Cryptocurrency is digital money. This type of currency uses blockchain technology, which is considered secure because it is capable of establishing distributed consensus even among untrustworthy parties. However, many people don’t know how to invest in cryptocurrency.
Cryptocurrency blockchains resemble old-fashioned bookkeepers’ ledgers, except that the ledger is electronic, and everyone with access to the ledger can also be the bookkeeper.
What is Cryptocurrency?
A cryptocurrency (or “crypto”) is a form of payment that can circulate without the need for a central monetary authority such as a government or bank. Instead, cryptocurrencies are created using cryptographic techniques that enable people to buy, sell or trade them securely.
Cryptocurrencies can be exchanged for goods and services, though they often are used as investment vehicles. Cryptocurrency is also a key part of the operation of some decentralized financial networks, where digital tokens are an important tool for carrying out transactions.
The most popular cryptocurrency, Bitcoin, has had a historically volatile price. In 2021, it hit an all-time high above $65,000 before falling back.
Is Cryptocurrency Safe?
Several factors make cryptocurrency not entirely safe, at least currently, while other signs are emerging that cryptocurrency is here to stay.
Can you lose all your money in bitcoin? Yes, you certainly can. Crypto is very risky and not like conventional investing in the stock market.
Cryptocurrency Risk
Cryptocurrency exchanges, more so than stock exchanges, are vulnerable to being hacked and becoming targets of other criminal activity.
These security breaches have led to sizable losses for investors who have had their digital currencies stolen.
Safely storing cryptocurrencies is also more difficult than owning stocks or bonds. Cryptocurrency exchanges such as Coinbase make it fairly easy to buy and sell crypto assets such as Bitcoin and Ethereum but many people don’t like to keep their digital assets on exchanges due to the aforementioned risk of cyberattacks and theft.
Some cryptocurrency owners prefer offline “cold storage” options such as hardware or paper wallets, but cold storage comes with its own set of challenges. The biggest is the risk of losing your private key, without which it is impossible to access your cryptocurrency.
There’s also no guarantee that a crypto project you invest in will succeed. Competition is fierce among thousands of blockchain projects, and projects that are no more than scams are also prevalent in the crypto industry. Only a small number of cryptocurrency projects will ultimately flourish.
Regulators may also crackdown on the entire crypto industry, especially if governments begin to strongly view cryptocurrencies as a threat rather than just innovative technology.
And, with cryptocurrencies being based on cutting-edge technology, that also increases the risks for investors. Much of the tech is still being developed and is not yet extensively proven in real-world scenarios.
Is Crypto a Good Long-Term Investment?
Many cryptocurrencies like Bitcoin and Ethereum are launched with lofty objectives, which may be achieved over long time horizons.
While the success of any cryptocurrency project is not assured, if a cryptocurrency project achieves its goals, then early investors could be richly rewarded over the long term.
For any cryptocurrency project, however, achieving widespread adoption is necessary to be considered a long-term success.
Bitcoin as a long-term investment
Bitcoin, as the most widely known cryptocurrency, benefits from the network effect — more people want to own Bitcoin because Bitcoin is owned by most people.
Bitcoin is currently viewed by many investors as “digital gold,” but it could also be used as a digital form of cash.
Investors in Bitcoin believe the cryptocurrency will gain value over the long term because the supply is fixed, unlike the supplies of fiat currencies such as the U.S. dollar or the Japanese yen.
The supply of Bitcoin is capped at just under 21 million coins, while central-bank-controlled currencies can be printed at the will of politicians. Many investors expect Bitcoin to gain value as fiat currencies depreciate.
Those who are bullish about Bitcoin being extensively used as digital cash believe that, over the long term, Bitcoin has the potential to become the first truly global currency.
Ethereum as a long-term investment
Ether is the native coin of the Ethereum platform and can be purchased by investors wishing to gain portfolio exposure to Ethereum.
While Bitcoin can be viewed as digital gold, Ethereum is building a global computing platform that supports many other cryptocurrencies and a massive ecosystem of decentralized applications (“dapps”).
The large number of cryptocurrencies built on the Ethereum platform, combined with the open-source nature of Dapps, creates opportunities for Ethereum to also benefit from the network effect and to create sustainable, long-term value.
The Ethereum platform enables the use of “smart contracts,” which execute automatically based on terms written directly into the contracts’ code.
The Ethereum network collects Ether from users in exchange for executing smart contracts. Smart contract technology has significant potential to disrupt massive industries, such as real estate and banking, and also to create entirely new markets.
As the Ethereum platform becomes increasingly used worldwide, the Ether token increases in utility and value.
Investors bullish on the long-term potential of the Ethereum platform can profit directly by owning Ether.
Best Cryptocurrencies to Buy
Over the last 10 years, only one year, 2014, has seen the overall market capitalization of cryptocurrency decline.
Past isn’t always prologued, and it’s true that the pandemic era has seen some irresponsible speculation in the crypto sphere, plus fraud in digital assets hit an all-time high in 2021.
Billions of dollars were lost to scams and “rug pulls” like the Squid Game token, where scammers shut off the ability to sell the token and walked off with their own profits.
That said, crypto is rapidly becoming more mainstream, and while regulation may be a risk facing the area, it’s also one of the biggest bull cases as digital assets are legitimized by firm rules from world governments. Here’s a look at seven of the best cryptocurrencies to buy in January 2022.
Bitcoin (BTC)
Market cap: Over $882 billion
Created in 2009 by someone under the pseudonym Satoshi Nakamoto, Bitcoin (BTC) is the original cryptocurrency. As with most cryptocurrencies, BTC runs on a blockchain, or a ledger logging transactions distributed across a network of thousands of computers.
Because additions to the distributed ledgers must be verified by solving a cryptographic puzzle, a process called proof of work, Bitcoin is kept secure and safe from fraudsters.
Bitcoin’s price has skyrocketed as it’s become a household name. In May 2016, you could buy a Bitcoin for about $500. As of Jan. 3, 2022, a single Bitcoin’s price was over $46,000. That’s the growth of about 9,200%.
If you have been thinking about getting some bitcoin, read this: Is Bitcoin a Good Investment? Everything You Need to Know
Ethereum (ETH)
Market cap: Over $447 billion
Both a cryptocurrency and a blockchain platform, Ethereum is a favourite of program developers because of its potential applications, like so-called smart contracts that automatically execute when conditions are met and non-fungible tokens (NFTs).
Ethereum has also experienced tremendous growth. From April 2016 to January 2022, its price went from about $11 to over $3,700, increasing by over 33,500%.
Binance Coin (BNB)
Market cap: Over $86 billion
The Binance Coin is a form of cryptocurrency that you can use to trade and pay fees on Binance, one of the largest crypto exchanges in the world.
Since its launch in 2017, Binance Coin has expanded past merely facilitating trades on Binance’s exchange platform.
Now, it can be used for trading, payment processing or even booking travel arrangements. It can also be traded or exchanged for other forms of cryptocurrency, such as Ethereum or Bitcoin.
Its price in 2017 was just $0.10; by Jan. 3, 2022, it had risen to around $520, a gain of approximately 520,000%.
Tether (USDT)
Market cap: Over $78 billion
Unlike some other forms of cryptocurrency, Tether 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.
In theory, this means Tether’s value is supposed to be more consistent than other cryptocurrencies, and it’s favoured by investors who are wary of the extreme volatility of other coins.
Solana (SOL)
Market cap: Over $52 billion
Developed to help power decentralized finance (DeFi) uses, decentralized apps (DApps) and smart contracts, Solana runs on a unique hybrid proof-of-stake and proof-of-history mechanisms that help it process transactions quickly and securely. SOL, Solana’s native token, powers the platform.
When it launched in 2020, SOL’s price started at $0.77. By Jan. 3, 2022, its price was around $171, a gain of more than 22,000%.
Cardano (ADA)
Market cap: Over $44 billion
Somewhat later to the crypto scene, Cardano is notable for its early embrace of proof-of-stake validation.
This method expedites transaction time and decreases energy usage and environmental impact by removing the competitive, problem-solving aspect of transaction verification present in platforms like Bitcoin.
Cardano also works like Ethereum to enable smart contracts and decentralized applications, which are powered by ADA, its native coin.
Cardano’s ADA token has had relatively modest growth compared to other major crypto coins. In 2017, ADA’s price was $0.02. As of Jan. 3, 2022, its price was $1.34. This is an increase of 6,600%.
U.S. Dollar Coin (USDC)
Market cap: Over $42 billion
Like Tether, USD Coin (USDC) is a stablecoin, meaning it’s backed by U.S. dollars and aims for a 1 USD to 1 USDC ratio.
USDC is powered by Ethereum, and you can use USD Coin to complete global transactions.
XRP (XRP)
Market cap: Over $39 billion
Created by some of the same founders as Ripple, a digital technology and payment processing company, XRP can be used on that network to facilitate exchanges of different currency types, including fiat currencies and other major cryptocurrencies.
At the beginning of 2017, the price of XRP was $0.006. As of Jan. 3, 2022, its price reached $0.83, equal to a rise of more than 13,700%.
Terra (LUNA)
Market cap: Over $33 billion
Terra is a blockchain payment platform for stablecoins that relies on keeping a balance between two types of cryptocurrencies.
Terra-backed stablecoins, such as TerraUSD, are tied to the value of physical currencies. Their counterweight, Luna, powers the Terra platform and is used to mint more Terra stablecoins.
Terra stablecoins and Luna work in concert according to supply and demand: When a stablecoin’s price rises above its tied currency’s value, users are incentivized to burn their Luna to create more of that Terra stablecoin.
Likewise, when its value falls compared to its base currency, this encourages users to burn their Terra stablecoins to mint more Luna. As adoption of the Terra platforms grows, so too does the value of Luna.
From Jan. 3, 2021, when its price was $0.64, Luna has risen over 14,300% to $92.64 a year later.
Polkadot (DOT)
Market cap: Over $29 billion
Cryptocurrencies may use any number of blockchains; Polkadot (and its namesake crypto) aims to integrate them by creating a cryptocurrency network that connects the various blockchains so they can work together. This integration may change how cryptocurrencies are managed and have spurred impressive growth since Polkadot’s launch in 2020.
Between September 2020 and Jan. 3, 2022, its price grew about 925%, from $2.93 to $30.04.
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How to Invest in Cryptocurrency
When you think of investing in cryptocurrency, you might think about buying and holding one or more crypto coins. Buying cryptocurrency directly is probably the most common way to add crypto exposure to your portfolio, but when it comes to investing in cryptocurrency, you have a few different options:
Buy cryptocurrency directly
You can choose to directly purchase and store one or more cryptocurrencies. Your options range from the most established digital currencies like Ethereum and Bitcoin to virtually unknown coins that are newly released in an initial coin offering (ICO).
Invest in cryptocurrency companies
You can invest in companies with a partial or total focus on cryptocurrency.
Your options include cryptocurrency mining companies, mining hardware makers, companies like Robinhood Markets, Inc. (HOOD) and PayPal Holdings, Inc. (PYPL) that support cryptocurrency, and many others with varying levels of crypto exposure.
You can also invest in companies like MicroStrategy Incorporated (MSTR) that hold large amounts of cryptocurrency on their balance sheets.
Invest in cryptocurrency-focused funds
If you don’t want to choose among individual cryptocurrency companies, then you can decide to invest in a cryptocurrency-focused fund instead.
You have a choice of exchange-traded funds (ETFs), such as index funds and futures funds, in addition to a range of cryptocurrency investment trusts.
Some crypto-focused funds invest in cryptocurrency directly, while others invest in crypto-focused companies or derivative securities like futures contracts.
Invest in a cryptocurrency IRA
If you want to invest in cryptocurrency and at the same time garner the tax advantages afforded by an individual retirement account (IRA), then you can consider investing in a cryptocurrency IRA.
Using the services of a crypto IRA provider can also facilitate more secure storage for your cryptocurrency holdings.
Become a crypto miner or validator
Perhaps the most direct way to invest in cryptocurrency is to mine it or act as a validator in a crypto network.
Cryptocurrency miners and validators earn rewards in crypto, which they can either hold as investments or exchange for another currency.
Conclusion
Owning some cryptocurrency can increase your portfolio’s diversification since cryptocurrencies such as Bitcoin have historically shown almost no price correlation with the U.S. stock market.
If you believe that cryptocurrency usage will become increasingly widespread over time, then it probably makes sense for you to buy some crypto directly as part of a diversified portfolio. \For every cryptocurrency that you invest in, be sure to have an investment thesis as to why that currency will stand the test of time.
FAQs
You can invest in Bitcoin or another cryptocurrency without a lot of money. Using Coinbase, for example, you can buy cryptocurrency with as little as $2 in your local currency.
You can invest in Bitcoin directly by using one of the major cryptocurrency exchanges, such as Coinbase or Binance. Another way to gain investment exposure to Bitcoin is to buy shares in a company with significant Bitcoin exposure, such as a Bitcoin mining company. A third option is to invest in a Bitcoin-focused fund such as an exchange-traded fund.
Investing in cryptocurrency is not for everyone. The prices of cryptocurrencies can be volatile, which makes investing in crypto likely a poor choice for conservative investors. If you are interested in assuming greater risk as an investor, then investing in one or more cryptocurrencies may be right for you.
You could not find any list of cryptocurrency questions for beginners without the mention of blockchain. The first-ever cryptocurrency, Bitcoin, is the first successful implementation of blockchain in the real world. Blockchain technology is basically a transparent, publicly accessible, trustless, and secure ledger.
The interest in purchasing cryptocurrencies would subsequently lead you to cryptocurrency FAQs related to crypto wallets. The crypto wallets are basically platforms for the secure storage of digital assets in comparison to exchanges.
Users could hold a wallet through an exchange account or a custody wallet and even from outside the exchange. As a matter of fact, cryptocurrency wallets help in storing the private keys to your cryptocurrency on the blockchain.
References
- 101blockchains.com/cryptocurrency-faqs/
- investopedia.com/investing-in-cryptocurrency/
- fool.com/investing/stock-market/market-sectors/financials/cryptocurrency-stocks/is-cryptocurrency-good-investment/
- nerdwallet.com/cryptocurrency-7-things-to-know
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