Investing in cryptocurrency – features and prospects

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Investing in cryptocurrency is a relatively new but very popular way of investing money today. The first digital currency, or cryptocurrency – bitcoin (BTC) – appeared in 2009, and since then its value has grown from almost zero to several thousand dollars. As of February 7, 2020, the WTC is around $10,000 and peaked at $18,000 at the end of 2017-2018. And besides bitcoin, there are more than 2,000 other cryptocurrencies to invest in. The first crypto-enthusiasts became millionaires long ago, but now the situation has changed. Let’s break down how to invest in cryptocurrency today, when bitcoin can no longer be bought for $10, which cryptocurrencies you should pay attention to and whether you should invest in this niche at all.

Peculiarities of investing in cryptocurrency

When investing in cryptocurrency, it is important to understand a few basic things:

  1. This is a risky asset. No one can guarantee you a return. You can make a lot and you can lose everything. That’s why you shouldn’t invest all of your savings in cryptocurrency.
  2. It is a virtual asset. Losing the key to your cryptocurrency wallet means losing money. The key can be stolen by intruders, or you can lose it yourself. That’s why it’s worth paying attention to security issues – for example, withdrawing money to secure cold storage wallets.
  3. All cryptocurrency transactions are irrevocable. If you send money, you can’t get it back. In a bank you can make a request to the support service and cancel the operation, but in cryptocurrency networks you can’t do this.

How to invest in cryptocurrency: an overview of the main ways

Cryptocurrency can be bought or mined by mining. This is legal, but when you withdraw money into fiat, you have an obligation to pay tax on your earnings. Let’s look at the main ways to invest in cryptocurrency.

Buying or exchanging cryptocurrencies through exchange offices

The easiest way to buy is through exchanges. There you can buy popular cryptocurrencies (bitcoin, ether and some others) within 15 minutes. To find a suitable exchanger, use BestChange monitoring service. It is enough to enter into the form the direction of exchange and the amount, and the system will show the best offers.

As a rule, the exchange rate at the exchangers is less favorable than on the exchanges. But this is compensated by the speed and simplicity of the exchange procedure.

Another way is to use telegram bots like VTC banker. There you can also quickly buy or sell cryptocurrency.

The pros of this method:

  1. High Speed.
  2. Simple and clear interface.
  3. You can do without registration.
  4. Russian interface
  5. There is a support service, sometimes around the clock.

Cons:

  1. This way you can buy only well-known cryptocurrencies – bitcoin and a few other coins. Exchangers do not work with little-known tokens.
  2. The exchange rate is not the most favorable.
  3. Many exchangers operate unofficially, your money is not protected.

The method is suitable if you want to quickly buy/sell a small amount of cryptocurrency, as well as for the first purchase. When exchanging large amounts, it is better to choose other options.

Direct exchange

Direct exchange services (p2p or peer-to-peer) resemble regular exchangers, but there is one key difference between them. In conventional exchangers, the service acts as an intermediary: it freezes funds until it confirms that the seller has received money in the account. The exchanger then transfers the frozen funds, and the transaction is completed. Like any other intermediary, the exchanger does not work for free: it earns on commissions and the difference in rates, which in the exchanger are slightly overvalued.

Direct exchange implies that there are no intermediaries, and the service only brings together the seller and the buyer. The most famous resource for p2p bitcoin exchange is LocalBitcoins. After registering on the service, you can find a person who is ready to exchange the right amount of bitcoins the way you want (for example, via transfer to a certain bank card). It’s free if you respond to someone else’s ad. The system charges 1% commission on the transaction amount for creating your own ad.

For a long time on LocalBitcoins you could find a person in your city/region, meet him in person, and conduct a transaction. But now this option has been removed. Also, the platform recently introduced an obligatory condition of account verification: previously it was possible to trade anonymously, it was enough to confirm the account by email.

Pros of working at LocalBitcoins:

  • you can find a suitable exchange rate and method of exchange;
  • no commissions.

Cons:

  • is only suitable for exchanging VTS;
  • verification of the account is required.

You can find a counterparty for a direct exchange directly – for example, on bulletin boards or in specialized groups in social networks. In this case, you save on commission, but you should understand that this is the riskiest way of exchange. There are many cases of fraud, when the seller or the buyer were attacked and lost their money or cryptocurrency.

Cryptocurrency exchanges

Exchange is a professional exchange platform, which is most suitable for large investors and professional traders. For a newcomer it is not easy to understand the interface of the exchange: compared with exchangers there are many additional options. In addition, most major exchanges are not russified.
There are hundreds of exchanges, the most famous are Binance, Okex, Huobi, Kucoin, EXMO, HitBTC and others.

To register at the exchange, you need to create an account by confirming your e-mail. Then it is desirable to connect the two-factor authentication for protection against intruders. After that you can start trading – for this you need to add money (or cryptocurrency) and to put an order to buy or sell. You can also set stop-losses: when the order reaches a predetermined level, it will trigger automatically. This helps to avoid losses, if the rate goes down sharply. To withdraw money most often requires verification of the account, which takes time (up to several weeks). Conditions vary from exchange to exchange. Before you start trading, read the rules of the site.

The pros of this method:

  • more favorable rates;
  • suitable for permanent trading;
    there are additional opportunities for professional traders;
    even little-known coins can be found on exchanges.

Cons:

  • more complex interface compared to exchangers;
  • not all exchanges support the Russian language,
  • Not all exchanges work with fiat, some allow only to exchange cryptocurrencies with each other;
  • verification is required. This means, firstly, that you will not be able to trade anonymously, and secondly, that you will not be able to withdraw your first money quickly if necessary;
  • keeping money on the exchange is dangerous: the site can be hacked, or the management can steal your deposit. Such precedents have already occurred. And for the withdrawal of money from the exchange you have to pay a commission, which is not always profitable – especially for those who trade constantly.

Investing in cloud mining

Mining is the process of mining a cryptocurrency. All cryptocurrencies fall into two categories – Proof of Work (PoW) and Proof of Stake (PoS). Most cryptocurrencies, including bitcoin, are of the first type. Mining these cryptocurrencies requires a lot of power and a lot of energy. To mine cryptocurrencies, you need to buy special equipment and set up a mining farm.

Bitcoins could once be mined on an ordinary home computer, but as the network grows and the hash rate (the combined power of all the devices connected to the network) increases, the complexity of mining increases, and now mining is only profitable for large, industrial-scale farms. For small investors who cannot afford to run such a farm, there is cloud mining. There are services that offer to buy back some of their capacity that they use to mine bitcoins, and pay a percentage of their profits.

Cloud mining was very popular in 2016-2017, but its popularity dropped when it turned out that many investors did not benefit from it: electricity costs can equal the investor’s actual profit. In addition, small services can turn out to be fraudulent and pay nothing out. If you want to invest in cloud mining, choose proven large services.

What cryptocurrency is worth investing in?

Bitcoin dominates the cryptocurrency market – in terms of capitalization (the product of the current price and the number of coins in circulation), its share as of February 7, 2020 exceeds 64%. Investing in bitcoin is the least risky because it is a universally recognized financial instrument. But bitcoin has already risen millions of times since its inception, and it is likely that further growth will no longer be as impressive.

There are also major cryptocurrency projects that are in the top 10 and top 30 coins by capitalization according to Coinmarcetcap. These include ether, ripple, Bitcoin Cash and Bitcoin CV, EOS, Litecoin, Tron, and others. Investing in them is potentially more profitable, but also riskier.

The most risky ones are investments in little-known projects that are not in the TOP.
You can choose one coin, like bitcoin, or distribute your investments among several, creating a cryptocurrency portfolio. Such a strategy will allow you to diversify your investments and reduce the risk of choosing the “wrong” asset. Even if one cryptocurrency fails to meet your expectations, the growth of other assets in your portfolio can give good financial results.

Regardless of what cryptocurrency you decide to buy, there is no guarantee that it will grow in value and yield. But statistics show that bitcoin and other top cryptocurrencies are growing over the long term.

How to invest in cryptocurrency: a step-by-step plan

If you have decided to become a crypto investor, you need to take a few steps;

  1. Choosing your investment method and strategy.
    Choose your strategy (long-term investing, trading, mining) and method of buying cryptocurrency. For beginners, the easiest and safest strategy will be long-term investing according to the “buy and forget” principle. Cryptocurrency rates can fall at certain intervals, so you should not invest for a week or a month. It is better to invest for at least 1-3 years. You can invest once or regularly buy more coins.
  2. Creating and depositing an e-wallet.
    You can create an online wallet for free in a few minutes. There are different kinds of wallets, one of the most famous is Blockchain.com. It is suitable for storing bitcoin, ether, bitcoin cache and Stellar. Register with the service of your choice: email confirmation is usually required. Write down all your login details and save them in a safe place. Wallet address (it is a sequence of letters and numbers) will be generated automatically. To find out your bitcoin address, click “Request bitcoin”. Copy it to get the bitcoins you buy.
     If you buy cryptocurrency on an exchange, the address will be generated automatically when you register your account. But storing cryptocurrency on the exchange is not safe: it is better to withdraw it to your personal wallet.
  3. Buying cryptocurrency. When buying cryptocurrency from an exchanger, provide your wallet address. Usually the transfer takes a few minutes. When buying on an exchange, you don’t need to specify your wallet address: it’s tied to your account. You will need your online wallet address when withdrawing funds from the exchange.
  4. Expect a favorable market situation. Determine in advance what selling rate will be acceptable to you. Periodically check the rate changes. It makes no sense to do it three times a day – be patient. At certain times the rate can drop: do not be nervous and rush to sell your coins at a loss. This is a normal situation on the market, and over time, the rate should recover.
  5. Selling cryptocurrency and withdrawal of funds. Selling is the same as buying. You need to make an order to sell, and the next steps are almost identical.

Advantages and disadvantages of investing in cryptocurrency

The benefits of investment:

  1. Opportunity to get a high income
  2. Minimum personal involvement of the investor.
  3. Becoming an investor is easy, even for a beginner.
  4. You can start with a small investment.

Disadvantages:

  1. Profitability is not guaranteed.
  2. Legislative uncertainty.
  3. Investments can be unprofitable in the short term.

Risks of investing in cryptocurrency

Investments in cryptocurrencies cannot be called safe. The main risks:

  1. There is a risk of losing access to cryptocurrency due to your own inattention or a hacker attack.
  2. The risk that transactions may be declared illegal and banned at the legislative level. So far, the legal status of cryptocurrencies in Russia remains uncertain, although transactions with them are not prohibited.
  3. The risk of a fall in the rate and the investor’s losses.

Conclusion

Investing in cryptocurrency is a promising but risky way to invest money. You shouldn’t sell your house or take out loans in the hope of getting a super return. It makes sense to invest a part of your capital, the loss of which will not be critical for you. In this niche, you can get a high profit due to a significant increase in the value of assets, but no one can guarantee that the selected coin will grow in value.