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“It’s impossible to overstate the level of innovation cryptocurrencies represent and their potential to change the way the world thinks about money,” says Guy Hirsch, US Managing Director of eToro. The market is still young, and not widely adopted, so with your first investments, you’re joining a core group of early adopters.”
You’ve probably caught on to the growing hype with Bitcoin. It has reached the $1 trillion mark in total market cap and values more than $50,000. You’re also hearing about the growth of Decentralized Finance and so you’re probably thinking – should I start investing in cryptocurrency?
What is Cryptocurrency
Before you start investing in anything, you’d need to know what you’re putting your money into.
Cryptocurrencies are digital assets that can be used as investments or online purchases. You can change fiat currency (dollars, euros, etc.) to purchase cryptocurrency coins such as bitcoin, ether, bitcoin cash, litecoin, and ripple.
Each cryptoasset has a unique line of code so they can’t be duplicated. This means that they can be tracked and identified when being traded. Being on a decentralized blockchain platform, there is no middleman to decide how a cryptocurrency is produced and what the value is. And so a cryptocurrency’s value is determined based on market demand.
Why invest in cryptocurrency
There can be many reasons why someone would want to invest in cryptocurrencies. Consider your reason before starting to build your crypto portfolio so you don’t go into it blindly or because you feel FOMO for not jumping on the trend. Maybe it’s to discover new opportunities or to support a certain project. Whatever it is, you need to understand the market as well as the assets you’re going to put your money into.
What to know before investing in a cryptocurrency
As an investor, you would need to set up a cryptocurrency portfolio to help you track each coin’s performance with analytical tools. With a portfolio, you can easily assess your risk profile and decide which crypto assets to invest in.
Before setting up a crypto portfolio, you would first need to do some research.
1. Read the company’s white papers
One way to look at a crypto project is that it’s like a startup business that has chosen a problem to solve. They may state it on their website or the company’s white paper which provides information about the purpose of the project, the people behind the project, the timeframe, strategy to accomplish their mission, as well as the specifics. Take time to read the information that gives you the general view of the who, what, when, and why of a project. If their vision and mission resonate with you, that’s a good sign to include them in your crypto portfolio and invest in the project.
2. Look at the coin’s price history
Cryptocurrency is highly volatile due to it being a relatively new asset class that lacks regulation or authority that controls the number of coins circulated. And so your job is to understand why the price moves up and down. A coin’s price may correlate with a few factors such as other coin prices, stock market moves, or world events. You can usually gauge how a coin price may move by looking at bitcoin’s price. If bitcoin’s value increases, most altcoins would drop in price because the buying of bitcoins leads to an increase in the selling of altcoins.
3. Take note of the total & circulating supply of a coin
Besides looking at the price of a coin, you would also need to look at a coin’s total supply and circulating supply. Total supply refers to the total amount of coins that can enter the market. Circulating supply is the current amount of coin available in the market. These values are important when you need to evaluate the value of a crypto project and include it in your portfolio. Bitcoin’s supply would be capped at 21 million bitcoins. This low or limited supply creates a higher demand for it and thus it’s considered a high-value project.
4. High developer activity is a good sign
Another way to decide whether a crypto coin is worth investing in is by monitoring the developer’s activity. You’d want to go on a site like GitHub to check the number of updates, the number of watchers, how many forks have been created, and the total stars. Generally, the higher the developer activity, the stronger or more valuable the project. It shows that the developers are constantly working on improving their systems and making sure that they are keeping to their promises.
5. Check out the community activity
Cryptocurrency is driven by the people. And so it would make sense to check out how active the community of a certain coin is. The more involved a community, the more valuable the coin. You can start by checking out the coin’s Twitter page and see how many followers they have and how engaged they are with the page’s tweets. You can also check out Reddit for deeper discussions, news, and announcements. This will help you in building up your crypto portfolio.
Reality check before taking the first step
No matter how good or valuable a project may be, always remember that there are still a lot of unknowns in the cryptocurrency world. Despite the white papers, you may still never truly know how exactly the system works unless you’re part of the team of developers. Cryptos also have an unproven rate of return and so trading crypto may be akin to gambling as it’s being exchanged through a peer-to-peer system without ties to regulatory standards. Moreover, fraudulent activity in the crypto world is very real. There will always be bad players who want to make shady deals or perform money laundering acts while remaining anonymous. So you’d have to be extra careful with your assets and learn to set up cybersecurity measures.
Invest at the right time
Once you understand the price movements and patterns, you would then know when the right time is to invest in cryptocurrencies. Be sure that you are investing with money that you can afford to lose. Make sure that you have sufficient emergency funds and are free from debt. Only then you could start building a crypto portfolio to kickstart your exciting crypto investment journey.
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CoinGecko's editorial team comprises writers, editors, research analysts and cryptocurrency industry experts. We produce and update our articles regularly to provide the most complete, accurate and helpful information on all things cryptocurrencies. Follow the author on Twitter @coingecko