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Investing in Crypto – Everything to Know Before Investing in Cryptocurrency
Investing in crypto for the first time can pose several obstacles. Though taking a wild stab in the dark can be profitable on occasion, failure to implement an effective investment strategy can be disastrous. Also, a lack of understanding regarding blockchain and cryptocurrency can lead new investors to make uninformed decisions.
Before you invest in crypto for the first time, it’s worth considering some basic principles. For example, have you ever stopped to ask yourself, “what is cryptocurrency?”, “what is DeFi?” or “what is Bitcoin?”. Understanding how these technologies operate on a foundational level will drastically improve your ability to make informed decisions when investing. Furthermore, there are various tools that assist with crypto investing, including trading indicators and on-chain analysis. Plus, an understanding of the different ways to buy, sell, and trade crypto could help you find the most profitable tokens or coins at the best rates.
You’ll likely need to interact with a crypto exchange when investing in crypto. A crypto exchange is where crypto is bought and sold. Centralized exchanges such as Coinbase and Binance are often the first place people start when they want to invest in crypto, as they offer a fiat on-ramp. This means that you can deposit money from your bank account into a crypto account to make crypto purchases.
Most centralized exchanges (CEXs) require users to upload some form of photo ID for “know your customer” (KYC) and “anti-money laundering” (AML) practices. However, some tokens are only available on decentralized exchanges (DEXs). DEXs are a type of peer-to-peer exchange that uses smart contracts to automate trading terms. Instead of matching individual investors via an order book, many DEXs use liquidity pools as part of an “automated market maker” (AMM) model. To interact with a DEX, such as Uniswap, you’ll need some sort of self-custodial crypto wallet.
Centralized exchanges tend to offer built-in crypto wallets with a custodial service that guarantees your assets up to a certain amount. However, to interact with decentralized exchanges, you’ll need some sort of non-custodial Web3 browser wallet. MetaMask is by far the most popular. Plus, it works with many different blockchain networks.
Although browser wallets such as MetaMask are incredibly convenient, they are not always the safest. This is because you could lose or break your computer, or someone may be able to gain access to your wallet when you’re not looking. Custodial wallets like those offered by centralized exchanges can be helpful for beginners, but they have a single point of failure. If the servers for a centralized exchange are down, or they get hacked, you may not be able to access your funds. Plus, deposit guarantees are not limitless, meaning that if you lose your funds, you may not be able to retrieve all of them if you have made substantial investments.
In many cases, the safest way to look after your investments is by using an offline cold storage hardware wallet. Most hardware wallets come with a seed phrase that acts as a recovery password. Provided that you keep this seed phrase in a safe place and nobody else knows what it is, you are in complete control of your assets. That said, being your own bank requires diligence and a little bit of technical “know-how”. For this reason, many newcomers and non-technically minded investors prefer to keep their assets in the custody of a centralized exchange. If this is the case, consider using two-factor authentication (2FA) and multiple exchange accounts to spread the risk.
How Does Investing in Cryptocurrency Work?
As with any type of investment: investing in cryptocurrency relies on the idea of buying an asset at a low price and selling it later at a higher price for a profit, or “buying low and selling high”. This premise applies to long-term investing and high-frequency trading. Crucially, this time horizon forms the foundations of most strategies when an individual wants to invest in crypto.
Cryptocurrency Investment Strategy
An investment strategy outlines an investor’s desired profit on an asset before selling it. A strategy could outline price targets, when the targets are expected to be met, and how much profit there is to be taken. A common feature in many crypto trading strategies is to take profits along the way. This ensures that you can at least recover your initial investment.
Choosing the right investment strategy requires an understanding of your own risk appetite. Are you naturally conservative or a measured risk taker? Are you looking to participate in regular intra-day trading, or are you hoping to accumulate over months or years? These factors will help you establish the appropriate investment strategy.
There is no “one-size-fits-all” strategy when investing in crypto. Instead, each investor will likely adopt a strategy that suits their risk appetite and time horizon. Additionally, it is worth bearing in mind how much you want to invest in crypto and the frequency. For example, do you want to invest a lump sum, or will you be investing on a weekly or monthly basis?
The term “hodl” means to hold crypto for an extended period. Hodling is one of the most consistently fruitful crypto investment strategies. Both newcomers and seasoned investors implement this strategy to great effect. The name of the game is to buy low, sit tight and wait for investments to increase in price over an unspecified period.
The hodl tactic requires minimum effort and helps investors to remove emotions from trades. Rather than monitoring the daily price fluctuations of their investments, hodlers can take a “hands-off” approach when investing. Furthermore, many high-frequency traders still possess a hodl portfolio for the future. Also, such traders may even take profits from day trading and put them in a hodl portfolio.
Dollar-Cost Averaging (DCA)
Dollar-cost averaging (DCA) involves allocating a sum of capital every day, week, month, or few months to build up an investment position periodically. Because most people don’t have huge sums of spare cash, it can be helpful to set aside a portion of a salary or regular income for investing in crypto. This method makes budgeting for investments relatively simple. Plus, it can minimize the effects of volatility.
By investing a similar amount on a regular basis, sudden price drops can be sought out as a buying opportunity, removing the disappointment felt when a major price correction occurs after making a substantial investment. It is worth noting that frequent deposits incur more fees. However, periodic investments like this tend to compliment the mindset of a hodler and can help to create a stable, considered portfolio.
Asset reallocation takes the hodling mentality to the next level by implementing effective portfolio management to take profits and cut losses to maximize profits based on asset performance. By taking profits regularly and reinvesting gains, investors can diversify their portfolios.
Additionally, by taking profits and reallocating them, investors can take back their initial investment and still “leave a horse in the race”. This is a particularly common strategy for reducing the risk on highly speculative investments. Whether you decide to take it all at once, at a particular milestone, or in increments, this method helps investors to maximize returns without taking on too much additional risk.
Day trading involves high-frequency trading over small time frames. Similar types of crypto trading include “scalping” and “swing” trading. Scalping takes advantage of small price movements over short periods, whereas swing trading involves trading over slightly longer periods of a few days or so. Moreover, most types of trading rely on some basic tools. For example, a trader is likely to use trading indicators, technical analysis, fundamental analysis, and on-chain metrics.
Another common way to trade crypto is by using leverage. Leverage is a way to trade used by many professional traders to maximize profits. However, leverage is inherently risky. For instance, when using a 10x leverage, a 10% price movement could result in liquidation and loss of assets. As such, it is not advisable to use leverage unless you know what you are doing. It is worth considering using a “stop-loss” to reduce the effect of liquidations. Also, as with any investment, successful day trading often uses an effective trading strategy.
Algorithmic trading is the process of automating trades using pre-programmed instructions based on specific parameters. The parameters can include variables such as price fluctuations, time, trading volumes, and various other trading indicators. One of the benefits of algorithmic trading is that it enables you to automate trades to be executed while you’re away from your computer. Many people use algorithmic “trading bots” to execute high-frequency trades with relatively small margins that can accumulate to make a healthy profit.
Trading bots vary from quite simple and easy to use to advanced technical automation systems. Furthermore, trading bots enable users to backtest trading strategies using historical data. Check out the Algorithmic Trading & Technical Analysis course at Moralis Academy to learn more!
Yield farming is a cryptocurrency investment strategy where participants jump between decentralized finance (DeFi) lending and borrowing protocols, searching for the highest annual percentage yield (APY). This is often a high-risk type of investment compared to hodling. However, yield farming can generate substantially higher returns.
Yield farmers provide liquidity to a DeFi protocol and earn token rewards in return. Also, farmers receive liquidity pool (LP) tokens that represent their share of a liquidity pool. These LP tokens can then be staked to earn further rewards. The interest rates offered generally represent the risk taken on. That is to say that liquidity pools with the highest APYs often hold more volatile assets. However, many farms offer liquidity pools with stablecoins and top-performing crypto assets. Although these pools may generate less interest than some pools, they generally provide less risk when the asset has a higher 24-hour trading volume.
Technical analysis is an analysis methodology for identifying trading opportunities and statistical trends using trading indicators. Further, traders use all kinds of indicators during technical analysis. This includes Fibonacci retracement levels, Bollinger Bands, the parabolic SAR, the Ichimoku Cloud, the directional index, etc. Additionally, investors use indicators such as price fluctuations, trading volumes, and moving averages to forecast investment opportunities.
Technical analysis helps investors to “read the story” of the price charts while making informed decisions using probabilistic outcomes rather than gut feeling and emotion. Although these trading indicators can be beneficial, you may find yourself looking at a lot of multi-colored lines on a chart without really understanding what’s going on. For this reason, to begin with, consider avoiding too many trading indicators when you start to invest in crypto. Once you have mastered a handful, perhaps start introducing more.
Furthermore, investors can obtain live crypto data from the blockchain known as “on-chain” data. This data shows network activity and can be useful for “on-chain” analysis. On-chain data provide insights such as the number of unique wallet addresses, network congestion, net unrealized profit/loss (NUPL), and daily issuance.
Fundamental is an analysis methodology that uses macroeconomic factors to forecast asset performances and market conditions. Unlike technical analysis, the fundamental analysis assesses market trends and external influences to predict certain market moves. For example, one might look at the traditional financial markets or stock markets to determine a bullish or bearish sentiment. When stock markets are down, there is a good chance that the crypto markets will also be down. Equally, when a major crypto project announces a huge partnership with a major sporting company, you might expect that project to perform well.
Another example of this is exchange listings. When a crypto asset is listed on a major exchange such as Binance, it’s often followed by a bit of a pump. Though this is perhaps less scientific than technical analysis, dismissing either type of analysis could be detrimental for crypto investors. For example, you may have been charting the hottest new crypto using technical analysis. This particular crypto could appear to have a high chance of “pumping to the moon”. However, if that project is hacked or the team runs into delays, the price could tank unexpectedly. This is why a combination of both the technical analysis and fundamental analysis method is essential.
What Companies are Investing in Cryptocurrency?
Investing in crypto has become a major business. In fact, some of the biggest companies in the world invest in crypto and place those assets on their balance sheets. Some of the biggest names include Microsoft, Visa, Mastercard, PayPal, Goldman Sachs, and MicroStrategy. The enterprise adoption of crypto is becoming difficult to ignore.
Historically, a lack of understanding and knowledge has created a barrier to enterprise adoption of crypto. However, many major companies are now going to great lengths to be involved in crypto and blockchain.
What are the Risks of Investing in Cryptocurrency?
Before you invest in crypto, please note that investing in crypto is inherently risky. Despite the many advantages, there are some key considerations to take into account before committing to any significant crypto investment. The crypto realm is currently mostly unregulated. Accordingly, most crypto assets are not guaranteed by any financial institution. Generally speaking, there is no authority in place to ensure the safety of investors.
Furthermore, crypto exchanges can be hacked. When this happens in a centralized exchange, your funds may be guaranteed up to a certain point. However, there is no guarantee. Plus, hacks on decentralized finance (DeFi) protocols and DEXs offer little to no protection.
Another consideration is how young the industry is. Few people actually understand the key value propositions of crypto and blockchain. As such, many who invest in crypto are in the dark about the factors that can influence asset prices. Also, crypto is extremely volatile. Crypto prices can seemingly drop off the face of the earth with little to no warning. For this reason, any crypto investor should be aware of the volatile nature of the asset class.
Moreover, crypto investing can present significant technical risks. Ensuring that you have correctly inputted a wallet address, selecting the right network, and ensuring that your funds are safe can be challenging. For this reason, investors should always take extra care when transferring assets and interacting with crypto exchanges.
Other risks include fake investment opportunities, money laundering, “pump-and-dump” schemes, fake exchanges, and a wide variety of scams. If you think something looks illegitimate or too good to be true, there’s a good chance that it is. Several impersonators use social media and YouTube, posing as celebrities or influencers that invest in crypto. Such tactics regularly dupe unwitting investors, so remember to take extra caution.
Beginners Guide on How to Invest in Crypto – Summary
Investing in crypto for the first time can be daunting. However, now that you’re equipped with all the tools you need to begin your crypto journey, you should be able to get started in no time. Remember, always do your own research, never bet more than you can afford to lose, and consider taking profits along the way!
Moralis Academy offers an extensive range of crypto and blockchain education courses. Check out the Crypto for Beginners course to learn how to buy, sell, and trade crypto safely using a crypto exchange account! Also, don’t forget to follow us on Twitter @MoralisAcademy! We’d love to hear your thoughts about investing in crypto!