Learning About CryptoCurrency Investing as a Complete Beginner
Perhaps you want to invest in cryptocurrency such as bitcoin or maybe want to invest in very low priced coins; coins that are than a penny hoping to strike it rich as the early investors in Bitcoin and Litecoin did.. Maybe you are somewhere in between.
Whatever level you are at requires a few basics. Read this page and you will know more than 99% of people about investing in cryptocurrency and will understand everything you need to go out and get started while minimizing your risk.
Starting at the Beginning: What Is Cryptocurrency:
Let us start with the basics. Cryptocurrency consists of two words, “crypto” and “currency”. Here, the word “crypto” refers to the fact that various cryptographic techniques and algorithms are used to secure the currency from fraud and other electronic tampering. The inventor of cryptocurrency made this his top priority, having a currency so secure that people would trust it.
The biggest achievement of cryptocurrency is that it is eliminating the use of any of central authority, or central bank. This is possible by using what is called a distributed peer-to-peer block chain network. While this sounds confusing right now, just understand what the goal was in the beginning…to eliminate the use of a central authority, which we all know as today’s modern banks.
That is a lot of new information in one paragraph… Let me explain it in more detail for you…
What Is A Peer-To-Peer Block Chain Network?
A peer-to-peer network is a network of computers that allows information to be shared across all of the users in the network. It allows users, known as nodes, to send information directly between one another without the need for a central authority to hold that information. So it’s a way to connect users to be able to share information. For an example, think of any kind of chat services like WeChat, Skype, or Google Hangouts. These are all peer to peer networks that allow people to talk with each other without having to worry about a central authority.
What Is A Distributed Network?
A distributed network is similar to the idea of a peer to peer network. It is a network that allows information to be spread across many users. While peer to peer means open communication across users, being distributed means that information itself can be owned by those users. If we want to understand a distributed network, we need to compare it with other types of networks.
There are three types of networks:
Each network has its own strength and use-cases. The distributed network is the best kind of network as it allows all of its users to hold the same amount of information.
In a centralized network, everything connects to a central network owner. This owner can be a person, company, or any kind of database. So only a single source holds all the information for the system. This is when you have a single point of failure, as everything relies on one specific server, or system.
In a decentralized system, there no longer a single point where all this information exists. Instead, this information is spread across multiple locations. A copy of that information can exist in each location.
And in a distributed network, everyone gets a copy of the information with the same access and control as everyone else. So there is no centralization of the information in this system and therefore more reliable as there is no single point of failure.
What Is Block chain that Uses Distributed Peer To Peer Network?
Blockchain is a network that eliminates the purpose of a middleman in any valuable transaction. And this network is also secured by cryptography. So in the blockchain network everyone has access to the transaction information. For this reason, we don’t need anyone else like a bank or any authority to track that information for us.
So after all this discussion, we can say, a cryptocurrency is a peer to peer digital exchange system in which cryptography is used to generate and distribute currency unit and also verification by miners is used to eliminate double spending.
There are so many types of the cryptocurrency system. The first cryptocurrency system was Bitcoin. Today different types of cryptocurrency system are used for a different purpose. For example, transactional cryptocurrencies like bitcoin and litecoin serve as a way to store and exchange value. And some of the cryptocurrency systems like ethereum is used to build blockchain and smart contract applications. There are other cryptocurrency systems like Ripple, Bitcoin cash, EOS, Cardano, Stellar, Neo and Monero. The market capitalization of every cryptocurrency is different.
History Of Cryptocurrency: How It Started:
The cryptocurrency was first discovered anonymously by Satoshi Nakamoto (a person or a group of person) in January 2009. The first most cryptocurrency created by Satoshi Nakamoto is “Bitcoin”. Fast forward to 2008 an unidentified author Satoshi Nakamoto published a whitepaper. This paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” It completely changed the idea of currency. On January third, 2009 Nakamoto released the bitcoin software. This unleashed the first cryptocurrency “bitcoin” into the world.
Difference between Fiat Currency and Cryptocurrency:
- First, conventional money or fiat currency is issued by the government and regulated by the central bank. Which makes this entire process a centralized system. In this centralized system, general people have no authority on this centralized process.
On the other hand, cryptocurrency exchange system is totally controlled by its users. This makes it a distributed system. And in this distributed system government or no other authority have control over this.
- Second, Fiat currency has two different form, bank note, physical coins. Digital records for fiat currency stored by some authority like a bank. But cryptocurrency only exists in digital form. And records of cryptocurrency are distributed across in a large peer to peer blockchain network. This network uses cryptography as its security measure.
- Third, Most cryptocurrencies supply is limited. Like, only 21 million bitcoin could be mined for the transaction. But unlike cryptocurrency fiat money have no such limitations because fiat money has an unlimited supply.
- Forth, fiat money can be stored in various form. Like there are various payment provider third parties who allow people to store their money digitally, e.g. PayPal. And banks also work as custodian of hard currency. But in the case of cryptocurrency, they provide a crypto wallet for storing cryptocurrency.
- Fifth, the government collects its taxes in the form of fiat money. So, if you have a certain amount of fiat money, you have pay taxes for them. But, in the case of cryptocurrency, you don’t have pay taxes for your currency.
Where to Spend Cryptocurrency?
You can spend your cryptocurrency just like conventional money or fiat money. You can spend your cryptocurrency tokens to purchase from any service or product provider who accepts cryptocurrency as payments. Like there are many major retailers like e.g. Microsoft, and Overstock who accepts cryptocurrencies as payment. You can also spend your crypto tokens at a cryptocurrency exchange to trade it for local fiat currency or to change it into another crypto token.
Why Invest In Cryptocurrency:
Volatility is the major characteristics of cryptocurrency. It means that their price fluctuates over short periods of time. This way you can make money faster than other methods. So if you want to make money faster and in an easy way then cryptocurrency could be a great platform. However, this great opportunity comes with great risk. For example, bitcoin price peaked in 2017 at around $19,000. The price in 2019 is roughly $4,000.
How to Invest in Cryptocurrency: A Step by Step Guide for Investing in Cryptocurrency:
There are so many ways to buy cryptocurrency. This complete guide will walk you through your cryptocurrency journey. As a beginner, if you want to avoid mistakes then you have to know all the information. There are two different ways to invest in cryptocurrency.one is direct investing and the other is indirect investing. Let’s learn more about them.
- Direct Investing: When you purchase cryptocurrency on your own then it is called direct investing.
- Indirect Investing: When you buy cryptocurrency related products like stocks, companies, IRA accounts then it is called indirect investing.
In order to invest directly in cryptocurrency, you need to follow these three steps:
- Choose A Suitable Currency As Per Your Requirement:
There are over 1,500 cryptocurrencies to choose from. Many currencies were designed to be used in a specific way or for a specific industry. The most popular cryptocurrency that we recommend are:
- Bitcoin: Bitcoin is the first cryptocurrency and it has the largest user base. Half of the cryptocurrency system is owned by bitcoin. Market capitalization for bitcoin is $97377694125 in today’s world.
- Ethereum: Etherium is popular for its development in blockchain and smart contracts. We can develop various blockchain and smart contract base application using ethereum. This cryptocurrency uses a simple if else condition. When a person completes this condition then the client gets paid by tokens through an ethereum wallet. In these days market capitalization for ethereum is $17591659028.
- LiteCoin: Another popular cryptocurrency system is litecoin. Litecoin was the first cryptocurrency to use scrypt for mining. Litecoin function is faster than any other cryptocurrency. This makes it more secure from any cyber attack.
- Ripple: It is a less popular cryptocurrency system of all. Though it a cheap currency it is used on a global scale. There are other cryptocurrencies like bitcoin cash, EOS, Stellar, Cardano, Torn, Moita, NEO, Dash, and Stellar Lumens. You can choose any of them according to your preference.
- Purchase It Through A Digital Wallet: E-Wallet:
After picking up your currency according to your choice you need a digital wallet to buy it. A digital wallet refers to an electronic device or online service that permits a person to create electronic transactions. This includes buying, selling, and investing currencies. An individual’s bank account can also link to a digital wallet.
Types of Digital Wallet: There are five types of digital wallet:
- Hardware Wallet: Hardware wallet is like your regular wallet except it consists of a digital device to operate your account. In order to use a hardware wallet, you need a software wallet first to interact with the device. All though all hardware wallets have their own software wallets for better understanding of hardware wallet you can say it is like a USB device. After plugging it in your computer you can use it easily. Some of the most better-reviewed hardware wallets are Ledger Nano X, Ledger Nano S, TREZOR One, Keepkey Bitcoin, TREZOR T, and Archos Safe-T mini hardware wallet.
- Online Wallet: You can operate online wallets through the computer, laptop and mobile devices like smartphones, iPad, tablets as long as you have an internet connection. It is considered to be the most useful wallet because they are cheap and can be accessed anytime if you have an internet connection. CoinBase and Coinpayment is a useful online wallet that let its users access it for free. This website only cut the transaction fee when you made a cryptocurrency transaction through their wallet.
- Mobile Wallet: Mobile wallets are nothing but mobile app based wallets. They let you carry your wallet in your Smartphone via an app. Crypto mobile wallets enable you to store your cryptocurrency right on your smartphone. This makes it very simple to carry your cryptocurrency and make your day to day purchase with it. Jaxx and Mycelium is a good example of mobile-based wallet for your cryptocurrency.
- Paper Wallet: Paper wallets are a good option for those who want to have a secure wallet without paying for a hardware wallet. A paper wallet is also free. MyEtherwallet is one of the good examples of a paper wallet. In order to create a paper wallet, you need to generate an address and a private key online at myetherwallet.com. and also it is mandatory to save a copy of your private key in a safe place. Losing your private key will cause you to lose your funds. So you need to be careful about the paper wallet.
- Desktop Wallet: It is also known as a software wallet. A desktop wallet is similar to have a file on your computer. Most of the desktop wallets are free. It is considered to be the most secure wallets of all. Because it has the minimum risk to get hacked by the third party as there is no internet connection needed for accessing your cryptocurrency. Though desktop wallet is so useful it has some cons too. Like if your computer hard disk drive gets crushed, or you simply misplace some file or your computer got damaged by virus then you have to face consequences. Electrum and Exodus are a pretty good example of a desktop or software wallet
How to Choose the Best Wallet for Storing Your Cryptocurrency:
Though all these crypto wallets serve different features, many people came to the conclusion that cold wallet like desktop wallet could be a good choice for beginners. Because it is always free and it comes in handy when you want to have a lot of transactions. Paper wallet and hardware wallet are a lot safer. But it’s not easy to have lots of transactions back and forth and also beginners could find it a bit difficult to use. Online wallet is also free but it is considered to be the less secure one as it can only be used through the internet.
*Note: Free wallet could seem very useful but it will cause you to lose some important features. For example, you may not be able to cash out your cryptocurrency into fiat currency like the US dollar.
- Invest Through A Cryptocurrency Exchange:
If you want to invest your hard earned money into cryptocurrency through a cryptocurrency exchange, first you have to know some information about an exchange.
A cryptocurrency exchange is similar to as a conventional stock exchange or currency exchange. The only difference is that the cryptocurrency exchange is an online-based platform. This exchange allows a customer to trade cryptocurrencies for other assets like conventional money or other types of cryptocurrencies with other people. By providing this service the market makers can get some fees as transaction commissions. You should also know that most of the crypto wallet can serve both as a wallet and a crypto exchange. Coinbase and Copay are two of the largest example of this type of crypto exchange.
Types of Cryptocurrency Exchange: Based on the distribution method crypto exchange could be three types:
- Centralized Exchange: This type of exchange is perfect for the beginners who are interested in trading cryptocurrency but have a little knowledge about it. In Centralized exchange system there are some intermediary parties such as companies as a middleman in order to make a possible way for trading on their platform. We can say that a centralized system is working as an interface which connects people to both cryptocurrency trading and the real economy. Centralized exchanges need some personal information and proof of identity like a passport in order to operate on their platform.
- Decentralized Exchange: A decentralized system does not need any intermediaries or any kind of middleman for their operation. As there is no middleman, users don’t have to provide their personal information or proof of identity or any kind of fees. In this platform, the user controls their funds anonymously. Besides all of these good features of a decentralized exchange, it’s not really easy for beginners to use this platform. And if your computer or account has been hacked then you can’t get it back from anywhere.
- Peer To Peer Distributed Exchange: It’s the simplest form of a cryptocurrency exchange. It just matches cryptocurrency buyer to a cryptocurrency seller. In this type of platform, people have more liberty for trading. For example, the seller gets to set their own price and what types of payment they will accept. Some may accept bank transfer, credit cards, PayPal and maybe even hard cash. Also, note that they take some fees for this matchmaking service.
Again crypto exchange can be divided into another two categories based on transaction type:
- Local Fiat to Cryptocurrency Transaction: In this type of transaction you can trade your conventional money into cryptocurrency.
- Cryptocurrency to Cryptocurrency Transaction: In this type of transaction you can trade your one kind of cryptocurrency into another kind of cryptocurrency.
Buy Cryptocurrency: Cryptocurrency Exchange Platform:
There are so many cryptocurrency exchange platform where you can exchange your fiat currency into cryptocurrency or exchange your cryptocurrency into other types of cryptocurrency. Some of the most popular platforms for exchanging fiat currency into cryptocurrency are, Coinbase, Coinmama, CEX.IO, Bitpanda, LocalBitcoin, Kraken, Gemini, and Bitstamp
And some other popular cryptos to crypto exchange platforms are, Changelly, Binance, Bittrex, Bitfinex, Poloniex.
How to Choose the Best Cryptocurrency Exchange for Trading:
There are some key factors you should keep in mind to select a crypto exchange for Trading. Using an insecure crypto exchange can lead you to lose your information and in some cases your cryptocurrency. So consider these things before you select your crypto exchange:
- Security of The Exchange: Safety first so security should be at the top of your list. Before selecting an exchange for transactions, investors should look into the exchange’s security protocol. The exchange web address should start with https. Try to avoid http address. The exchange should provide two-factor authentications to its users for login safety. Customers deposit should be stored in offline e.g.in cold storage. The exchange should have auditory programs 24/7. And it is always better to select a reputed exchange for your transactions. Exchange with the best security is Coinbase, BitMax, ItBit.
- Trading Platform: There are three types of trading platform. You should choose wisely for your trading as per your requirements. Try to choose an exchange situated in your own country.
- Liquidity: Liquidity makes it possible to complete the transaction more easily and faster and without having to deal with price volatility. A large volume of trading is a good indicator of a crypto exchange’s liquidity and overall ability to fulfill a users order at any point of the day. Exchanges that offer the highest amount of liquidity are BitMex, Coinbase, and Kraken.
- Transaction Fees: Every exchange needs a few amounts of fee for every transaction. Before choosing your exchange, compare all the fees that an exchange charges. Exchanges that support low transaction fees are Binance, Bitfinex, and BitMex.
- Supported Currency: Before choosing your exchange you need to know what type of currency they are trading. E.g. most of them trade bitcoin and ethereum. And there are some other exchanges who supports other altcoins. Exchanges with the highest amount of trading options are – BitMex, Bitfinex, and Deribit.
- User Experience: Try to choose an exchange with user-friendly interfaces. It will help beginners to deal with their trading more fluently. Exchanges with the best interface and mobile support are Coinbase, Kraken, and Binance.
Indirect Investing: Indirect investing is the conventional form of investing through a broker. In this type of investing you don’t have to go over all hassle that you need to do in direct investing. Indirect investing is an easy and low-risk way to profit from the market without your direct participation. There are some pretty good options for this type of investing:
- You Can Invest In A Cryptocurrency Company Stock: There are many companies that invest in cryptocurrency and the technology behind the cryptocurrency. If you buy their stock you would be supporting cryptocurrency. Your best choice could be a publically traded company e.g. Intel Corporation, Facebook, IBM. Also, there are other companies who accept cryptocurrencies as their payment method e.g. Microsoft.
- You Can Invest In The Bitcoin Trust: A trust or an investment trust is actually a company that owns a fixed amount of given asset. People who want to invest money in the trust, buy shares of the trust and owns a contract that represents ownership of the assets held by the trust. The trust is managed by a company who charges a fee for buying shares of the trust. This trust is traded on NASDAQ.com offered by GBTC.
- You Can Invest In An IRA: IRA means individual retirement account. You can trade cryptocurrency with your IRA. In order to trade cryptocurrency with your IRA, you need to establish a self-directed IRA. There are some companies e.g. LLC, BitcoinIRA, BitIRA, CryptoIRA that can help you to trade cryptocurrency with your IRA account. Basically, you just have told these companies which cryptocurrency and how much cryptocurrency you want to buy. Then you give them money and they do the investing for you.
Security Risk That Could Occur When You Are Dealing With Cryptocurrency:
If you want to secure your hard-earned cryptocurrency, you need to know what security problem could occur to your cryptocurrency. In this section, we will discuss some of the major security problems that could occur when you are dealing with cryptocurrency.
- Hackers Could Get To You: When you are trading in an online platform, the biggest risk could come from a hacker. This type of entity could obtain your password and other valuable information that could lead you to lose your cryptocurrency. Phishing, Ponzi schemes, and ransomware are some methods done by the hacker to hack your currency.
- Your Crypto Wallet Security Could Be Vulnerable: Because of some loophole, a wallet could be vulnerable. This affects the privacy of crypto users because their currency could be diverted to other accounts.
- You Store Your Private Key Online: One thing you must keep in mind that if you are trading cryptocurrency you can’t keep your private key and other valuable information online.
- You Are Dealing With An Insecure Third Party: A cryptocurrency exchange could consider a third party. If their security is week then you might lose your valuable information as well as your cryptocurrency.
- Double Spending: Double spending is a problem where a person uses the same amount of money more than once. It’s usually happen in digital cash system.
How to Secure Your Cryptocurrency:
You can take several security measures to keep your cryptocurrency safe. Some of them are given below:
- Take Security Steps To Prevent Hacking: If you want to prevent hacking two-factor authentication is a way to stop it. You should use it for your email account, and also for your cryptocurrency storage service. This two-factor login process consists of a password and an SMS text to your phone. But in this way text could be intercepted. So you should use an app base verification process e.g. Google Authenticator. Another great step to prevent hacking can be the use of a strong password. Try using a long pass (more than 16 characters) which you haven’t used in any other place on the internet.
- Secure Your Private Key In A Paper Book: Do not expose your private key by storing them online. Try to use a paper book instead. In that book, you can also store your other valuable information too.
- Double Check the URL: Hackers could create a fake crypto exchange to collect your personal information. So before using an exchange double check the web address of that exchange.
- Be Aware Of Scams: Scammers use some common scam method to gain your information as well as your cryptocurrency. E.g. phishing, tech support scam, pyramid schemes, and giveaway scams. To stay clear out of this do not believe anyone on the internet. Just verify and double checks for everything before you make a move on the internet.
- Do Not Invest Much More: Dealing with cryptocurrency is still a risky matter. So if you want a fair play do not invest more than you are ready to lose at any moment.
- Use A Good Quality Antivirus: It is a good practice to use a good quality antivirus for your online based wallet and crypto exchange.
- Do Not Brag: While you are on social media or social gathering do not brag about your cryptocurrency. And also do not share what crypto exchange or wallet you use for your cryptocurrency. It can make you an easy target for scams.
- Choose Your Wallet and Exchange Wisely: choose your crypto wallet and exchange wisely. Try to use cold wallets like desktop wallet and hardware wallet as they serve as your own storage. And also try to use a reputed exchange for trading.
Bottom Line: This article is a step by step guide for a beginner who has interest in trading cryptocurrency. All the companies, exchanges or wallets we talked about in this article is not recommended by us. We just use them as an example. So if you are a beginner, this could give you a complete idea about how to get started.