As the cryptocurrencies considered to be new in the market, we must first define what is the cryptocurrency and how its work? The basic definition of the cryptocurrency is that it is decentralized digital currency based on blockchain technology. Although the most popular cryptocurrencies are Bitcoin and Ethereum, which may be familiar versions for investors, currently, there are more than 5,000 different types of cryptocurrencies in the global market.
Cryptocurrencies are used as investment financial instruments as stocks and in some countries individuals can use cryptocurrencies to buy regular goods and services. Though a novel and exciting asset class, investing in cryptocurrency can be risky. Therefore, it is recommended that investors must do a fair amount of research to fully understand how or whether to invest in the cryptocurrency.
A cryptocurrency is a medium of exchange that is digital, encrypted, and decentralized. Unlike the normal currencies, such as the pound, dollar, euro, or rupee, there is no central authority or central bank to manage and maintain the value of a cryptocurrency. Instead, these tasks are broadly distributed among a cryptocurrency’s users via the internet. This also consider to be risk element in the cryptocurrency. Because with central authority, market can be regulated and protected.
The history of cryptocurrency started in 2008, when Satoshi Nakamoto created the first bitcoin. Researchers of cryptocurrencies have concluded that embedded in Nakamoto’s code for the first batch, or block of bitcoin, was a newspaper headline. Then, the start of a digital revolution, thousands of cryptocurrencies have followed in the footsteps of Bitcoin.
It is true that in the global financial market, trust is at the heart of financial system and people put their faith in financial institutions, particularly central banks. Financial institutions control how capital flows through the economy. This is as a result of liquidity being a social convention. Money exists and has value as a result of people agreeing that it does. This agreement only works for the reason that individuals put trust in financial institutions such as banks.
However, cryptocurrency does not have a system of trusted institutions. Instead, investors trust that their ledgers are accurate. As cryptocurrencies are code recorded on digital ledger that get longer as more investors use them.
Innovators behind cryptocurrency want to create a secure system that does not rely on financial institutions or central banks. To achieve this, cryptocurrencies are registered on a revolutionary technology called the blockchain, which is a ledger of transactions that is not held by a centralized institution. Instead, transactions are verified and logged by network of computers all over the world in a process known as mining.
The mechanism of cryptocurrency mining has two purposes: to activate new a cryptocurrency, such as bitcoin, into circulation, and to verify all transactions on the network. However, cryptocurrencies are governed by a complex process. For example, if someone wants to complete a transaction, everyone on the network is alerted. The transaction is verified by so-called miners to check the legitimacy of the transactions. Once a miner has checked a few thousand transactions, they group them together in a block.
The miners then race for the right to add the block to a string of those previously made, known as the blockchain. This process aims to solve a complex numerical problem. The miner that solves it first sees his block added to the chain. At the end of the process, the miner is rewarded in bitcoin. This entire process is incredibly energy intensive and is a major contributor to the climate crisis.
In order to keep cryptocurrency scarce and help maintain its value, the number of bitcoins that can be mined is capped at 21 million. However, as of June 2021 almost 19 million bitcoins have been mined and the number is increasing and may exceed the 21 million.
How to Invest in Cryptocurrency
The aim of Bitcoin, and many other cryptocurrencies, is to create a new decentralized financial system beyond the control of government and banks. In doing so, it has captured the imagination of the world
Like shares and bonds, cryptocurrencies are also can be bought and sold as stocks and have been attracting the attention of some of the world’s biggest investors, and even banks such as Morgan Stanley. Before investing in the cryptocurrency, the investor must be aware that there are two views on the cryptocurrency market.
The first view is that most cryptocurrencies represent bubbles and fraud. The second is that the blockchain technology embodied in coins is increasingly becoming an important innovation and that at least some coins may be assets that represent a stake in the future of this technology. Additionally, critics assert that for something to be considered currency, it has to work as a medium of exchange.
Also, individuals should be aware that the cryptocurrency market is highly volatile; therefore, they need a profitable cryptocurrency investment strategy to help them achieve successful investments, if any. Also, investors need to invest in a well-known, stable, and profitable cryptocurrency.
Although cryptocurrency has become a social phenomenon, the bitcoin dream has not been fully realized as a result of the lack of regulation in the market. In 2010, the price of a single bitcoin began at less than 0.01 USD. By the end of 2021, the value of a single bitcoin rose to 60 USD, with the market value of all cryptocurrencies reaching a staggering 2.5 trillion USD. Then, at the beginning of 2022 the value of bitcoin declined to 32 USD.
Cryptocurrency investors use some strategies to invest profitably. However, we strongly recommend that an investor should research and develop the best strategies.
Although it is not as effective as in the fund markets, investors can use the same strategies as the fund markets to invest in the cryptocurrency market too. Embracing a hold mentality or purchasing a well-known stable cryptocurrency and hold it for the longest possible period, to allow the greatest potential to profit from a cryptocurrency’s rise in value.
This holding strategy has become one of the main staple strategy of cryptocurrency investment. Long-term investing in widely known cryptocurrency often works amazingly well; additionally, investors can diversify their investment portfolio strategy when investing in cryptocurrency in a bear market. Also, investor should sell the cryptocurrency as soon as its value increased higher. As there are always a potential of decreasing its value. Simply, it is best for investors to use an arbitrage strategy. In simple terms, investors buy a cryptocurrency for a low price and sell it at a higher price.
As a source of passive income, the traditional dividend payouts received from holding stocks can also be achieved in the decentralize finance market. Investment in some cryptocurrencies can be source of passive income, too. However, not all cryptocurrency pay dividends.
Some cryptocurrencies, such as NEO coin or VeChain, pay annual dividends of between 5 and 10 percent of their products. The dividend payout is received in the form of cryptocurrency. For example, NEO cryptocurrency holders earn their dividends in the form of GAS, which is used as a fuel on the NEO blockchain.
NEO is a kind of cryptocurrency, which develops a smart contract platform that supports applications written in a variety languages. NEO developers collect fees in the form of GAS for deploying and running smart contracts.
When structuring cryptocurrency portfolio, it is advisable for investors to comprehensively research the cryptocurrency market to understand which cryptocurrencies will pay dividends.
Some individuals use arbitrage in their approach to different investments as it is probably the fastest way to generate higher income in the cryptocurrency market than other exchange markets. As cryptocurrency is considered to be a highly risky and volatile market, investor can take advantage of such volatility through arbitrage; however, this can be considered unadvisable for beginners or new investors.
Investor also can research for cryptocurrencies listed for one particular price and then look at another exchange, if he find a difference in price, he can then buy from the exchange that offer lower price and resell it in the exchange that offer higher price. In such cases, you will buy the cryptocurrency on the cheapest exchange by transferring your cryptocurrency from one wallet to another. Investor will then sell it on the other exchange, where the coin is trading at a higher price as we mention. In this example, you must be quick to predict that there is a fair profit margin. Otherwise, it is not a profitable arbitrage trading strategy.
To invest in a risky, asset such as cryptocurrency, it is not only logical for investor to take an advantage of the volatility, but also the investor, particularly when the value of assets in the cryptocurrency markets are lower, to buy or enter into the market.
An environment in which the value of cryptocurrencies is lower, for instance, in early 2022, when major cryptocurrencies such as Bitcoin and Ethereum started the year at a lower price, presents as a buying opportunity.
In January 2022, the value of Bitcoin decreased by 6 percent, falling below 33 USD for the first time since September 2021. At the same time, the value of another cryptocurrency, Ethereum, also declined by 7 percent of its value, plunging below 2 USD. Such an environment offers a chance for investors interested in investing in cryptocurrencies to review their financial plan and buy into the volatile asset class.
However, investors shouldn’t rush into any investment for the reason that it is relatively cheap. If buying cryptocurrency doesn’t fit into your long-term financial goals, you shouldn’t purchase it for the reason that it’s trading at a relative discount in the market.