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Cryptocurrencies : 6 Basics Info You Should Know

cryptocurrency investment
ASNB
ASNB Academy

7 min read

Investing in cryptocurrencies can be lucrative and rewarding, but it also carries significant risks of loss, as its volatility puts investors at higher risk.  

To navigate this new investment platform, it's crucial to understand the fundamental aspects, benefits, and risks associated with cryptocurrency investment.

As such, when choosing the best cryptocurrency to invest in, you must consider your individual goals, timeline, monetary capability, and risk profile, just as you would with any investment.

Additionally, you should do your due diligence to ensure that any crypto project you are interested in is legitimate and secure.

1. What is Cryptocurrency?

Cryptocurrency is a digital or virtual currency that uses cryptography for security and operates independently of a central authority or government.

Unlike traditional currencies we use daily, which are issued by the governments of each country (fiat currencies), digital currencies leverage blockchain technology to gain decentralization, transparency, and immutability.

In today's world, Cryptocurrency can be used to pay for purchases online without going through an intermediary, such as a bank, or it can be held as an investment.

2. Key Features of Cryptocurrencies

  • Decentralization: Most cryptocurrencies are decentralized and operate on a peer-to-peer network without a central authority to oversee its operations.
  • Security: Cryptocurrencies use cryptographic techniques to lock transactions, control the creation of new units, and verify asset transfers.
  • Transparency: Transactions are recorded on a public ledger for transparency to reduce the risk of fraud
  • Immutability: Once recorded on the blockchain, transactions cannot be altered or deleted, ensuring the data integrity.

3. Popular Cryptocurrencies

  • Bitcoin (BTC): The first and most well-known cryptocurrency, often referred to as digital gold. Created in 2009 by Satoshi Nakamoto, bitcoin (BTC) is the original cryptocurrency. In May 2016, you could buy one bitcoin for about $500. As of Jul. 23, 2024, a single bitcoin's price was around $66,506. That's a growth of 13,201%.
  • Ethereum (ETH): Open-source, decentralized blockchain platform that enables the creation and execution of smart contracts and decentralized applications (dApps). From April 2016 to the end of July 2024, its price went from about $11 to around $3,501, increasing 31,730%.
  • Tether (USDT): Tether (USDT) is a stablecoin, meaning it's backed by fiat currencies like U.S. dollars and the Euro and hypothetically keeps a value equal to one of those denominations.
  • Binance Coin (BNB) is a cryptocurrency used to trade and pay fees on Binance, one of the largest crypto exchanges in the world. BNB's price in 2017 was just $0.10. By late July 2024, its price had risen to around $584, a gain of 584,301%.
  • Ripple (XRP): This cryptocurrency focuses on facilitating real-time cross-border payments for financial institutions. At the beginning of 2017, its price was $0.006. As of Jul. 23, 2024, it reached $0.60, a rise of 9,825%.

4. Benefits of Cryptocurrency Investment

  • High Potential Returns: Cryptocurrencies have shown the potential for significant returns, with some coins appreciating substantially over a short period.
  • Portfolio Diversification: Adding cryptocurrencies to a diversified portfolio can provide exposure to a new asset class, potentially enhancing overall returns.
  • Accessibility: Cryptocurrencies can be traded 24/7, unlike traditional markets, which have specific trading hours.
  • Hedge Against Inflation: Some investors view cryptocurrencies, particularly Bitcoin, as a hedge against inflation and currency devaluation.

5. Risks of Cryptocurrency Investment

  • Volatility: Cryptocurrencies are highly volatile, with prices capable of experiencing significant swings in short periods.
  • Regulatory Uncertainty: The regulatory environment for cryptocurrencies is still evolving, and future regulations could negatively impact the market.
  • Security Risks: Although the blockchain is secure, exchanges and wallets can be vulnerable to hacks and fraud.
  • Market Manipulation: Due to relatively low liquidity in some cryptocurrencies, prices can be subject to manipulation by large traders (whales).
  • Lack of Intrinsic Value: Unlike traditional assets, cryptocurrencies do not generate cash flows or earnings, making valuation challenging.

6. Steps to Start Investing in Cryptocurrencies

  • Research and Education - Understand the basics of blockchain technology and the specific cryptocurrencies you are interested in. Stay updated with market news, trends, and regulatory developments.
  • Create a Wallet—Store your cryptocurrencies in a secure wallet. Options include hardware wallets (e.g., Ledger, Trezor) for enhanced security or software wallets for convenience.
  • Choose a Reliable Exchange - Select a reputable cryptocurrency exchange with solid security measures, good liquidity, and a user-friendly interface (e.g., Luno.
  • Develop a Strategy - Define your investment goals, risk tolerance, and time horizon. Decide whether you will adopt a buy-and-hold strategy, trade actively, or invest in a diversified portfolio of cryptocurrencies.
  • Start Small - Make a small investment to familiarize yourself with the market dynamics before committing large sums of money.
  • Diversify Your Portfolio—Avoid putting all your funds into a single cryptocurrency. Instead, diversify across multiple coins and tokens to spread risk.
  • Monitor and Review - Regularly review your investment performance and stay informed about market developments. Be prepared to adjust your strategy in response to market changes and regulatory updates.

Conclusion

Cryptocurrency investment offers exciting opportunities but comes with substantial risks. A thorough understanding of the market, careful planning, and a disciplined approach can help investors navigate this volatile landscape and potentially reap significant rewards. By staying informed and making prudent investment decisions, you can harness the benefits of this innovative financial technology.

However, before embarking on an investment journey with cryptocurrency, build your financial fort by investing in low-risk investments such as ASB or fixed deposits. If you lose, it will not negatively impact your financial standing.