Table of Contents
Although cryptocurrencies were first conceived as a payment method, investing in cryptocurrencies has become one of the most popular investment alternatives in recent years. However, it is a financial asset that involves a lot of risk and that we must inform ourselves thoroughly before choosing them as an investment.
In a nutshell
- Cryptocurrencies are a remarkably secure payment method based on blockchain technology. This technology allows transactions to be recorded in a decentralized manner, making it very difficult to hack.
- There are many cryptocurrencies, most created outside of government control. This fact makes them a remarkably anonymous payment method outside of state control.
- Investing in cryptocurrencies has become a common practice for many people looking for high returns in a short period of time. However, the volatility of these types of digital currencies makes them very risky investments.
- We can find the so-called stable coins on the market, whose purpose is to link its value to that of an external value as a way of achieving some stability. However, this policy does not guarantee being out of risk.
- Before investing in cryptocurrencies, it is advisable to follow several steps such as research in depth, diversify investments or analyze different cryptocurrencies.
What are cryptocurrencies?
Cryptocurrencies are a type of digital currency that have gained special relevance in recent years. There is only its digital version and it allows monetary exchanges in a safe, instant and global way .
They are based on block chain technology or better known as blockchain , by which all operations of each cryptocurrency are recorded. These records cannot be deleted or altered.
This kind of digital currency was created in principle as a secure and decentralized payment method outside the control of governments. But to tell the truth, the fact of investing in cryptocurrencies has turned them more into an instrument of speculation than payment.
The most popular cryptocurrency, the so-called Bitcoin, is in turn the oldest of all those that exist. Its origin dates back to 2009, when a person whose true identity is unknown, but who calls himself Satoshi Nakamoto, designed Bitcoin. Thus, this cryptocurrency became especially popular in the second half of the 2010s.
Of course, there are many options to invest in cryptocurrencies that have emerged from companies or even governments, such as the Chinese, which has launched its own version called E-Yuan.
Characteristics and operation of cryptocurrencies
As we indicated previously, cryptocurrencies are managed through blockchain technology. This technology allows any operation carried out using cryptocurrencies to be recorded and compiled in a multitude of devices at the same time , that is, in a decentralized manner.
This decentralization allows transactions and investment in cryptocurrencies to be very secure, since none of the movements executed through this means of payment can be hacked.
At the same time, another of the features that make this type of currency so interesting is the anonymity they provide to the user . And it is that, unlike any banking operation, in which an intermediary is needed, cryptocurrencies allow anonymity to be preserved to a certain extent, since they are managed through a decentralized computer network.
However, when investing in cryptocurrencies using conventional currencies we need to exchange them through exchanges. These exchanges are companies that allow you to exchange your current currency into cryptocurrencies and store them in digital wallets.
Well, in many cases to use the services of an exchange it is necessary to reveal the identity of the user. For this reason, anonymity is guaranteed to a certain extent.
On the other hand, and unlike conventional currencies that are created arbitrarily by the central bank that manages it, cryptocurrencies work through their own algorithm .
Thus, this algorithm sets the pace for the creation of the issuance of new units . For example, in the case of Bitcoin, half the units are issued each year than the previous year, until 21 million units are reached.
This fact makes Bitcoins an asset whose value cannot be arbitrarily modified by issuing new units and at the will of a few. For this reason, if the use of one of these cryptocurrencies were fully extended, it could have a fairly stable value, a fact that we are still far from.
However, there is a type of cryptocurrency called stablecoins, whose objective is to link its value to another external asset such as a physical currency, raw materials or even debt instruments. However, these coins can also see their value decoupled from the reference asset and lose value, as happened with the Luna cryptocurrency.
In fact, the value of cryptocurrencies is marked by the supply and demand they have. However, since the supply is regulated, it will be largely influenced by the demand for investment in cryptocurrencies.
This can be a problem, especially for those cryptocurrencies with a small cap value and few users. And it is that this fact can cause its value to be easily altered by a few individuals, which increases volatility and risk.
How to invest in cryptocurrencies?
As we told you before, to invest in cryptocurrencies it is necessary to resort to an exchange, that is, a company with which you can exchange physical currencies for cryptocurrencies. Now, you have to decide where you will put your investment safely. So once you have decided which cryptocurrencies to invest in, you will have to choose one of the two storage modalities.
- Hot wallet: these are totally online cryptocurrency wallets that can be consulted from your mobile or computer.
- Cold wallet: the investment is digitally stored on a physical medium and not in the cloud. In this way, it is possible to access your money even without an internet connection.
On the other hand, an alternative way for those wondering how to invest in cryptocurrencies is by mining them. And it is that both to create new units of any cryptocurrency and to carry out operations, computing power is required with which to encrypt them.
This is where the miners come into play, offering their computers to carry out the necessary calculations for the cryptocurrency to work. These miners require a very large computing power to carry out these functions, so they need to invest both in energy and in new hardware that is capable of carrying out the necessary calculations in the shortest possible time.
Well, miners are rewarded with the same cryptocurrency they have helped run, provided they have been able to carry out the necessary calculations.
Although this alternative to invest in cryptocurrencies may seem interesting, the truth is that it has different drawbacks: there is a lot of competition, a lot of investment in computer equipment is necessary, the energy costs involved are very high, and it has come to be prohibited in countries like China.
Tips for investing in cryptocurrencies
First of all, you have to be aware of the risk involved in this type of investment . Cryptocurrencies are considered a high-risk investment given their volatility and the scant supervision and regulation to which they are subject.
As we indicated before, the value of a particular cryptocurrency will be largely determined by the demand for it. For this very reason, the value can even go to 0, losing almost all of the value. As for example, it happened to those who decided to invest in cryptocurrencies in 2022 with the aforementioned Luna cryptocurrency. For these reasons it is vitally important to attend to a series of points before beginning the investment.
Get trained and informed
Although this is basic when undertaking any investment activity, in the case of cryptocurrencies it becomes more necessary. So, familiarize yourself with the world of cryptocurrencies and how they work and research each of the cryptocurrencies in which you want to invest.
If the amount to invest in cryptocurrencies is high, it is also convenient to have professional advice and be guided by those who know more than you.
Don’t invest more than you can afford
The money you dedicate to this transaction should not be needed in the short or long term, taking into account that it is a high-risk investment and you can lose a large part of the money.
Invest in the medium or long term
The high volatility of this market means that what we win at a given moment we can lose in the next minute. In this sense, the best cryptocurrencies to invest will be those with less volatility and a more sustained upward trend, even if they entail less profitability in the short term.
Diversify
As with any type of investment, diversification is one of the best strategies for investing in cryptocurrency as well. Therefore, when you are thinking about it, do not allocate all your money to invest in cryptocurrencies or in the same cryptocurrency.
Choose different investment products with different levels of risk and do not limit yourself to one cryptocurrency. In this way, the risk of your investments not being profitable will be drastically reduced.
Secure your investment in cryptocurrencies
Although cryptocurrency transactions are very secure, their storage may not be so. In fact, despite the fact that it is difficult, our wallet can be hacked or simply steal the passwords with which to access our cryptocurrencies.
To avoid these situations, certain precautions must be taken, such as proper password management, updating the software regularly or making backup copies in case you have a cold wallet.
Analyze and choose between various cryptocurrencies
In the market there are countless cryptocurrencies to invest. In this article we are going to focus on which cryptocurrencies to invest based on their current capitalization. Likewise, we also added some stablecoins for those who want less risky options.
10 Cryptocurrencies with the highest capitalization
- Bitcoin: The dean of cryptocurrencies and the one that amasses the most capitalization. Free floating cryptocurrency.
- ethereum: It was created in 2014 and has been the second cryptocurrency by capitalization for several years. Free floating cryptocurrency.
- Tether: It is the stablecoin with the largest capitalization and one of the oldest. It is tied to the dollar.
- USD coin: As its name indicates, it is a stablecoin linked to the dollar.
- BNB: This free-floating cryptocurrency belongs to Binance, the company with the highest volume of daily cryptocurrency operations.
- XRP: Free floating cryptocurrency. It belongs to Ripple, one of the largest companies in the digital currency ecosystem.
- Binance USD: Stablecoin generated by Binance.
- Cardano: Free floating cryptocurrency created in 2017 by one of the co-founders of Ethereum.
- Solarium: Free floating cryptocurrency. One of the newest on the list.
- Dogecoin: Free floating cryptocurrency. Designed as a kind of joke to expose speculation in the world of cryptocurrencies.
Advantages and disadvantages of investing in cryptocurrencies
Advantages
- Transaction security: operations carried out with cryptocurrencies are very secure because they use blockchain technology that is very difficult to hack.
- Global Currency – Some of these digital currencies are supranational and not controlled by any public organization. This factor allows them to be used anywhere in the world as a means of payment. However, they do exist today, it is possible to invest in cryptocurrencies created and controlled by states such as the E-Yuan.
- Intermediaries are not necessary: intermediaries, such as banks, are removed from the equation to operate with this payment method, which means less expenses and commissions, as well as more control on the part of the user.
- Anonymity: transactions can be executed to a greater or lesser extent anonymously.
- Immediacy: operations carried out with cryptocurrencies are carried out automatically and instantly, unlike some banking operations that can take days.
- Issuance is limited: the issuance of some cryptocurrencies is controlled by an algorithm until it reaches the maximum that can be issued. This makes it possible to avoid inflation to a greater extent, since the money supply does not grow so that its own value does not fall.
Disadvantages
- Volatility and risk: the volatility of digital currencies is very high, so the risk of investing in cryptocurrencies is also very high. In addition, since most are not backed by any government, there is also no guarantee in case of fraud, as is the case with other financial instruments such as deposits.
- Immature technology: the technology that supports cryptocurrencies is still in the development and improvement phase, so it is not yet adopted by the bulk of the population.
- Legal problems: some governments, such as the Chinese, are putting a stop to the use of cryptocurrencies by escaping state control and even being used in activities of a criminal nature.
- It is not generally accepted as a means of payment: in addition to entire countries where its use is very limited, there are many sectors and businesses that do not accept cryptocurrencies as a means of payment.
- Very high ecological footprint: being an energy-intensive activity, it produces amounts of pollution at the same level as other polluting industries.