If you are new to cryptocurrency trading and investing, this summary guide will give you enough information to dive right in. It will help you understand what you need to get started. This is the basic information that will quickly make you comfortable with cryptocurrency (“cryptos” for short).
Know Your Cryptos
Bitcoin is the world’s first cryptocurrency. It uses open-source programming code. The first Bitcoin transaction happened on January 9, 2009. The starting value was US$ 0.0008. It took about two years for Bitcoin to reach the value of $1 in February 2011.
Bitcoin’s all-time high, so far, was $68,990.90 in November 2021. Bitcoin currently trades at around $42,000 (April 2022).
Bitcoin transactions have a publicly-shared ledger called a blockchain. Some Bitcoin network members called “miners” create Bitcoins and add transactions to the blockchain. Miners receive a fee, paid in Bitcoin, to create Bitcoins by using a computer to calculate complex mathematics (proof of work). Miners may also receive a different fee, paid in Bitcoin, to verify a block of transactions. After a block of transactions is added to the blockchain, it is a permanent record.
Anyone on the network can become a miner if they have the specialized computer equipment needed to do the work. Also, anyone can see the entire history of the blockchain. The blockchain is a list of all transactions in the order they were made back to the first one.
Because the programming code is open source, all software developers can use it. They are free to improve Bitcoin and make new cryptocurrencies. There are many cryptocurrencies now. Their popularity depends on the use cases, style, rules, and the number of people in the user base.
The top ten cryptocurrencies and market value (as of March 2022) are:
- Bitcoin (BTC) $846 billion
- Ethereum (ETH) $361 billion
- Tether (USDT) $79 billion
- Binance Coin (BNB) $68 billion
- U.S. Dollar Coin (USDC) $53 billion
- XRP (XRP) $37 billion
- Terra (LUNA) $34 billion
- Cardano (ADA) $33 billion
- Solana (SOL) $33 billion
- Avalanche (AVAX) $22 billion
Honorable mentions include the meme coins of Dogecoin (DOGE) $17 billion and Shiba Inu (SHIB) $13 billion. DOGE started as a joke. Now, DOGE is respected due to interest from billionaire Elon Musk. It has the potential of scaling up to be useful for low-cost transactions. SHIB is supposedly the “DOGE killer,” so it is a joke on a joke now being taken seriously as crypto with a huge following.
Understand the Risks
Even though the valuations of the top cryptocurrencies are in the many billions, they have no backing by anything. They have no intrinsic value. They are only worth what some other investor is willing to pay for them. You are investing in complex computational math and permanent, encrypted digital records. Nevertheless, cryptos are attractive to some as alternative investments.
The risks of investing in cryptos include:
- Complete Loss of Value: Cryptos may suddenly lose popularity. All their value may evaporate.
- Volatility: The trading price of cryptos goes up and down significantly. Many cryptos experience daily changes of 5 to 10% in value, up or down. A sudden downside correction of up to 50% loss is common.
- Government Regulations: Governments may make trading, owning, and using cryptos illegal. China has already done this. Governments may also ban some cryptocurrency exchanges. The U.S. banned Binance. More regulations are coming.
- Perception of Criminal Intent: Cryptocurrency use may be semi-anonymous by hiding the ownership of a digital wallet. Bitcoin is popular with criminals for trading illegal goods. It is the payment method for extortion demands from a cyber-attack of ransomware that locks a computer with encryption.
- No Insurance: Investing in cryptos through an exchange is not covered by any insurance if they are lost.
Decide Between Digital Wallet vs. Exchange?
You may keep your cryptos in your private digital wallet or in your account on a cryptocurrency exchange. Here is an explanation of the difference.
Using a Digital Wallet
A digital wallet is a storage medium for cryptos. There are many digital wallets available. Some are software or downloadable apps. Some are physical media, such as a thumb (USB) drive.
A digital wallet stores cryptocurrencies. The wallet uses two encryption keys with long passwords of 256 characters each.
The public key is the wallet’s address for use by those who want to send cryptocurrency to that wallet. The wallet’s owner uses a private encryption key to approve transactions with the cryptocurrency in that wallet.
The private key must be secret. The owner must take care to protect it. If the private key is lost, so is the cryptocurrency in that wallet. Some unfortunate people lost millions this way, so be careful with your private key. Do not store a private key online or in any digital format that might expose it to hacking. Instead, write it on paper and keep that paper secure like it is a million dollars in cash.
To use a digital wallet to receive cryptos, you give your public key to someone or for an online transaction. That key encrypts the information sent to your digital wallet. You can open the digital wallet only if you have the matching private key that requires your top-secret password.
Storing Your Cryptos on an Exchange
Some find it more convenient to let the currency exchanges hold the cryptos for them when trading cryptos. This method defeats the security of having the cryptos stored in your private digital wallet. However, many opt to do this because constantly dealing with a digital wallet while trading cryptos is cumbersome.
Some cryptocurrency exchanges were hacked with many millions in value of cryptos stolen. This danger is the systemic risk of having an exchange hold your cryptos for you.
Whether you keep cryptos in a private wallet or let a cryptocurrency exchange hold them for you is a personal decision. Make the decision based on your risk tolerance and confidence in the crypto exchange you use.
Look at Transaction Fees
Buying and selling cryptos incur fees. To buy cryptos using a fiat currency like the U.S. dollar, you may pay a transaction fee. This fee includes the cost of using a credit card or making a bank transfer to buy the cryptos with dollars.
Transaction fees may be stated or hidden in the spread between the buy and sell prices on an exchange. Carefully investigate all fees for any system you are thinking of using.
Dive Into Cryptocurrency Exchanges
Cryptocurrency exchanges are the easiest way to invest in crypto. You open an account, fund it, and start trading. Use a bank card for the funding process. You can complete this account sign-up process on some exchanges in minutes. You will have to give your identification. If you use an exchange, you will not have any anonymity.
Some popular exchanges are:
Consider Online Brokers
You don’t have to dive into cryptocurrency investments alone. Some online brokers for stock trading also allow investors to trade cryptos. They can provide valuable market insight and opportunities. While Robinhood is the most noted for beginner crypto investors, Tradestation and Webull also specialize in the market.
Ready, Set? – Crypto!
Now, you know all you need to dive right in and start trading crypto. You may trade for as little as $10 in real money. Learn more as you gain experience. Never risk any money you cannot afford to lose completely. Enjoy the process of trading cryptos while being financially prudent about the risk.