Five Things to Know Before Investing in Cryptocurrency

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Cryptocurrency is created using cryptographic technology that allows people to buy, sell, and trade them in privacy. No centralized government or bank is controlling the market. This is extremely beneficial for investors looking to make quick gains or buyers looking to keep their purchases private. For these reasons, cryptocurrencies are consistently growing in popularity.

If you are new to the market, you may be wondering what the best tips and secrets are to getting started. Maybe you are wondering how to buy Bitcoin or how to make money fast. This article encompasses five important key things you should know before leaping into the crypto market.

1. The Money Is Not Guaranteed

As discussed previously, there is no bank or government entity backing cryptocurrency. While this may not seem significant, it is extremely important to understand what this means. If you invest a thousand dollars into a specific crypto coin and the coin crashes, you have no insurance protecting you from the investor.

For example, banks are required to carry insurance typically per person and bank. If your crypto exchange or wallet fails, there is no insurance backing your wallet. You could easily lose everything. With a high-risk investment, comes high return. You should only invest or risk what you are willing to lose.

You do have the option of holding a “cold” wallet. A cold wallet gives you complete control over your digital assets. However, you will not make any interest or profit off the assets you keep in your cold wallet.

2. Cryptocurrencies Do Not Generate Cash Flow

If you know anything about stocks and share corporations, investors make money by holding shares while the business generates profits. The more cash flow a business generates, the more valuable shares become to the holder. For example, shares or stocks may be worth $100.00 at the beginning of the year for a business. The business begins to generate a large cash flow and increases the worth of the stock to $200.00. This is a very basic analogy but shows the cash flow and profits affect the shareholders. Cryptocurrency does not produce a cash flow. For you to make money off a coin, someone else has to lose money.

3. Understand the Exchange

Cryptocurrencies can be bought using Canadian and American dollars as well as euros, pounds, and other forms of circulated currency. However, you often cannot purchase one coin using another coin. When you are first starting to invest and looking up how to buy Bitcoin, you will find many applications that will help you transfer money from your bank account so you can invest.

These applications typically have fees associated with the exchange. Before purchasing Bitcoin or any other currency, you should investigate the fees associated with the wallet or application. You may find some are much more affordable options than the popular applications. If the coin is worth less than the exchange rate, you could end up losing money during the purchase or sale of your investment.

4. Market Cap

After looking at the different types of cryptocurrency, you may start purchasing a coin when its prices are at a low. This is a common mistake new investors make. For cryptocurrencies such as Bitcoin, you should look at their market cap rather than their affordability. A market cap is the total value of all of the coins that have ever been mined. You can calculate the market cap manually by simply multiplying the current market price of one coin by the number of coins available on the market or in circulation. You can also search the current market cap of the coin on your device’s search engine. If the coin has a high market cap, it is a better investment for short- and long-term trading.

5. Risk Management

You can lessen the risk of your investment by understanding the market and watching trends. However, no matter the precautions you take, trading cryptocurrency is always considered a high-risk investment. If you time it right, it can produce a high return on investment. Not only do the exchange rates of cryptocurrency drastically change daily but they are not backed by any centralized bank or government. If your cryptocurrency is hacked, stolen, or lost, there is no institution to help you recover your money. Ultimately, the money will be lost and never recovered. The bottom line is you should only invest what you are not afraid of losing.