Digital currencies such as Bitcoin and Litecoin have been all over the news lately, convincing many skeptics to invest in the dynamic space. However, it can be difficult to know where to begin. This article is intended as an entry point for a complete novice to begin to understand and invest in digital currency.
Phase 1: Do Your Homework
You must understand cryptocurrency in order to profit from it, and that means learning about the blockchain. The blockchain is a public ledger capable of automatically recording every crypto transaction. Each recorded transaction is a “block” on the blockchain upon which other blocks are built. If somebody wanted to hack the blockchain, they would have to hack each block in a manner that they constantly agreed with each other or risk getting caught by miners, or individuals using powerful computers to verify each transaction.
The blockchain is public, meaning that anybody interested in doing so may trace a specific coin back to its origin. This acts as another deterrent to hackers, as any flagged tokens may easily be removed from their account. The way this happens is a little counter-intuitive though.
Let’s say that Elizabeth is sending 100 Bitcoin to Frank. The resulting transaction on the blockchain has three components: Output, Amount, and Input. The Output is Frank’s electronic wallet because he is receiving the money. The Amount is 100 Bitcoin. The Input is NOT Elizabeth’s Bitcoin wallet, however. Instead, it is the wallet(s) that originally gave her the currency she is now giving to Frank. Structuring the transaction in this manner is what allows each individual coin to be traced back to its creation.
Note that each crypto’s blockchain operates slightly differently, with the variations often separating the good investments from the bad ones.
Phase 2: Make A Plan
Now that you understand what you’re investing in, it’s time to consider how you will invest in it. The best way to do this is to first determine how much money you can afford to lose and how much risk you’re willing to take on. Like any other investment, you should never invest more than you can lose or make an investment incompatible with your personal risk tolerance.
Next, you should decide what ROI you’re looking for. Contrary to what you may see on TV, you need to choose a realistic figure. For example, you are unlikely to receive a 200 percent return if you’re not willing to stomach any risk at all.
Once you have a plan, stick with it. Some “expert” is likely to try to convince you that Bitcoin is dead, Ripple is the next big thing, or the like, but they are likely more interested in their own pocketbook than yours. Sell as soon as you see a price that gets you the ROI you wanted, as hanging on too long and losing everything hurts more than later discovering you could have made a little more profit.
Phase 3: Pick A Coin
Finally, it’s time to select a coin. You should always do your own research on a coin’s recent price trends using a trusted pricing site like CoinMarketCap. When determining a coin’s upside, you should consider things such as its planned circulation, underlying blockchain, and the viability of the organization that issued it.
Most cryptos have a set cap on how many tokens can be released into the market, and smaller caps tend to produce higher value coins. On the other hand, a very large distribution is likely necessary for any cryptocurrency hoping to become as ubiquitous as the American dollar. Both a coin’s current circulation and its final one are available on CoinMarketCap, so choose one with the distribution you want.
The other information is harder to find on an unbiased site. Blokt.com and CoinReviews.io are usually trustworthy sites as a whole, but individual authors may have their own biases to look out for. When you get better at distinguishing between solid information and less trustworthy news, social media platforms such as STEEMIT and even Twitter can be added to your research.
Phase 4: Select An Exchange
You need an exchange to facilitate the purchase of your chosen coins, and there are many to choose from. Most beginners are advised to start with CoinBase.io due to its intuitive interface, convenient option to fund your purchases with a credit card or bank account, and premium security features. It trades in only four tokens though (Bitcoin, Ethereum, Litecoin, Bitcoin Cash) while charging high transaction fees (up to 3.99% if you use a credit card), causing many investors to outgrow it.
When you’re ready to move on, there are several options available to you. Bittrex operates like a stock exchange in that cryptocurrencies are traded as matching pairs, with no option to use traditional money to purchase crypto on the site. However, it offers over 190 coins to choose from and charges minuscule transaction fees of a quarter of a percentage point on most trades.
Gemini provides Bittrex’s low transaction fees with CoinBase’s ability to use a bank account to fund your purchases, but it only deals in Ethereum and Bitcoin. There is also a $500 weekly spending cap while Bittrex has no cap and CoinBase has a variable cap that’s easy to work around.
Many exchanges besides the above exist, so you should be able to find the features you need without trying too hard. Just make sure that you are using a reputable company, as some (such as BitConnect) are Ponzi schemes masquerading as legitimate exchanges.
Once you have mastered all four phases above, you’re ready to invest in cryptocurrency. Never forget to have fun, and good luck!