• Marc Primo

A Guide To Understanding Cryptocurrencies Before Making An Investment

This is an article “A Guide To Understanding Cryptocurrencies Before Making An Investment” by Marc Primo

In October 2008, a certain Satoshi Nakamoto sent a mailer to members of an online cryptography forum. The paper contained details of a decentralized, digital currency that entailed the first footprints of blockchain technology. Transactions are stored via a public ledger without any individual acting as administrator. The concept of a peer-to-peer electronic cash system enabled users to send a virtual currency to other users without any mediation from intermediaries. Just like that, the first cryptocurrency called Bitcoin was born.

With Bitcoin's rise at the height of a global financial crisis in 2009, more people soon showed interest in the potentials of cryptocurrency as a viable financial investment. After ten years, Bitcoin finally reached the mainstream. Soon, other self-regulating, highly secure cryptocurrencies were created and introduced in the market. The convenience of having real-time access to digital funds and transactions via e-wallets became highly fascinating to many. Today, cryptocurrencies have become national currencies (El Salvador now recognizes Bitcoin as legal tender), opening up more investment opportunities.

However, not everything is flawless when it comes to cryptocurrencies. You'll need to consider specific risks and financial policies before investing. During the first half of the year alone, Bitcoin has become more volatile, with a 47% drop by July. Some cryptocurrencies have already failed, including OneCoin, BitConnect, and BoringCoin, among over 2,000 others. Most of the reasons these cryptocurrencies didn't survive range from poor planning, fraudulent practices, and lost traction.

While making money from cryptocurrency remains promising, not knowing what you are getting into can result in unwanted financial consequences. To help you make more innovative investments, here are some essential things you need to learn about cryptocurrencies.

How cryptocurrencies work

A cryptocurrency is a non-tangible or digital form of money that anyone can use to make payments to replace traditional banking methods and physical notes. It is independent of any financial institution and can increase (or decrease) its value over time. Utilized for its transactions are online ledgers with high levels of encryption to achieve optimum security. These online ledgers are made possible through Blockchain technology which records and documents data concerning both sender and receiver's e-wallet addresses and transactions.

Early investors who have followed the development of Bitcoin can mine more coins using advanced hardware that solve complex math problems. However, cryptocurrencies are yet to be fully regulated and remain products of computer programs and codes that can transfer value via peer-to-peer transactions.

Investors need to create an e-wallet that would best work for the cryptocurrency of their choice, as well as online specialty exchanges such as Coinbase or Binance. With every e-wallet created, algorithms generate private and public keys that go with their credentials. This data is similar to how traditional bank account numbers, mailing addresses, or proofs of ownership work to determine which the sent cryptocurrencies will go.

Confirming that someone has sent you cryptocurrency values on your e-wallet allows you to send them to other users. Each transaction you make via your e-wallet creates a coded trail that is similar to a math puzzle. The code determines the value you sent and unscrambles the code to make a signature verification or whether the sender and receiver's codes fit together. Such a process makes it impossible for anyone who lacks the transaction information to decode the signature verification for highly secure transactions.

Recently, Bitcoin announced its first major update in four years in Taproot, which increases transaction privacy and efficiency while also providing the option to do away with intermediaries for smart contracts.

Things to consider when investing in cryptocurrency

Before investing in Bitcoin or any other cryptocurrency, there are four essential factors you have to check first, namely: valuation, performance, history, and risk.

Given that most cryptocurrencies remain largely unregulated and untaxed, values may seem unsteady compared to stocks that somehow possess some form of underlying value based on a company's revenue. Before you buy Bitcoins as a form of investment in Blockchain, remember that they won't give you any form of ownership for the technology.

As for a cryptocurrency's performance in the market, it's not always safe to assume that past results will give you insights for future indications. While there are plenty of online cryptocurrency portfolio trackers out there, you should choose the best one that allows you to keep your portfolio balanced yet diversified. It would help if you used a tool that determines what's in the middle of the low and high-risk investment range, considering that most cryptocurrencies change in value, fast.

Another critical thing to consider is how your choice of cryptocurrency has evolved since its inception. As mentioned, values can be as unpredictable as to how the late '90s dot-com bubble was. Keep in mind that investing in cryptocurrency can be highly speculative. If you are not sure which cryptocurrency to invest in, it would be best to consult an expert financial advisor to help you decide.

Lastly, it's essential to consider cryptocurrencies as highly volatile investments that can fluctuate as fast as you can spell it. Try to foreshadow the potential outcomes first, and don't invest your coins all at once. As long as they are still unregulated, there are higher chances of risk involved, mainly how you cannot get any investor safety for them. And while Blockchain is exceptionally secure, there's no telling how new digital technologies can create hacking tools that target your e-wallets.

Advantages of investing in cryptocurrency

On the upside, learning more about cryptocurrencies can lead to more long-term investments that allow you to control your own money. Without any financial institution to regulate how you manage your finances, you can create global transactions and engage in trade whenever you feel like it without decreasing your digital currency's value.

Aside from having complete control of your money, there are no fees to pay, you have broader access to more investment options, and it lets you enjoy better market liquidity through cryptocurrency exchange sites.

Investing in cryptocurrency and anticipating an upfront surge in value is never enough. You have to monitor values as you would stocks and know when to go long or short when trading. Make sure you have the proper risk assessment strategy in place before you invest. This way, you'll know when to make the appropriate stops and limits while trading cryptocurrencies and make a handsome profit from better margins.