We’ve all heard them. The stories of classmates and colleagues who bought and sold cryptocurrencies at the exact right time and made a huge profit, the incredible success stories that make us wonder what life could have been like if only we’d bought some Bitcoin at the right time. But what actually is cryptocurrency, and does it have a place in a solid investment strategy? How does it even work? Here are a few things to consider if you’re curious about investing in crypto:
Understand what crypto actually is
Cryptocurrencies are a digital currency and can, under some circumstances, be treated as real money in that they are sometimes an accepted currency for buying goods directly. This makes them a little different from stocks and shares, because you don’t have to sell them in order to reap the financial benefits. They are purely digital and have no cash form, and you can’t simply transfer them to your bank account – you’ll need to keep them in a special digital wallet.
They are also not managed or governed by any central agency, like banks or governments, making them far more volatile than, say, sterling or euro.
Get clued up on the different types
If you’re interested in investing in cryptocurrency, the first step is to research the different types, and find out what you might like to invest in. With over 10,000 different types, there are a lot to choose from, and you’ll probably have only heard of a couple of the biggest ones. With more than 7 million active users, Bitcoin is the undisputed king, but the days of buying it for pence and selling for a huge profit are all but over.
This would have to be quite a long article in order to cover each and every currency, so here are a few of the most popular options:
The household name of cryptocurrencies, there are currently more than 19 million bitcoin tokens in circulation. It can be traded directly for goods on the internet.
Litecoin functions in a very similar way to bitcoin, but is a little younger and, ostensibly, more efficient.
Ethereum is mainly used by app developers and users, and doesn’t focus so much on digital currency.
Find safe places to learn and invest
One of the most important things in your crypto investing journey is the integrity of your information sources. There are an increasing number of ‘trading experts’ cropping up on social media platforms, particularly Instagram and TikTok, but this is not always the right place to get your information. Check out credentials and make sure that any information is trustworthy – you don’t want to end up losing money because of a dodgy tip on the internet. It’s worth looking for a reputable course to get a comprehensive understanding of how it works, like this one by Princeton University, before you start looking for individual trading advice.
You can now invest in crypto using some mainstream platforms like Revolut, which might be a more comfortable way to get started.
Learn to understand the cycles and the risks
Often, with crypto, the worst time to buy it is when everyone is talking about it. As with all investments, when there’s a surge in interest, the price goes up – but this tends to happen in extremes with cryptocurrency, meaning that the gains can be huge, but so can the losses.
The FCA (Financial Conduct Authority) has expressed concern about cryptocurrency, citing scams and the fact that it’s difficult for consumers to work out the real value and risks involved for their stance – i.e. because crypto is so hard to understand, it’s also much more difficult to really comprehend what level of risk you’re taking on when you invest. They also dealt a blow to crypto values by banning cryptocurrency derivatives and exchange-traded notes being sold to retail investors from January 2021.
Only invest what you can afford to lose
This is technically true with all investments – putting your emergency fund into the stock market is not necessarily the best course of action under any circumstances. But experts tend to compare crypto investments more to gambling, putting it in a similar category to day trading in terms of risk, and because it’s an unregulated market, it can be a bit like the wild west.
Make sure it’s offset by lower-risk investments
Investing in cryptocurrency as part of a broader portfolio, and having it make up a relatively small proportion of your investments is probably the safest way to go. Diversifying your investments across different types – stocks, shares, bonds etc. – is a well-established strategy for long-term growth, and it’s a good idea to think of crypto investments as part of this, rather than a get-rich-quick scheme.
If crypto investing is something that excites or intrigues you, there are ways to make it work as part of a broader investment plan – just don’t risk your life savings on something so insecure.
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