To capture the essence of cryptocurrencies, it is worth first familiarizing yourself with the specifics of bitcoin. Let us explain that it is a decentralized digital currency, created to enable cheap, fast, convenient and maximum secure payments that do not require the involvement of banks or other intermediaries. Bitcoin is beyond the control of governments and central banks, and has a pre-limited supply of 21 million units and cannot be changed in any way. Mining of more bitcoins continues, although it is worth noting that nearly 19 million of them have already been introduced into circulation.
This limited amount, but also large price fluctuations and growing popularity, which somehow contributed to the decrease in the efficiency of the bitcoin network and the increase in transaction fees, shaped the perception of the cryptocurrency. Today, for most people, it is not a currency or means of payment, but an ordinary financial instrument that can be an interesting alternative to investing in stocks or commodities.
Cryptocurrency market – huge and very diverse…
The advent of bitcoin and its associated blockchain technology has sparked the creation of more cryptocurrencies (we call them altcoins or alternative cryptocurrencies). Some were supposed to be its improved version and be used for instant payments, but over time the market was dominated by digital assets with other properties and applications.
Some cryptocurrencies allow you to build decentralized applications and services, some allow you to raise funds for various projects, others are secured with real goods (e.g. gold or dollars) and are supposed to imitate changes in their prices. There are also those that are created as a joke (the so-called memcoins). It is worth noting that there are already several thousand cryptocurrencies, so it is a really extensive and highly diversified market.
….but young and immature
Importantly, although the cryptocurrency market is huge, it is still very young, and this has many important consequences (you could hear about some of them in the aforementioned interview). They include e.g. the fact that it is still difficult to determine which specific cryptocurrency projects will play an important role in the future – let’s emphasize that most of them will probably play none and will be forgotten over time.
An important expression of the immaturity of the market is that some cryptocurrencies with great potential enjoy little interest from investors, while high profits generate assets that are practically worthless, but with great marketing. This second group included dogecoin (dog cryptocurrency), whose price in 2021 increased thousands of percent mainly due to Elon Musk’s tweets.
How to perceive bitcoin and other cryptocurrencies? Today, it is primarily financial instruments
Design and functional differences between individual cryptocurrencies can be really big, but it will be difficult for you to understand them when you first come across the subject. To begin with, however, you should remember that all virtual assets have a price and are listed on special exchanges, so from the perspective of the average investor, they are ordinary financial instruments.
Investing in cryptocurrencies is in many ways similar to trading stocks, traditional currencies or commodities. Its essence in most cases is to buy a given instrument as cheaply as possible and sell it at a high price. It is worth noting, however, that some digital assets allow you to earn additional money on the so-called staking (interest for storing them in a specific place) or mining (mining new cryptocurrency units).
Cryptocurrencies – how to start trading? Create an account on the stock market and start investing
If you have already taken care of the basics and understand what instruments you are dealing with, all you have to do is buy bitcoin or other virtual assets. You can conclude a transaction in several ways, with the most popular being using the services of one of the special exchanges.
Cryptocurrency exchanges enable convenient trading of virtual assets and thus constitute the center of their entire ecosystem. Currently, there are several hundred cryptocurrency exchanges, but the vast majority work very similarly and combine the functions of brokers and classic exchanges (e.g. securities). They are responsible for executing orders or introducing cryptocurrencies to trading, and at the same time provide investment platforms that allow you to conclude transactions, track prices and analyze their charts, or use technical analysis tools.
Buying bitcoin and other cryptocurrencies is possible after setting up a free account on the selected exchange. It is very simple, takes literally a few minutes, and is similar to registering on many other websites. In most cases, you will need to provide personal information and verify your identity, but there are still exchanges where you can trade anonymously (at least in theory, because in practice no one is anonymous online).
The process of buying cryptocurrencies and selling them is very similar to the stock exchange or forex market. After logging in to your account, you place an order with specific parameters (price, number of units purchased, etc.) and wait for the transaction to be completed.
Investment in cryptocurrencies in questions and answers
The above information is just a fragment of the knowledge you need to explore if you want to successfully invest in cryptocurrencies. To help you better understand the topic, we have created a series of articles in which we have thoroughly discussed the individual issues. Before you start reading them, read the answers to popular questions of beginner crypto investors.
Who is investing in cryptocurrencies for?
For anyone who sees the potential in this market, hopes for high rates of return on it, and at the same time accepts the accompanying risk. Importantly, people from virtually all over the world can now freely invest in digital currencies.
What is the risk and profit potential of cryptocurrencies?
They have very large price fluctuations and are able to generate both severe losses and huge, unparalleled on any other market, rates of return. However, keep in mind that the risk and profit potential differ from one cryptocurrency to another.
How to reduce the risk of investing in the cryptocurrency market?
The methods include successive purchases of cryptocurrencies that will allow you to average the entry price into the investment, as well as the use and adherence to a specific investment strategy. You should also keep technical and fundamental analysis in mind and avoid buying assets right after strong increases.
How much can you start investing in cryptocurrencies?
Unlike, for example, cryptocurrency shares, you can buy in fractions. Thanks to this, even bitcoin, which costs tens of thousands of dollars, is available to people with little capital. The minimum transaction value depends on the exchange and the specific cryptocurrency, but usually does not exceed a few dollars.
What are the most important and popular cryptocurrencies?
In addition to bitcoin, these include e.g. litecoin (LTC), ethereum (ETH) or ripple (XRP). The latter was created with the needs of banks in mind, Litecoin provides faster and cheaper transactions than Bitcoin, while the Ethereum network allows you to create decentralized applications. Cardano, polkadot, solana and dogecoin are also very popular.
What technologies and innovations are associated with cryptocurrencies?
This includes blockchain technology, cryptography, smart contracts, NFT tokens, DeFi (decentralized financed) or other decentralized applications and services, and even the Internet of Things.
Are cryptocurrency exchanges safe?
There have been major thefts and even disappearances of entire exchanges (along with investor funds) in the past. Today, many of them are large global companies that want to provide investors with the best and safest services possible. They use numerous security measures in their systems, or at least two-stage authorization of transactions and withdrawals. Despite everything, due to the lack of regulations, cryptocurrency exchanges are still not as safe as, for example, brokerage houses or banks.
Where to store cryptocurrencies ?
You can keep your cryptocurrencies on the exchange, but a safer solution is to transfer them to a special cryptocurrency wallet. Such a wallet can be physical, web, mobile, desktop and even paper. Regardless of which one you choose, you must ensure safe storage of the private key (access password).
Is it possible to trade with leverage in the cryptocurrency market?
Yes, futures contracts and options for several dozen of the most popular cryptocurrencies are available on the market, but only some cryptocurrency exchanges (e.g. Binance) offer them. With leverage, you can also invest in crypto via CFDs, provided by traditional brokers, e.g. XTB or TMS Brokers.