Does Cryptocurrency Belong in Your Investment Portfolio?
Cryptocurrency is an emerging asset class that has grown tremendously over several years. More than 1,000 different cryptocurrencies are available on various exchanges, with new ones being added daily. Whether to invest in cryptocurrency is not an easy one to answer. You can’t apply traditional valuation methods to cryptocurrency assets, like the P/E ratio or dividends-to-price ratio. However, there are some factors you should consider before making your decision.
Understand the Risks of Cryptocurrency
Digital currencies have become a major phenomenon, with Bitcoin famously exploding in value in recent months. Are they worth investing in? There is no right or wrong answer since both risks and benefits are associated with investing in cryptocurrency.
One of the principal risks of investing in cryptocurrency is extreme volatility. Bitcoin can either move up or down by up to 10 percent on any given day. This type of volatility means that if you buy Bitcoin for $10,000 today and it goes up to $12,000 tomorrow but then drops back down to $9,000 the next day, your investment would have gone down by 20%.
This unpredictability makes cryptocurrency a risky asset class for those who don’t know how to manage it properly. It’s also reason enough for many people not to invest at all.
On the other hand, cryptocurrencies aren’t correlated with other asset classes like stocks and commodities like gold and oil. Plus, they’re not influenced by geopolitical factors like interest rates or tariffs as traditional investments are.
It means that it has its unique risk profile; those who understand this profile can potentially make more money on crypto than they might otherwise be able to make on traditional investments.
Consider the Pros and Cons of Investing in Cryptocurrency
If you’re considering investing in cryptocurrency, there are some things you need to consider. Below we’ll list the pros and cons of investing in crypto and how each may affect your decision.
Pros:
- Potential for high returns when crypto is used with traditional investing
- Very low correlation to traditional asset classes
- Tax advantages when compared to other investments
Cons:
- Volatility with crypto makes it difficult to accurately price and add it into a portfolio
- Lack of liquidity means that many exchanges can’t handle large order sizes, which can lead to slippage when trading larger blocks of shares
Know Your Risk Profile
Investing in cryptocurrency is a form of speculation that carries a significant risk of loss. It’s possible to lose everything you put into cryptocurrency, so it’s important to know what you’re getting into.
If you are prone to impulsive buying or have a hard time making decisions, this may not be the best investment for you. Consider, too, your financial goals and what is most important for you before investing in cryptocurrency. For example, if your goal is to save for retirement, there are safer investments with better rates of return.
Understand How to Buy Cryptocurrencies
The first step towards investing in cryptocurrency is understanding how to buy it. To do this, you’ll need two things: an online wallet and a cryptocurrency exchange like Coins Union. The online wallet allows you to store your cryptocurrencies and access your private key for security purposes. The cryptocurrency exchange is the marketplace where you can purchase cryptocurrencies with your fiat currency.
There are a few different types of exchanges that vary in terms of their features and levels of security. Some offer higher levels of security than others, which might be significant depending on your preferences and concerns about security. It’s essential to thoroughly research the various options before deciding which exchange is best for you.
Buy Bitcoin or Ethereum First?
Bitcoin and Ethereum are the two most popular cryptocurrencies and serve as an excellent starting point. If you want to invest in cryptocurrency, starting with these two digital currencies may make sense.
One of the primary reasons for this is that Bitcoin and Ethereum have less “noise” than many other coins. It means that they are less likely to be subject to sudden price swings or dramatic changes in value. Instead, they are more stable, making them a good option for beginners who want to get into crypto investing.
Bitcoin has also been around since 2009, so it’s more established than newer coins on the market. Because of its longevity, Bitcoin likely won’t disappear overnight like some of the more new coins on the market might.
On the other hand, Ethereum has some interesting potential uses outside of being a currency. It can also be used as a platform for creating programs or businesses on top of it. It may make Ethereum more valuable over time because there are only so many cryptocurrencies it can be compared with at this stage in its lifecycle.
Know Your Wallet
Before you decide to invest in cryptocurrencies, it’s important to understand what you are investing in. Some of the more popular cryptocurrencies are Bitcoin, Ethereum, Dash, Litecoin, and Ripple.
Each one of these cryptocurrencies has its unique features and value proposition. For example, Bitcoin is accepted by a growing number of merchants and is the most widely used cryptocurrency today. Ethereum is a cryptocurrency created to be a platform for other decentralized applications and smart contracts.
Dash is an open-source, peer-to-peer cryptocurrency with instant transactions and low transaction fees. Litecoin was one of the first altcoins to be released as a bitcoin spinoff, and bitcoin’s core code has heavily influenced its design. Ripple is another cryptocurrency that many people believe can revolutionize banking. It offers an easy way for banks to send money across borders without any added fees or wait time.
Get Bitcoin or Ethereum from Fiat Currency
The first thing you’ll need to do is get some of the major cryptocurrencies like Bitcoin or Ethereum. If you don’t already have cryptocurrency, this may require some conversion. Most exchanges only accept fiat deposits in the form of cash, bank transfer, credit card, or debit card.
For example, if you want to buy $100 worth of Ethereum (ETH), then you would need $100 worth of bitcoin (BTC) or Ethereum Classic (ETC). Both BTC and ECT can be converted to ETH on many exchanges.
What’s important to note is that not all exchanges will offer direct trading pairs with fiat currency.
Exchange Bitcoin for Ethereum on an Exchange
One of the best ways to get into cryptocurrency is by using an exchange. Exchanges allow you to buy and sell cryptocurrencies, as well as offer other services, like storing them in a wallet.
When researching your exchange, look at factors like:
- Exchange security: how safe is your account?
- Exchange reputation: can you trust this company?
- How much verification is required: do they require ID or bank statements?
- Fees: what are they charging you?
How to Choose Which Exchange to Use
When you purchase cryptocurrency, you buy it on an exchange. It’s important to carefully consider which exchanges are best for your needs before deciding.
There are three major types of exchanges:
- Cryptocurrency-to-cryptocurrency
- Fiat currency to cryptocurrencies
- Cryptocurrency with fiat currencies
The first type converts one type of asset into another type. The second converts fiat currency into cryptocurrency. The third is a hybrid that allows you to buy or sell cryptocurrencies without converting them into fiat currencies.
Each of these types has its advantages and disadvantages, so it’s essential to evaluate which you will need the most to make an informed decision about which exchange is best for you.
For example, if your trading volume is high in the cryptocurrency space, a crypto-to-crypto exchange might be your best option. If you want to have flexibility in how you spend your money, then a crypto-to-fiat exchange might be better suited for you.
If you’re interested in investing in cryptocurrency, make sure to look at all of the risks and benefits before deciding. If you choose to invest, make sure you use a wallet that will make it easy to store your coins and tokens.
Consider the level of control you want over your coins and tokens before buying any crypto assets on an exchange. Investing in cryptocurrency is not like investing in stocks or bonds. There are many factors to consider when deciding whether or not to invest in cryptocurrency.
