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Investing in Cryptocurrency: What is it and How it works

By 
Eve Halimi

The Blockchain represents an extremely innovative aspect of the third iteration of the internet which is web 3.0. This system of public, decentralized immutable ledgers has ushered the world into what could be the next primary medium of exchange across decentralized networks- cryptocurrencies.

The new era’s currency

Since their inception in 2008 with Bitcoin as the pioneer, cryptocurrencies have grown both in popularity and utility. More companies are adopting crypto as an acceptable payment mode while more investors are trying out their hand in crypto markets.

For instance, the total market cap of cryptocurrencies currently stands at over $1 Trillion with major cryptocurrencies like Bitcoin and Ether recording market caps of over $432 billion and $182 billion.

Going by these market capitalizations, cryptocurrencies are a lucrative investment that when done correctly can earn investors significant revenue. But what exactly are cryptocurrencies and how does investing in crypto work?

Virtual currencies

A cryptocurrency is a “digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority.” This means that cryptocurrencies are virtual assets which are not physically tangible like fiat money.

Unlike conventional currencies like the dollar, the euro, or the pound, cryptocurrencies are not regulated by centralized monetary authorities, e.g, central banks.

Rather, cryptocurrencies are based on the Blockchain which is a decentralized network of computers that help to establish a trustless system powered by consensus algorithms like Proof-of-Work and Proof-of-Stake.

As a result, cryptocurrencies make peer-to-peer transactions possible, effectively eliminating the need for financial intermediaries.  Some of the popular cryptocurrencies include Bitcoin, Ether, Binance, Solana...

So how does investing in crypto work?

Now that you have a clear idea of what cryptocurrencies are, the next important question is this; how can you benefit from crypto as an asset more than a medium of exchange? How does investing in crypto work?

There are several ways in which you can invest in crypto and earn returns.These include purchasing crypto directly, investing in crypto funds and IRAs, and mining and validating crypto.

However, the most common way people invest in crypto is through buying cryptocurrencies then selling them at a profit when their market prices go up. The following steps comprehensively demonstrate how crypto investing works;

a)   Determine a crypto exchange you prefer

Cryptocurrencies are bought on crypto exchanges like Alinea Invest, Coinbase, and Crypto.com. Therefore, conduct an in-depth research and establish which exchange suits you best in terms of security, flexibility, fees, ease of use, and user education.

A user-friendly crypto exchange that will save you the inconvenience of struggling too much as a beginner. A secure exchange will ensure you do not lose your funds in case of cyber attacks and one with low fees will be affordable especially if you are just starting out.

b)   Setup a crypto trading account

Once you identify your preferred cryptocurrency exchange that will satisfactorily cater to your needs, create an account on that exchange.

It is with this account that you will be able to buy and sell cryptocurrencies.

Setting up an account is fairly easy. All you have to do is visit the official site of the crypto exchange you’ve chosen, download the product, register yourself, and verify your personal details. This process all together should take 5-7 minutes in total.

c)   Add funds to your crypto account

After you open an account on a legitimate crypto exchange, connect it to your card or bank and then transfer money from your bank into the account. You can fund your crypto account using a variety of fiat currencies including the dollar depending on the crypto exchange you are using. These are the funds you will use to buy crypto. This process should take less than 60 seconds.

d)   Settle on the type of cryptocurrency you want and place an order

As we’ve mentioned earlier on this article, there are currently over 20,000 cryptocurrencies available in the markets.

Like regular companies, different cryptocurrencies have different market valuations, growth potentials, and risk factors.

So do your research, analyze each cryptocurrency and find the best coin you may want to invest in. Once you make a decision, place a buy order for that cryptocurrency on your preferred exchange. Make sure you do so at a price point that is likely to grow and earn you returns.

e)    Store and hold your crypto funds

Cryptocurrencies can be stored in either hard or cold wallets. Cold wallets are physical storage devices like USB drives or hard disks while hot wallets are online-based digital wallets.

When trading crypto on an exchange, users are given wallets that are hosted by the exchange. These wallets are called custodial wallets. Custodial wallets are convenient especially when you are actively trading crypto.

However, they should only be used for short lengths of time.

When you are seeking along-term storage solution, it is best to always go for non-custodial wallets.

f)    Follow your exchange’s guidelines on selling and buying crypto

Crypto investing requires you to be aligned with the cryptocurrency to ensure it goes along your investment goals.

If you are convinced that the cryptocurrencies are likely to maintain an upward growth curve, you can continue holding some of them in your portfolio.

However, if you have valid reason to believe that this cryptocurrencies technology and vision has changed, it may be wise to sell off as much crypto as reasonably possible to make a profit and avoid losses. You can also sell the crypto in your portfolio if you have found an opportunity that promises higher returns.

 

(i) Disclaimer

The Content is for informational purposes only, you should not consider any such information or other material as investment, financial, or other advice. Nothing contained on our Site constitutes a solicitation, recommendation, endorsement, or offer by Alinea Invest or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction. When investing your capital is at risk.

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