Investing in cryptocurrencies can be rewarding if you know what you’re doing.
That said, like other investments, there is some level of risk involved, and the reason crypto is attractive is that, on the one hand, it provides potentially higher yields than other investment options.
On the other hand, the cost and ease of entry are much more accessible than any other source.
In order to get started with crypto investing, there are a few basic terms to understand and some basic investment strategies to consider.
A cryptocurrency is a digital currency where transactions are verified and recorded by a decentralized system through cryptography.
Decentralized finance, or DeFi, operates as peer-to-peer transactions recorded on a public digital ledger without a third-party intermediary like a bank or credit card company.
These transactions occur on decentralized exchanges, which record and verify the transaction through the use of a smart contract that allows users to transfer their coins to another party based on the crypto’s value at the transaction’s time.
As opposed to other currencies issued and controlled by a central authority like a Central Bank or other government financial institutions, crypto is exchanged between the two parties.
The benefit of crypto is that it makes transactions and lending much more accessible and eliminates many fees and paperwork in traditional finance.
However, traditional currency’s value stems from the amount of currency in circulation at any given time, and the faith people have in the government controlling the currency.
Crypto’s value is derived based on the market, meaning that the supply of the coins and the demand for the coin at any given time may vary.
Take one of the most well-known cryptocurrencies around, Bitcoin. Bitcoin’s value derives from the amount available and its desirability for others.
The supply is limited as the coin is thought to be finite, and there won’t be any more in production. But, at the same time, the demand is high for the coin, both of the limited numbers of available coins and the widespread acceptance of Bitcoin.
Cryptocurrency exchanges have been in the news lately with the collapse of FTX. Due to the alleged misconduct of CEO Sam Bankman-Fried, millions of crypto and traditional money disappeared almost overnight.
An even bigger issue is that FTX was the third largest exchange, making crypto transactions more challenging for investors.
However, Coinbase is one of the most popular and trusted exchanges in cryptocurrency and has recently announced it will accept Easy Bank Transfers to make trading nearly real-time and add layers of security.
To get started as a casual cryptocurrency investor, the person would utilize an exchange like Coinbase. With the ease of EBTs, an investor would deposit money into the exchange and then purchase coins and tokens, either whole coins or percentages of existing coins.
Basic investing strategies include buying and holding (HODL) coins, purchasing NFTs, or yield farming.
HODL
HODL is an industry joke that started from a typo describing the investment strategy of buying and holding a coin as it appreciates in value. Of course, due to the volatility of cryptocurrency, a HODL strategy may take longer than other investments, but it also provides an opportunity for a significant return.
NFTs
NFTs are non-fungible tokens and digital products owned by a single individual and may not be transferred or sold without the use of smart contracts.
In decentralized exchanges, NFTs can be placed in a wallet, a smart contract created, and the user is able to transfer the NFT to another user through the execution of the smart contract.
NFTs are a single token, making them have more inherent value than other cryptos, but that value is dependent on the demand of the NFTs.
Yield Farming
Yield farming is similar to traditional finance of unused parking money into a savings or CD account. In exchange for the money, a bank or other lender pays you a small return for securing the money for a predetermined amount of time.
Yield farming takes that strategy and offers much higher potential returns due to the volatility and demand for certain crypto.
Getting started in cryptocurrency is more straightforward than people realize. However, the potential for high rewards in crypto investing does come with the caveat that the volatility and unsecured nature of DeFi add to the risk.
Still, for investors taking a balanced approach, crypto’s potential may be more than tempting and part of a good overall strategy.