Money & Finance

Everything You Need To Know Before Buying Cryptocurrency

Since the hype peak in late 2017 and early 2018 when almost everybody was eager to join the crypto, things have settled down. But still new enthusiasts buy cryptocurrencies – Bitcoin, mostly – each day. It may be risky for newcomers if they dive in without appropriate knowledge. Before you buy Bitcoin or other crypto, define the reasons why you want to get involved in the industry, explore basic rules and potential risks.

The basics

Simply put, cryptocurrency is a database of math-protected entries. It exists in the digital form only and requires the Internet access. There are a lot of cryptocurrencies in the market, you can check their stats on Coinmarketcap. Each coin has unique features and, more importantly, its own purpose. Some cryptocurrencies, like Bitcoin, tend to become a globally accepted payment system, while others, like Ether, act as a fuel for decentralized applications development.

Most of the crypto projects are based on blockchain technology, a decentralized system that stores information in separate blocks, with each block containing data from the entire chain. The process of adding transactions to the chain is called mining; in order to mine crypto, people use a computing power. All data is totally transparent and unchangeable after being fed into a blockchain. Owing to that, the blockchain is highly protected from hacker attacks.

Despite their smooth functioning and growing popularity, cryptocurrencies hold a lot of risks – high volatility, a limited number of areas they can be used in, a possibility of governmental bans.

Reasons you may need cryptocurrency

Basically, there are three purposes of buying crypto:

  1. Holding. You buy some coins and just keep them for a while. It may be either for diversifying an investor’s portfolio or just for being engaged in a trending activity.
  2. Trading. Potentially more profitable than just holding, it works in a similar way to the traditional exchange. You register an account and try selling or buying crypto on the most favourable terms. The process requires a decent skill and some luck to succeed.
  3. Everyday using. Depending on the nature of a specific cryptocurrency, you can use it for regular money transfers, application development, or paying for goods and services.

Key things to learn

Regardless of your purpose, you will need a wallet before buying crypto. A wallet has a public address, similar to an email, that is used for sending and receiving money. There’s also a private address used for confirming the transactions. Private keys should be kept secret.

Cryptocurrency wallets can be software, hardware, and paper.

  1. Software. These wallets can be web-based or desktop. They are the most convenient and the least secure. Don’t use them for storing large amounts of cryptocurrencies.

Examples: Blockchain.com, Jaxx, Exodus, Mycelium.

  1. Hardware. These wallets are expensive but way safer than software ones. Being protected from the Internet hacks, they still can be broken physically.

Examples: Trezor, Ledger Nano.

  1. Paper. Simply put, it’s a piece of paper with public and private addresses printed on it. This is the only type of wallet which requires entering private keys for withdrawing money.

Example: BitAddress.

Another thing to remember is taxes. Cryptocurrency trading is regulated by law, so you should learn about the current tax rate in your country and report your crypto gains and losses. To avoid mistakes, consider consulting with tax analysts.

Essentials of holding crypto

Here are the most important rules for both long-term investors and occasional buyers:

  • Find a reliable exchange. Big-name cryptocurrency brokers like Coinbase or Coinmama are considered trustworthy.
  • After buying, transfer crypto to your wallet. Don’t keep it on the exchange’s account as it may be hacked.
  • Read the news regularly. Depending on the market trends, it may be more profitable to sell a part of your funds or to buy more. Track it to catch the right moment.
  • Remember about security. Protect your wallets and accounts with a two-factor authentication, don’t reveal your private key, and use firewalls.

Essentials of trading crypto

If you want to be involved in trading, here are the rules you should follow:

  • Explore exchange services. Register on the major exchanges like CEX.IO that also provide trading functionality. They offer a lot of cryptocurrency pairs to trade with.
  • Diversify your portfolio. It’s better to own not only Bitcoin but other cryptocurrencies too. Major crypto-to-crypto exchanges support an impressive number of tokens.
  • Be reasonable. Don’t believe that you can get insane profits in a day. It’s possible but hardly attainable. Make your profit from small deals. Don’t make hasty decisions just because the coin’s price hits its peak.
  • Always do your own research. Read guides and news, check stats, explore trading tools offered by exchanges, and never stop researching. Don’t trust analysts who may fool you in pursuit of their own goals.

Essentials of investing in crypto

These are basic things to know for making a solid crypto investment:

  • Understand how the crypto project works. Before investing, read through the whitepaper and try to predict its future adoption.
  • Get an appropriate wallet. So far, as a lot of minor currencies aren’t supported by multi-wallets, you will need a separate one for each coin. Choose a wallet in accordance with its type and safety level.
  • Check the alternatives. Make sure the project you’re going to invest in corresponds with your purpose best.

Conclusion

The golden rule of the crypto world says: Never invest more money than you can afford to lose. The cryptocurrency market holds a lot of risks, and every crypto-related activity should be well-protected. Define a clear goal of buying cryptocurrency and follow the basic rules to reach your goal. Always research a lot and stay updated with the current events.

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