Investment in Cryptocurrency – Basic Awareness

With the huge expected returns publicised in the press over the last few years (Axie, Bitcoin etc.), there are equally important stories of how people have lost their life savings (e.g. Squid Game Token)!  Most people advise that investment in cryptocurrency, that it’s risky but there are ways to mitigate those risks.

This is the seventh section of the Cryptocurrency and Blockchain awareness programme, How to Crypto.

This page deals with longer term investment (at least a couple of years) rather than day or swing trading (buy and sell within a day or within a week or two). Cryptocurrency trading requires a different approach as you are typically taking in increased risk based on more complex criteria in a very volatile market.  It isn’t impossible to do, but many experts argue that 60%-80% of all day trades for example, lose money.

If you are new to investing in cryptocurrency, the following points may help you avoid disaster…….

• • For the foreseeable future, Cryptocurrencies will be more volatile than traditional investments in stocks, bonds and precious metals – there will be wild price swings up and down.  You should only invest what you can afford to lose and whatever you do, never borrow to invest in crypto…. NEVER!
    

• • Your investment in cryptocurrency requires you to do some research to find an exchange that is suitable for your needs. This is where you will buy and sell your coins (sometimes called on and off-ramping).  You need to know that you can buy and sell easily and convert back to your national currency without hindrance.  You should test the exchange of your choice before making any significant investments. It’s really important to do this! My favourite exchange for instance, is Binance, but my bank wouldn’t let me transfer money from my bank account to the exchange. Such problems are common. Banks and financial institutions (noticing that money is leaving their customers’ accounts for crypto) are attempting to stop transfer to exchanges to ‘protect’ their users from unscrupulous deals. I personally believe that the real motive for this is to reduce the flow of money to financial institutions outside their control.

• • Store most of your investments in Hard/Cold wallets (see the Security section, Crypto Security – Protecting Digital Assets). Only keep crypto on exchanges when you are looking to make trades.  Exchanges can be hacked and accounts looted. If it’s not your wallet, it’s not your crypto!  Some crypto exchange customers have lost considerable amounts of money.  I transfer crypto to and from exchanges only when I am about to make a trade.  

• • Watch for scammers.  Scammers love crypto because most people don’t do due diligence when investing.  Your investment in cryptocurrency is important enough to carefully undertake your own research before deciding to part with your money. Why do you believe that the team behind your favourite the crypto project are honourable and are you sure that the project will still be around in a year or two?

• • Make sure you have an Investment Strategy and stick to it!

• • Don’t succumb to psychological pressure.  This may sound silly but it’s probably the most important rule.  Don’t suffer from Fear Of Missing Out (FOMO) which will cause you to prematurely invest without doing the necessary research and due diligence work.  And, just as importantly – Don’t sell because of Fear Uncertainty and Doubt (FUD) when the market plummets – don’t have weak hands, trust in your original research and decisions – you will have considered what you need to do in such circumstances, deviating from your strategy (after all that research), is counterproductive.  After an investment in cryptocurrency when the price has dropped significantly, it is very normal for the price to go back up again, we just need patience. Carefully consider the status before exiting your investment.  Bitcoin, as an example, has had numerous crashes (some by as much as 80%!) and always bounced back.

If you think you can do all of the above, let’s look at some cryptocurrency investment options.

Basic Investment – Major Cryptocurrency (currently)

Crypto currencies are usually listed in order of market cap (total value of all the coins minted).  This changes regularly because of popularity, perceived use case and media hype. New currencies and tokens come and go and with over 10,000 cryptocurrencies it can be a difficult job to find the right ones to invest in.

Let’s take a look at some of the most popular by market cap:

Bitcoin (BTC)

Market Cap: $880bn.  This is the most obvious choice as a store of value (i.e. it’s like digital gold). Bitcoin’s price has skyrocketed and it has become a household name. In May 2016, you could buy a Bitcoin for about $500. As of Jan. 3, 2022, a single Bitcoin was priced over $46,000. That’s growth of about 9,200%.

And yet, it’s not been an easy ride for Bitcoin. The number of people in the media that believe it’s a scam is considerable.  This year, I saw a video of a guy asking people if they would rather have a hundred dollars or a bitcoin, a large proportion would rather have the dollars!  Some noteworthy headlines from ‘reputable’ publications over the years show similar sentiments (note the price per bitcoin in 1st Jan of that year (in brackets)):

• • • 2010 “Why Bitcoin can’t be a currency” – The Underground Economist ($0.09)
    • 2011 “So that’s the End of Bitcoin Then” – Forbes ($0.30)
    • 2012 “Wired, Tired, Expired for 2012: Bitcoin” – Wired ($5.27)
    • 2013 “A Prediction: Bitcoin is Doomed to Fail” – The New York Times ($13.30)
    • 2014 “Bitcoin revealed: a Ponzi scheme” – The Washington Post ($770.00)
    • 2015 “Jamie Dimon: Bitcoin Will Not Survive” – Coindesk/Fortune ($313.92)
    • 2016 “R.I.P. Bitcoin.  It’s time to move on” – The Washington Post ($434.46)
    • 2017 “The Great Bitcoin Scam” – Forbes ($997.69)
    • 2018 “The Bitcoin Pyramid scheme continues to collapse” – New York Post ($12,414.75)
    • 2019 “Bitcoin will soon be worth zero” – New York Post ($7,188.00)
    • 2022  On January 1st Bitcoin was worth $47,743.22

Bitcoin has recently been made legal tender (can be used to pay for goods in shops and businesses – by law) in El Salvador with other countries lining up to do the same. Adoption is increasing a a speedy rate but as yet, the super large investment portfolios don’t include Bitcoin.

It’s true  that Bitcoin still has a number of hurdles to overcome in terms of mass adoption, but advocacy has increased considerably in recent months and Bitcoin is widely considered the safest investment potential of all digital assets.  I was interested in getting some Bitcoin in 2013, I decided against it because I couldn’t be bothered.  As many bitcoin advocates will argue, it is never too late to get in.

Ethereum (ETH) 

Market Cap: $445bn.  A Layer 1 crypto with the ability to operate smart contracts.  It’s currently the most popular option for the development of applications including Decentralised Finance.  It is very expensive to buy and sell on Ethereum at the moment because of high transaction fees. There are many other faster and cheaper layer 1’s ecosystems out there.  I should say though, that most analysts believe that Ethereum is a very safe investment currently.

Binance Coin (BNB) 

Market Cap: $72bn.  Binance Coin is the native token issued by the Binance cryptocurrency exchange and trades with the BNB symbol. Binance is the largest cryptocurrency exchange in the world. In 2020, it recorded a high of $3 trillion USDT in total trading volumes. Governments and financial institutions are keen to impose restrictions and regulations on the exchange which can be prohibitive to users wanting to trades. But the fact is, dispite this, Binance is still the most popular exchange because it’s infrastructure is feature rich.  Many new projects are supported and Binance have investment funds of their own to promote projects on their ecosystem.

Tether (USDT) 

Market Cap: $70bn.  This is the most popular stablecoin.  It is linked to the US dollar and mostly used by people like you and me to trade other crypto-currencies.  Many traders are changing to other stablecoins as Tether is mainly backed by debt rather than actual dollars. Despite this, it is still the leading stablecoin in an increasingly competitive area. You would typically buy Tether with your fiat currency in preparation to invest in a cryptocurrency on an exchange.  However, there are an increasingly large number of people buying USDT to invest in DEFI as they would get a better interest rate than their bank.

Cardano (ADA) 

Market Cap: $44bn.  Another powerful layer 1 coin that was one of the first to embrace the Proof of Stake consensus mechanism.  It has recently released its smart contract functionality which will also have cheaper and faster transaction speeds than Ethereum (although it is still struggling a little with performance issues).

These are relatively low risk cryptocurrency investments.  Other higher risk (but with greater expectation of rewards) are some of the small market cap ‘altcoins’:

Dogecoin (DOGE) 

Market Cap: $7.5bn.  The infamous meme coin has no value other than as a store of value.  It was initially developed as a tipping coin that would never gain high value but then declined in popularity and price.  Recently Elon Musk has taken an interest in it (as a pet project (sorry, couldn’t resist)) and it has regained much of its early popularity.

Dogecoin is widely considered a favourite cryptocurrency investment of Elon Musk who has recently purchased Twitter.  Many expect the coin to rise in value as it is thought the Musk will increase it’s utility and use case as part of his activities regarding Twitter.  Do you own research before investing though, this may just be hype and until we see a good reason why Dogecoin should be valuable, it should continued to be considered a meme-coin.

Cosmos (ATOM) 

Market Cap: $10bn.  This is a cryptocurrency that powers an ecosystem of blockchains designed to scale and interoperate with each other. The team aims to “create an Internet of Blockchains, a network able to communicate with each other in a decentralised way.” Cosmos has a proof-of-stake blockchain consensus mechanism.

Axi Infinity (AXS)

Market Cap: $4bn.  A token that can be earned while playing a game or purchased on an exchange.  This is currently the most popular and most famous ‘Play to Earn’ game. It’s accompanied by the other Axi Infinity token called SLP (Smooth Love Potion). These tokens can be used to create characters in the game or buy items and virtual land.  Price fluctuates depending on the popularity of the game or service and scarcity of its resources.  The price has taken a dive recently and is currently a tenth of the price it was in 2021 and has not been helped by a huge hack that cost the company $650million!

These major crypto currencies are part of 10,000 plus cryptocurrencies.  Some will go nowhere, some were created as scams, some are poorly designed and others are currencies that will make you a millionaire!  The only way to tell which is which is by doing your own research (i.e. trust your own judgement rather than others).  

When purchasing coins, determine your desired risk to profit ratio.  It may be that you want to gamble on higher returns by investing in crypto with a higher risk.  Or you may, like most of us, decide that you simply need a store of value (ideally, that can’t be manipulated by the government or those naughty bankers).

 

In section eight of this awareness course, we start our cryptocurrency investment journey by looking at developing an Investment Strategy: Developing Your Crypto Investment Strategy.

 

This article is copyright 2022 by Tony Fawl, CryptoNET.

This page is part of the How to Crypto Web Series, an awareness course for beginners interested in blockchain projects and cryptocurrency investment. Please checkout the Bibliography and Glossary of Terms pages for other useful resources and links. To find out what we do, take a look at the About Us page.

Disclaimer: CryptoNET.org.uk is not a registered investment, legal or tax advisor or a broker or dealer.  All investment/financial opinions expressed by CryptoNET.org.uk are from the personal experiences of the owner of the website and are intended as educational and entertainment material. Best efforts are made to ensure that all information is accurate and up to date but we would still recommend that you do your own research before making investment decisions. 

 

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