The very first thing you should know when it comes to cryptocurrencies, especially if you are a newbie and haven’t been involved in crypto trading or investing activities before, is not to get caught up in the hype. While from the outside, it looks like a very profitable venture to participate in, and in most cases, it has proven to be exactly that, you cannot throw caution to the wind and just jump unquestioningly into the industry you know very little about.
For sure, you have seen many success stories of people getting financially healthy quickly due to investing or trading in cryptocurrencies. There are many examples in the media about cryptocurrencies being an essential part of many institutional investors’ portfolios.
Still, we cannot emphasize enough that it takes a lot of effort, not to mention the time required to learn all the analysis techniques, apply them correctly, consider many external factors, and not exercise extreme caution before you can even think of achieving the level of success they have achieved over the years.
However, suppose you have gotten comfortable with the knowledge that the cryptocurrency market is very volatile, and yet you are willing to dip your toes in it. In that case, it is important to do some extensive research, which includes learning about the dos and don’ts of crypto trading and investing. Then, you should continue reading this article.
Reflect on Your Motives for Cryptocurrency Investment
The very first question you should ask yourself is, why are you planning to invest in cryptocurrency? Especially when there are other stable and less volatile options like stock market or bond trading available that also have the possibility of yielding you a good return on your investment and are certainly less risky compared to cryptocurrency.
Are you interested because you, like many others before you, are getting caught in the hype of cryptocurrency? Are you enticed by the success stories of many others, especially those stories that have seen people turning from rags to riches? Or do you believe that cryptocurrency can be a very quick gateway for you toward financial prosperity and stability?
Whatever the reason is, we would recommend you keep them in check for now and don’t act hastily, especially if your motive is to just make some quick bucks without first reading the fine print of investing in cryptocurrency.
The fine print in question doesn’t exist officially anywhere, but many seasoned crypto traders, experts, or analysts will certainly inform you about the risks involved in trading. We certainly would advise you not to take anything for granted when it comes to crypto trading because markets have seen extreme volatility in the past, and many people have been caught up in the storm of price volatility and, due to their late reflexes, have incurred massive losses.
But there are also success stories in between these failures, and we are sure you have your eyes set on such accounts as well and want to witness something similar to yourself as well.
So, keeping all these things in mind, let’s ask yourself the next question: what sort of risks are you willing to take, and how diverse do you want your investment portfolio to be? Do you want to invest in only one crypto token, or do you want to diversify your portfolio and include different cryptocurrencies in your portfolio?
Cryptocurrency has been famously termed as the hedge against inflation and, in recent years, has been considered one of the very best alternative sources of investment. You may also be interested in the fact that there are better chances in crypto trading to potentially earn higher returns quickly compared to what you can achieve with traditional investment options.
Before investing in cryptocurrency, gain a personal understanding of what you hope to achieve, as this will help you plan your next move in your journey towards financial independence.
Understanding the Cryptocurrency Landscape
To make smart choices when investing in cryptocurrency, it is crucial to get a better understanding of how the cryptocurrency world operates. Your preferred priority should be to take the time to explore the various cryptocurrencies available for trading in the crypto market. Bitcoin, Ethereum, Solana, Cardano, Doge, XRP, and Matic are some of the most popular cryptocurrencies, but thousands of others are worth knowing about.
Furthermore, you should also look into the technology behind the creation of cryptocurrency. We are talking about none other than Blockchain technology, which is the backbone of cryptocurrencies. Each blockchain relies on consensus protocol to maintain its record. There are different kinds of these protocols. For example, some, like proof-of-work, need powerful mining setups to verify transactions. Others, like proof-of-stake, reward those holding the most currency with validation rewards.
Understanding these details will impact your decision in choosing which crypto you want to purchase. For instance, in some cases, you might be able to earn rewards by holding and staking your cryptocurrency. There can be various other factors as well that drive the prices of cryptocurrency, and you should consider them before making your next move.
They can include several factors, like which cryptocurrency is currently trending and any positive news or sentiments are developing around your favorite crypto because market sentiment is also a very important factor to consider in crypto. Are the regulations changing or evolving around cryptocurrency? So, you know that there are several different boxes to tick before you make your next move.
Exploring Hot vs Cold Wallets: Making Informed Choices
When you buy a cryptocurrency, you can either keep it in your wallet that is created by default on the exchange where you have purchased your crypto, or you can try the other alternative, which is the more preferred option and that is to keep it in either a hot or a cold crypto wallet. The major difference between these two types of wallets is how secure they are compared to one another and which one of them is more user-friendly.
Hot wallets are great if you plan to trade or spend your cryptocurrency often, but they’re more at risk of being hacked or stolen. They’re always connected to the internet, like online exchanges or mobile wallets, making them easier to access but also easier for hackers to get into. Cold wallets, on the other hand, aren’t connected to the internet.
These can be hardware wallets or paper wallets. They are very secure because they are offline, but they are not as easy to use for regular transactions. Even though they are not vulnerable to online attacks, buying and selling from a cold wallet is harder.
When you have finally decided to embark on your journey of trading or investing in cryptocurrency, think about which wallet suits you better. Those who have a fair knowledge of the workings of the crypto world have been seen using both options. They keep their more important cryptocurrency in the cold wallet for safety and the rest in a hot wallet for easier access and transactions.
Shielding Your Cryptocurrency Access
Whether you are choosing a hot or a cold wallet, you must keep your private key confidential. A private key is the gateway to your cryptocurrency funds; it is like a password that provides access and control to your digital assets. Private keys are linked to a specific cryptocurrency address, and it is vital to understand that whoever possesses this key effectively controls the funds associated with that address. So, we cannot stress enough how important it is that you don’t share your private key with anyone else.
Typically, these private keys are generated by cryptocurrency wallets automatically. Losing this key means losing access to the funds forever. Hence, it’s imperative to keep private keys safe. Storing them offline in a cold wallet or using reputable custodial services is recommended for security.
While storing your cryptocurrency on exchanges ensures liquidity and easy trading, it comes with certain risks. Exchanges having access to your keys might expose your funds to potential loss in case of exchange failures or hacking incidents.
Evaluating Cryptocurrency Projects and Test Transactions
It is very important that whichever cryptocurrency you choose to purchase, you should first look at the specifics of that crypto before considering investing in it. What we mean by that is that before you consider buying a crypto, you should go over its whitepaper, which is easily accessible for everyone to read. If it is not available, then this is a concern, and you should evaluate your options and think about looking elsewhere.
Reading the white paper thoroughly is crucial. It should serve as a comprehensive guide to the developers’ intentions, outlining the project’s overview, specifics, and timeframe. The lack of detailed information in the white paper could be a negative sign. It’s the development team’s opportunity to transparently present the project’s details. An incomplete or misleading white paper might indicate underlying issues with the project.
Also, be wary of crypto projects that are frequently changing their timelines and show few progress updates. This could be a warning sign that the said crypto project is showing signs of weakness, and it may not be a suitable option to invest in such a project.
Another important fact you should consider is that cryptocurrency is unique in terms of not having irreversible transactions. Unlike traditional banks, if you have mistakenly sent funds to the wrong address, then that money might not be irretrievable, and you would be facing a very high possibility of losing those funds forever.
Instead of showing haste when it comes to conducting transactions, you should first test your skills in completing transactions by carrying out test transactions first. Conducting test transactions is crucial for validation before sending significant funds. While these transactions may involve higher fees, they serve as a safety net against potentially costly errors.
What do we mean by test transaction? A test transaction is a process where you send a small amount of cryptocurrency to a test address. This is the simulation of a real-life method of conducting a transaction without actually transferring any funds to another party.
This process ensures the accuracy of the sending and receiving steps, verifies the functionality of your wallet, and confirms the correctness of the recipient’s address. Successful test transactions provide confidence for larger exchanges by validating the transaction information.
Timing and Caution in Cryptocurrency Investments
Suppose you have completed the steps of conducting thorough research of which cryptocurrency projects meet your investing expectations, which exchange you want to use for trading, what type of wallet you want to store your crypto in, and also learning about some analysis techniques so that you can make informed decisions. In that case, the next step you should follow is to keep your expectations in check. It’s crucial to recognize that the cryptocurrency landscape is fast-paced and notably volatile.
It’s also vital to remember the speculative nature of cryptocurrencies. While some might become overnight success stories, many investors have experienced substantial losses in the volatile world of crypto. Investing in cryptocurrency involves going through various rough patches and facing constant risks.
We have always said to our readers that they should do their due diligence and go through all the steps mentioned above before they start trading crypto. Why is this important? This way, they would save themselves from sustaining potential losses and ensure that they don’t cause any detrimental effects to their financial health.
Conclusion
The primary challenge for cryptocurrency investors lies in avoiding the hype. Analysts consistently warn about the high volatility and unpredictability of cryptocurrencies. If you are considering entering the cryptocurrency market, thorough research is crucial, much like any other investment. Understanding your motivations for choosing this investment avenue and gaining familiarity with cryptocurrencies and blockchain technology is fundamental in making an informed decision about its suitability for you.
