In this piece, we will take you through a complete guide on cryptocurrency investing for dummies. First, we need to make sure we have a good understanding of the basic foundations of digital currencies.
Then we will proceed with the development of the cryptocurrency world and the evolution of value in digital assets. And to complete our guide on cryptocurrency investing for dummies, we will examine the digital marketplace and how you can access these markets.
Before we get started, we need to understand some of the main terminology in a basic way. We will mention more about them as we continue. Here’s a list to begin with:
- Blockchain: The ledger digitally records all transactions of the digital currency in a permanent and incorruptible way.
- Wallet: A place to digitally store your cryptocurrency.
- Cold storage or cold wallet: This refers to a wallet that is not accessible through the internet. For maximum security, your wallet should be stored offline.
- Keys: This is the password to access your wallet. They are extremely long, and unless your wallet is held by an exchange only you have them.
- Proof of Work: The activity of creating digital coins by solving complex algorithms is known as mining. PoW is the name for this procedure.
- Proof of Stake: This is another way of producing digital coins but relies on a network of stakeholders of the coin to mine and validate transactions.
- Stablecoin: A digital coin that is pegged to the value of another commodity or currency.
- Fork: When there is a divergence in the protocol of a blockchain. A Hard Fork denotes the change is permanent, i.e., a new cryptocurrency or new mining protocol.
- Burn: The process of eliminating digital coins from circulation.
What is a Cryptocurrency?
A cryptocurrency is a digital asset that exists outside of any centralized control. Each digital coin is incorruptible and can be exchanged for fiat money among holders of the coin. The digital coin is constructed by an algorithm that is transcribed to a digital ledger using blockchain technology.
Digital coins are mined, and the miner receives a reward in the same digital currency for the effort. The existence of the new coin is recorded on the digital ledger. Any transactions are also recorded on the ledger.
For example, a citizen holding a cryptocurrency in a wallet in the US can send that cryptocurrency to another person anywhere in the world. The person receiving must have a wallet to receive the digital asset. And it all happens outside of any centralized control.
This transaction is then recorded on the blockchain. Theft or hacking of the ledger is practically impossible. And anonymity is guaranteed although the ledger is public, as no names or addresses are visible.
Depending on where you live you can own cryptocurrencies completely anonymously. However, in most parts of the western world that tends to be difficult to achieve. In any case, the value of these digital coins is purely on the worth given to them by the market participants. No central bank or government can decrease its value, through inflation or printing extra money.
Blockchain technology is virtually unbreakable, so we know that the system cannot be cheated on. Do not confuse the fact that the blockchain is unhackable with the security of wallets. If wallets are held online, then in theory there could be someone capable of hacking into that wallet.
The infographic above shows how a blockchain works. With each transaction or new coin mined a block is added to the chain. Because the chain is indelible the sequence of transactions recorded is unhackable.
The Dawn of Cryptocurrencies
A guide to cryptocurrency investing for dummies wouldn’t be complete without knowing the origins of all the digital assets we currently have. In 2008, someone going by the name of Satoshi Nakamoto published a white paper on a cryptography mailing list.
The white paper detailed the function of a network of peers to generate an electronic payment system that did not rely on simple trust. On January 3, 2009, Satoshi Nakamoto mined the first Bitcoin with block number 0.
So came about the dawn of cryptocurrencies.
It may indeed seem that cryptocurrencies lack any fundamentals to analyze but the truth is quite the opposite. Before you invest in any digital asset you should examine a few factors that can create an idea of how successful the virtual going might be. To start learning fundamental analysis in your cryptocurrency investing for dummies guide let’s go thorough the main principles.
We’ll get into a bit more detail, but here is the list of aspects to investigate.
- Crypto Whitepaper
- Background Analysis
- Product Road Map
The whitepaper is the document that details all the most important features of the project. And at a minimum should contain the following information:
- Blockchain technology solutions
- Planned features & upgrades
- Cases for use
- Token economics
- Sale information
- Team profiles
Read the whitepaper carefully and check for reviews from the crypto community.
The project’s website should include all the information about the new crypto, and the team members. Check the team members have a good track record and the necessary experience to make the project a success. Also, check out who the early backers and advisors may be.
Product Road Map
Most crypto projects have a road map charting the timeline for the test nets, releases, and planned features. Use the road map to verify the achievement of milestones and determine whether the project has a clear path for future developments.
This is the economics of the demand and supply of crypto. Cryptos are also known interchangeably as tokens because they serve more purposes than simply being a method of payment. Consider also the rewards that govern behavior on the network, such as node mining in a proof of work system protocol.
Most Popular Cryptocurrencies
The cryptocurrency marketplace currently has thousands of digital coins on offer. Many are generally unknown and probably will never become anything more than a cryptography exercise.
However, many others have grown in popularity, as we have seen above, due to their underlying fundamentals. It makes sense when investing in cryptocurrency to diversify your crypto portfolio and hold a variety of coins.
We are going to go through the top three coins by market capitalization. Just to get an idea of how they are traded and what they are used for.
At the time of writing, Bitcoin has a market capitalization of just under $400 billion. That’s quite a shot off its peak when at one point Bitcoin had a total value of over $1 trillion. The popularity of this coin comes from a few factors.
First mover advantage, in doubt being the first digital coin to get notoriety in the then-obscure world of cryptography played its role. Limited supply, the total number of coins that can be mined is restricted to 21 million.
A limited supply, as we know, means that the asset is more valuable than another similar asset with a greater supply. Thirdly, general acceptance, this cryptocurrency has become a mainstream asset, with market participants at the institutional level.
The widespread interest in this coin also makes it one of the most heavily traded. The average daily volume of this digital asset is around 2.5 million coins or $49 billion at current prices.
Ethereum is considered the silver of crypto, and ,yes, you guessed it, Bitcoin is the crypto equivalent of gold. Ethereum’s digital currency, Ether, was launched in 2015. It’s an open-source blockchain with smart contract functionality. The protocol also allows for decentralized finance applications.
These apps can provide a variety of services, you can lend your Ethereum for interest, or borrow cash against the Ethereum you hold. Or even create NFTs, which are rising in popularity as many brands are getting in on the game.
The average daily volume of this crypto coin is around $23 billion or 1.5 million coins. The supply of this coin is not limited. However, in the whitepaper, the founder of Ethereum Vitali Buterin, stated that by around 2021 there would be approximately 150 million Ethereum coins in circulation.
We currently have just over 122 million in 2022, so the forecast Buterin made was slightly short. Although there is no maximum cap on the number of Ethereum coins that can be added to the supply, it is not intended to be an inflationary feature.
This is because supply is designed to be reduced gradually over time. This feature should create a slower supply rate compared to the demand rate. This ensures that supply does not crush the value of Ethereum as time progresses.
However, to keep things in check the community is burning Ethereum. The burn is achieved by sending the digital coins to a wallet that has a receive-only feature. Once the Ethereum has been received in the wallet it can no longer be sent elsewhere and is considered burned.
Tether is a stablecoin that is pegged to the value of the US dollar, i.e., 1 Tether is worth 1 US dollar. This stablecoin was created by Bitfinex, a Hong Kong based exchange, in 2014. It has since then issued a total of just over 69 billion coins.
Supply is regulated by the Tether team according to the demand they see. May also burn Tether on redemptions as they see necessary. This Tether is held in the team’s treasury and out of circulation.
The average daily trading volume is around 60 billion coins. The coin enjoys the price stability that is lacking by its bigger peers such as Bitcoin. Price volatility is especially concerning when consumers want to make payments using a digital currency.
The low cost and speed of transactions make this coin a viable alternative to fiat money. And consumers know that the digital currency is backed by US dollars. However, if you are looking to trade or invest in stablecoins, note that the price of this coin rarely drops below $0.99 or above $1.01.
The crypto marketplace is where you can buy and sell a variety of cryptocurrencies. Most of the big exchanges do not list a large variety of the newer digital coins. It takes time to build trust and interest and that’s when more exchanges open their doors to newcomers.
There are around 20 thousand different cryptocurrencies according to CoinMarketCap, yet the largest exchange, Binance, lists only 387 coins. Although crypto is all about decentralized finance, and it is, if you are in the US you will need to verify your identity to open an account with an exchange.
Once you send funds to your account on the exchange you can start trading and investing in cryptocurrencies. The range of fees on exchanges varies greatly from one shop to another. Fees for buying and selling range from 0.1% to 1.5% depending on the exchange and volume traded.
Some exchanges also offer discounts on market makers. These are participants that place limit orders rather than simply act on the current price in the market. Most exchanges do not charge withdrawal or deposit fees, although some exchanges still charge for one or both.
Depending on the exchange and the type of account, some exchanges offer leverage by allowing you to trade on a margin. Trading on a margin means that you can trade with larger amounts than the funds on your account. The exchange then charges you a fee for borrowing the extra cash.
List of major exchanges
- Huobi Global
Trading and investing can be a dangerous activity when you are involved in traditional assets. However, cryptocurrency investing is even more hazardous due to the high volatility of the underlying assets.
You can get some guidance and help from companies that offer their services to filter out the most likely top performers. Going it alone is never a good idea, especially in a marketplace that is full of information that is impossible to stay on top of.
If you are going to invest in cryptocurrencies, you can take advantage of the specialized services of crypto IRAs in a tax-free environment. Many companies offer these services out there, and we have compiled a list of the top five, you can read our reviews here.