you. The ability to convert from one cryptocurrency to another also makes identifying suspicious activity more important than ever.
An essential step in protecting your crypto assets is to safeguard all of your online accounts, especially your exchange account, through two-factor authentication. Whenever you log in,you will be required to input a code (usually an authentication code) from your phone or computer as an additional form of identity verification. Two-factor authentication ensures account security by requiring access to physical devices, not just an email address and password.
If you’re more experienced, consider getting a cryptocurrency hardware wallet. These are small electronic devices which store your crypto and integrate it with online software. The digital signature of the device itself, as well as further identification checks, help guard your coins. The most popular wallet available is the Ledger Nano X.
And a final thought about regulations
Although cryptocurrency regulations are in an early stage of development, there’s a wide range of legal and regulatory practices involved. China, for example, prohibits financial institutions from engaging in crypto transactions but permits crypto mining operations. Japan has taken an approach similar to the U.S., focusing on regulation and crypto taxation. Be sure to understand the implications of your crypto investments in your locale, and note that individual states and provinces may have laws, too, that allow or prohibit what you want to do in crypto.