In 2017, Cooper Tarly, a crypto investor, bought Bitcoin and Ethereum. According to him, he invested several hundred dollars in each of the cryptocurrencies. In 2021, he was already a millionaire. 

The editors of MC.today figured out what investments in cryptocurrency are, what are their advantages and disadvantages, and collected expert advice on how to minimize risks.

Features of investing in cryptocurrency

Cryptocurrency is a type of digital currency that does not rely on a central authority to verify transactions or create new coins. Instead, it relies on cryptography, the science of encrypting information, to prevent forgery.

Cryptocurrency works on blockchain technology. The latter consists of individual blocks of data that can contain information about anything. For example, transactions made in a certain cryptocurrency. Each block of data contains a link to the previous block – this is how a chain of blocks is created. Thanks to the encryption of information, the chain remains unchanged and hackers cannot change its data.

There are now thousands of cryptocurrencies. However, this is a very unstable and speculative investment. The prices of even the most popular of them are much more volatile than the value of other assets such as stocks. For example, in November 2021, Bitcoin reached its all-time high and cost about $67,000, and on May 12, its price collapsed to $26,000.

Many investors are attracted by the potential profit from investing in cryptocurrencies. But even experienced investors must first understand how it works.

Suze Orman, a personal finance expert, says her first experience with investing in cryptocurrencies was challenging.

At the same time, Marat Mynbaev, the founder of Amir Capital Group, believes that blockchain compared to the stock market is like modern technology compared to something backward. “For me, the stock market is like a locomotive,” says Minbaev.

Ways to invest in crypto

Here are the most popular ways to invest in crypto.

• Buy and store coins. You can buy popular coins such as Bitcoin or Ethereum, or you can buy lesser known ones. For example, Dogecoin, Solana and others. In the long run, there is a chance that their price will rise. But there are also risks that some crypto may disappear, which means you will lose funds.
• Invest in cryptocurrency companies. These are companies partially or completely focused on cryptocurrency. For example, they are engaged in mining , that is, they mine cryptocurrencies, produce equipment for mining, have large amounts of cryptocurrency on their balance sheets, and so on. These companies include MicroStrategy Incorporated, Robinhood Markets, PayPal Holdings.
• Invest in crypto-focused funds . If you don’t want to choose among individual cryptocurrency companies, you can invest in funds. They manage investors’ money so that they get a return on deposits greater than the rate of bank deposits. This profit should also exceed inflation. Crypto-focused funds can invest in crypto-currency, crypto-currency companies.
• Become a cryptocurrency miner or validatorone who confirms transactions in the blockchain and receives a reward for this. So you will receive a reward in cryptocurrency. You can keep it as an investment.
• Lend coins or put them in a liquidity pool. A liquidity pool is a repository of cryptocurrencies where a trader can quickly exchange one currency for another. For this, you will receive interest or transaction fees.

How to choose a cryptocurrency for investment

You can evaluate a cryptocurrency for investment through technical and fundamental analysis. Here’s how they differ.

Fundamental analysis

With fundamental analysis, you need to dive deep into the topic. That is, you need to consider all available information about the asset in order to understand how it works. For example, to explore the financial performance of cryptocurrency, the user community. You can also study the technical document, which contains the technology and project plans.

With the help of fundamental analysis, you can understand whether an asset is overvalued or undervalued. Let’s take Ethereum for example. Most decentralized finance programs run on its blockchain. If you assume that DeFi will rise, it can be assumed that the value of Ethereum will rise in the future.

Technical analysis

Technical analysis examines how the value of an asset and the size of trades have changed over time. Is crypto rising or falling? Do people invest or take away? What events affect price fluctuations and so on.

Technical analysis focuses on numbers. He assumes that the market has already included all known information in the current price of the cryptocurrency and its sales volumes. Since current prices show supply and demand, the price of an asset should give you an idea of ​​how the public feels about it now. This is how traders predict trends and make investment decisions.

What cryptocurrency to invest in

Choosing a good cryptocurrency is not like choosing a good stock. A share gives ownership of a company that generates profits for its shareholders, or at least has the potential to do so. Owning a cryptocurrency means owning a digital asset with zero intrinsic value.

Here are the top 10 cryptocurrencies to invest in, according to Analytics Insight:

• Bitcoin (BTC) is the first and most popular cryptocurrency. Its capitalization is more than $500 billion. Bitcoin has become a cryptocurrency for traders, but it is more profitable to use it as a long-term investment. Its price is very changeable, for example, on May 12 it cost $26,000, and now it is about $30,000. But over the course of several years, its value is growing. In 2009, bitcoin was worth nothing, in 2011 its price was less than $30, and after 11 years it has grown a thousand times.

Bitcoin capitalization. Source: CoinMarketCap

• Ethereum (ETH) is the most popular alternative to Bitcoin. Its capitalization is more than $200 billion. The goal of Ethereum is to create a decentralized set of financial products that anyone in the world can freely access, regardless of nationality, ethnicity or faith. Vitalik Buterin launched the project in 2015 to empower bitcoin. 

Capitalization of Ethereum. Source: CoinMarketCap

• Litecoin (LTC) was launched in 2011 by Charlie Lee, a former Google engineer. The cryptocurrency followed in the footsteps of bitcoin, that is, it uses the proof of work transaction confirmation algorithm . But, unlike the first cryptocurrency, Litecoin processes transactions faster. Capitalization of Litecoin is approximately $5 billion.

Capitalization of Litecoin. Source: CoinMarketCap

• Ripple (XRP) is a token that provides low transaction fees and fast transactions. The company that issued XRP works with financial institutions. In fact, this is a money transfer network that works instantly and thereby reduces exchange rates. Its technology is used by banks to work faster. Before Ripple, they had to work through intermediaries. They were expensive, and operations were carried out within a few days. Capitalization of XRP is more than $20 billion.

Capitalization of XRP. Source: CoinMarketCap

• US Dollar Coin (USDC) is a stablecoin because its price is pegged to the value of the dollar. It is backed by dollar assets held in segregated accounts with US financial institutions. USDC is powered by Ethereum and can be used for transactions worldwide. The capitalization of US Dollar Coin is more than $50 billion.

USDC capitalization. Source: CoinMarketCap

• Tether (USDT) is a stablecoin whose price is backed by fiat money. It can be British pounds sterling, US dollars or euros. Hypothetically, the coin retains a value equal to one of these denominations. So the price of Tether should be predictable. Therefore, it is chosen by investors who are afraid of the unstable price of cryptocurrencies. USDT capitalization – more than $75 billion.

USDT capitalization. Source: CoinMarketCap

• Dogecoin (DOGE) is one of the coins whose price is affected by the actions of Elon Musk. For example, when he decided to buy Twitter, the value of the coin increased by 30%. Dogecoin was created by two software engineers Billy Markus and Jackson Palmer in 2013. It was a joke to comment on the wild speculation in the cryptocurrency market. Now the coin is accepted for payment by such companies as Dallas Mavericks, Kronos, SpaceX and others. Capitalization of Dogecoin is more than $11 billion.

Capitalization of Dogecoin. Source: CoinMarketCap

• Shiba Inu (SHIB) is one of the most promising cryptocurrencies. The biggest event associated with the coin is the announcement of the Shiba Inu Metaverse, where people will be able to buy lots in the Shiba Lands. Consequently, the cryptocurrency will grow in price. The capitalization of the coin is more than $6 billion.

Capitalization of Shiba Inu. Source: CoinMarketCap

• Binance Coin (BNB) is a cryptocurrency supported by the Binance crypto exchange. With BNB, users on the exchange pay lower fees. The token is also used to power Binance Chain and Binance Smart Chain, two independent blockchain networks. Binance is burning BNB tokens to reduce the overall circulation. This may increase the price of the token. 

Capitalization of Binance Coin. Source: CoinMarketCap

• Bitcoin Cash (BCH) is a modification of Bitcoin. The coin appeared in August 2017, when a fork occurred in the blockchain of the first cryptocurrency. Bitcoin Cash is aimed at peer-to-peer online transactions. Its goal is to make paying with cryptocurrencies easy and cheap. If the cryptocurrency market grows, bitcoin will become less and less suitable for ordinary transactions. In this case, it will be replaced by Bitcoin Cash. Because it is a smart choice for investment. The capitalization of the coin is about $4 billion.

Capitalization of Bitcoin Cash. Source: CoinMarketCap

Investment process

If you want to invest directly in cryptocurrency, you can use a cryptocurrency exchange. Here’s how to buy coins.

• Select an exchange. It is best to choose a well-known exchange with a good reputation and a large selection of currencies. For example, CoinBase, Binance.
• Sign up. You must provide personal information and verify your identity. So the exchange will make sure that you are not a scammer.
• Fund your account with fiat money. To buy crypto, you need to have ordinary money on your account, for example, US dollars or hryvnias.
• Decide which cryptocurrency you want to buy. You can invest in one or more cryptocurrencies.
• Place an order to buy cryptocurrency. On different exchanges, you need to follow different steps for this.
• Store coins in a digital wallet. After the purchase, the information needed to access your cryptocurrency is stored in the digital wallet. The latter can be listed on a cryptocurrency exchange or with an independent wallet provider. For example, MetaMask, Electrum and others.

Advantages and disadvantages of investments

Investing in cryptocurrency has several advantages:

• Diversification. Now there are about 10 thousand coins in which you can invest. The cheapest ones cost less than $1.
• Recoil potential. Your profit depends on the strategy you have chosen. For example, wait a few years until the price of your coins rises. For example, within 13 years, the cost of bitcoin has grown from zero to $30 thousand. You can still invest in staking or lend at interest. In the first case, you can earn about 10% per annum, in the second – up to 1000% per annum.
• Additional benefit. Unlike stocks, some cryptocurrencies, such as bitcoin, can be used to pay for goods and services.

But there are also disadvantages for investors:

• Limited regulation.  In many countries, the state does not regulate the crypto market. That is, there are no rules and laws that can protect you. For example, if your account is hacked, you could lose all of your investment. Or if the coin you are investing in turns out to be a scam, there is nothing you can do.
• Price volatility. Cryptocurrency prices can fluctuate dramatically every day. For example, on May 12, the price of bitcoin fell to $26,000. This was an anti-record for 2022. In comparison, in November 2021, Bitcoin hit its all-time high at $67,000. Some investors find it difficult to survive such significant price fluctuations.

Expert advice on how to secure your cryptocurrency investments

Douglas Boneparte, a certified financial planner, recommends investing in crypto companies rather than directly in crypto. This is how you reduce your risks. For example, you can buy Tesla shares, because it accepts payment in cryptocurrency. But, before choosing which company to invest in, it is worth checking its balance sheet.

Investing in cryptocurrencies directly is riskier. Marat Mynbaev, founder of Amir Capital Group, believes : beginners should first understand blockchain processes, wallets, and transaction systems. Only then can you go to the crypto exchange. He also advises to start investing in crypto from small amounts. And when you figure out how the market works, you can increase the rates.

Ivan Paskar, a leading marketing specialist in Ukraine and Eastern Europe at Binance, believes that if you fill your investment portfolio with different cryptocurrencies, the risks of losing money are reduced. In his opinion, you need to have crypto from different market segments:

• coins of decentralized blockchain projects and cross-chain projects;
• tokens of centralized and decentralized exchanges;
• tokens of the largest DeFi projects;
• stablecoins are coins whose value is pegged to real currency, gold, oil, and so on.

Ivan also advises to analyze the top ten coins with the largest capitalization and invest in them. 

If you are acquiring unknown tokens, you should use the venture investor approach . That is, you are not investing in a digital coin, but in a startup and its team. Therefore, the following factors need to be assessed:

• idea;
• realistic ambitions;
• project economics;
• use of the token;
• team and experience.

It is important to find out whether someone has invested in this project from large funds and at what stage it is now.

Conclusion

Investing in cryptocurrency is quite risky. This is due to the fact that the price of coins is determined only by supply and demand and is only in some cases backed by real assets. For example, fiat currency, gold or oil.

But such investments can bring good returns. For example, you can invest a few hundred dollars in coins that grow in value and become a millionaire in a few years. This is what happened to crypto investor Cooper Tarly.

In addition to investing in cryptocurrencies, you can invest in crypto-currency companies. They can produce real items or provide services, but they have cryptocurrency on their balance sheet. If the price of the crypto rises, the shares will also rise in price.

If you want to buy coins, you should understand how the blockchain works, transactions, and so on. You also need to understand what is happening in the market. For example, if money is invested in it, then most likely the price of a certain cryptocurrency will increase.