Investing 101 – How to Invest in Cryptocurrency

Since there are more than 4000 cryptocurrencies, choosing the best cryptocurrency to invest in may not be an easy task. 

Even if cryptocurrencies go up in value, many investors do not see them as a real investment. The reason being that cryptocurrencies generate no cash flow, so for one to profit in it means that another has to pay a higher amount for the currency than the previous person. This theory of investment is called “the greater fool”. This is in contrast to a well-managed business, which increases its value by growing the profitability and cash flow of the business.

how to invest in crypto currency

Warren Buffett, a legendary investor, compared Bitcoin, which is the most talked-about cryptocurrency, with paper checks “It’s an effective way of transmitting money and you can do it anonymously. A check is a way of transmitting money too. Are checks worth a whole lot of money? Just because they can transmit money?”

People who see bitcoin or other cryptocurrencies as the currency of the future should understand that currency needs stability so that buyers and consumers can determine what is the fair price for the goods. Since cryptocurrencies have not been stable through much of their history, it is difficult to see them as valuable. For instance, bitcoin traded close to $20,000 in December in 2017, but a year later its value dropped low to $3,200. Recently, in September 2020, it was again up, trading for more than $11,000 and such disparity in price creates a conundrum. 

Currently, these are the top 10 cryptocurrencies:

  1. Bitcoin valued at $128bn
  2. Ethereum valued at $19.4bn
  3. XRP valued at $8.22bn
  4. Tether valued at $6.4bn
  5. Bitcoin Cash valued at $4.1bn
  6. Bitcoin SV valued at $3.4bn
  7. Litecoin valued at $2.6bn
  8. EOS valued at $2.4bn
  9. Binance Coin valued at $2.4bn
  10. Tezos valued at $1.5bn

In order to buy cryptocurrencies, one will require a wallet, which is an online app that can hold a person’s currency. First, the person will need to create an account on an exchange, then proceed to transfer real money in their wallets to buy any cryptocurrency such as Bitcoin or any other. Coinbase is a popular website that allows cryptocurrency trading exchange and where one can create both a wallet and trade bitcoins or any other cryptocurrency. There are online brokers that offer cryptocurrencies as well, such as Tradestation and Sofi Active Investing. 

Investing in Bitcoin

Investing in Bitcoin (BTC) is similar to investing in stocks. The difference is that investing in Bitcoin is far more volatile because of the daily oscillation. The following are the steps to invest in stocks:

  1. First, you need to open a brokerage account at a firm that allows crypto investments.
  2. Second, you need to deposit funds from your bank account into the brokerage account.
  3. Third, you need to buy a stock using deposited funds or cash balance.
  4. Lastly, you can later sell the stock for a gain or loss. The funds are returned automatically to your cash balance.

With Bitcoin, the main difference is buying stock using deposited funds, when you buy Bitcoin instead of stock. It depends on the exchange or trading platform, for instance in some cases, you can buy Bitcoin using a credit card or by transferring funds from your bank account. For other platforms, you need to transfer Bitcoin directly. This is known as a direct deposit for Bitcoin.

Here are some tips, in case you plan to invest in cryptocurrency yourself:

Research Before Investing

To make a profit in cryptocurrencies, one needs to research well about the coins. Once there is a better understanding of the coin you plan to invest in, you can understand the utility it contributes to the crypto-world. The reason why there is so much doubt about cryptocurrencies is because of the serious loss and the dramatic decrease in Bitcoin & Altcoins that took place in December 2017. So for a person entering the market without lengthy research may have the possibility of running into huge debt. Investing in Bitcoin, like forex and stocks, one doesn’t have to gamble to make a profit. So it’s better to be careful with the decisions you make, because the result of investing in cryptocurrencies with little or no knowledge can lead to the worst circumstances.

The Right Option May Not Always Be the Most Hyped One

For a crypto investor to make the right decision doesn’t mean it needs to be based on the coins that are hyped – as that can be highly risky. For people wanting to make money investing in cryptocurrencies, one will have to invest based on calculated risks and taking the right guidance from the right people. It is better to not rely on only what the crowd is saying about a coin because if the price crashes all of a sudden, it would lead to a terrible loss. Taking guidance from someone who is well informed, will help you to arm yourself with enough knowledge before investment. For one to make money in cryptocurrencies, there needs to be enough patience and knowledge to make profits.

Try to Choose More Than One Coin

If you’re looking to prevent or reduce the loss in investment, you should think about spreading your money across more than one cryptocurrency. Although this would account for its own complications, it’s better than to invest in just one coin. Knowing that cryptocurrencies are extremely volatile in their pricing, it’s still unlikely that all the coins will simultaneously fail.

Apart from Bitcoin, there are other cryptocurrencies for you to look into for investment but beware of scam coins when figuring this out. You can try and opt for a cryptocurrency that you think has potential, and try to put a proportion of your investment based on the calculated risk you take. The idea behind these tips is to mitigate the risk of losing all your money so be sure before you invest.

About the Financial Action Task Force

Financial Action Task Force (FATF) is an intergovernmental organization founded in 1989, that reviews money laundering and terrorist financing techniques. It is working to strengthen its standards which address new potential risks, such as the regulation of virtual assets, which have spread, as cryptocurrencies have gained popularity. The intergovernmental organization also monitors countries to ensure they implement the FATF Standards fully and effectively and holds countries under the FATF Grey Countries List to account for noncompliance. The FATF Grey Countries List is a list of countries that FATF considers non-cooperative in the global effort to combat money laundering and the financing of terrorism. 

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