Introduction
Cryptocurrency or crypto is a form of digital currency designed to be an alternative to physical money. And about 425 million users worldwide have adopted it. You can use crypto as a currency to buy goods and services. However, most investors hold it primarily as a speculative asset to diversify from traditional investments, such as stocks and bonds. In this article, we’ll cover the basics of crypto, how to purchase it, and factors to consider before investing.
Highlights and Key Takeaways
- Cryptocurrencies are very volatile. That’s why most crypto investors hold them as a speculative asset to make a profit when the prices surge.
- Cryptocurrencies are digital currencies without a central authority or government controlling their circulation.
- While you can invest in any of the thousands of coins available, it’s best for beginners to purchase the popular and reputable ones.
- Choosing a reliable cryptocurrency exchange and a safe wallet are very important decisions for new crypto investors.
Basics of Cryptocurrency
What is Cryptocurrency?
A cryptocurrency is a digital asset used for trading, held as an investment, or used for paying for goods and services. So, it’s like physical money, such as Euros or U.S. dollars, but only available online. The first crypto Bitcoin was released in 2009. Today, we have thousands of cryptocurrencies with the most popular ones being Ethereum, Cardano, Solana, and Polkadot.
Below are the primary crypto characteristics that you should know.
- Decentralization: Fiat or traditional money like Euros and USD are issued and controlled by central authorities like central banks and governments. But crypto operates on a technology called blockchain without any central authority controlling the system. One of the popular ways to measure decentralization is through the Nakamoto Coefficient.
- Limited Supply: Most cryptocurrencies have a fixed or capped supply to create scarcity. For instance, bitcoin’s supply is capped at 21 million.
- Cryptography: Crypto uses a technology called cryptography to secure transactions, making them more difficult to hack or manipulate.
- Borderless: Everyone with an internet connection worldwide can access crypto.
- Censorship-Resistant: No government or central authority can block crypto transactions or reverse completed ones.
- Inherently Digital: There are no Ethereum or Bitcoin coins available physically. It’s all virtual currency designed to be used online.
- Irreversible and Immutable: No one can move your crypto without the private keys. And once transactions are recorded on the blockchain, they are irreversible.
- Speed: Crypto transactions occur within minutes or even seconds.
Understanding Blockchain Technology
Are you wondering how crypto transactions occur without a middleman like a bank? To understand how crypto works, you must learn the concept of blockchain.
Blockchain technology offers a decentralized, secure, and transparent way of recording and verifying crypto transactions. It’s like a ledger distributed across a network of computers worldwide, often referred to as nodes.
Blockchain collects transaction details in blocks. Each block is like a page of a big ledger with a specific capacity. Once a block is filled with transactions, it’s closed and linked to the previous block, creating a continuous chain of blocks.
Using cryptography, the information in each block is secured by a unique code called a hash. The code is generated using the information in the block and the hash of the previous block. This makes it extremely difficult to alter the details in a block without changing all subsequent blocks. All participants (nodes) have access to the entire blockchain.
Steps to Buy Cryptocurrency
Researching Different Cryptocurrencies
In the crypto market, just like any other financial market, there are winners and losers. In recent years, we have seen both popular and less-known coins failing. The Terra Luna (LUNA) and TerraUSD (UST) crash in 2022 sent shockwaves in the industry, and some investors lost money.
Some of the reasons coins fail include:
- Loss of traction
- Founders abandoning their projects
- Rug pull
- Fraud, hacks, and scams
- Lack of strategic business plans
Here’s how you can research various cryptocurrencies and avoid buying failing coins.
- Research the Founders: Choose projects whose founders have a great reputation in the industry without traces of fraudulent ventures.
- Understand the Project Plan: Read the coin’s white paper to understand the business use case behind the project. If the mission resonates with you and there’s a strong demand for that use case, go for it.
- Listings: Opt for coins that are listed on the top crypto exchanges. These exchanges often research the projects they list thoroughly to maintain their reputation.
- Market Capitalization: Check the overall value of the coin. Those with a high market capitalization and often low risk are best for beginners.
However, as a new crypto investor, it’s best to stick to the popular and top coins like Bitcoin, Ethereum, Tether (USDT), Solana, Binance Coin (BNB), Cardano (ADA) and Polkadot (DOT).
Choosing a Cryptocurrency Exchange
The easiest and most popular way to buy and sell crypto is through cryptocurrency exchanges. But how do you choose among the over 200 exchanges available globally? It can be daunting! But knowing what to look for can help you choose the right one for your investing priorities.
Below are tips on how to choose the most reliable and best cryptocurrency exchanges.
- Reputation: Find out what past and current users are saying about the exchange through online reviews.
- Transparency: Check the website to find their physical address, fee structures, security measures, and other crucial details. Providing such information is a sign of transparency which is associated with legitimate crypto exchanges.
- Security: Several exchanges have had security issues in the recent past, including attempted hacks. So, no exchange is 100% safe. But to be on the safe side, go for platforms that have been around for the longest time, have a large customer base, and have had the least amount of security issues in recent years.
- Pricing and Fees: This is where exchanges vary the most because that’s how they make money. Check the website to find the fee structure and understand how the costs will impact you based on your investing style.
- User Interface: Some platforms offer different views like “basic” and “advanced” to cater to investors at different levels.
- Payment Methods: Find out if the exchange offers deposit and withdrawal options that are easily accessible to you.
- Supported Currencies: Check if the exchange has the currency pairs you want to trade or invest in.
- Liquidity: How quickly and easily can you buy an asset on the exchange? Look for exchanges that have a lot of users or investors who hold a lot of assets on the platform and trade frequently.
- Customer Support or Help Page: When learning how the exchange works, you might encounter some challenges. Check if the platform has a reliable customer support team or helpful guides on its website.
Creating an Account on the Exchange
Once you know what currencies to buy and have zeroed in on the best crypto exchanges, it’s time to sign up.
Every crypto exchange has its registration process. But here is a general overview of what to expect.
- Visit the crypto exchange’s website and look for the Sign-Up button (often at the upper right-hand corner).
- Follow the onscreen instructions to submit all the required information including email address, country, date of birth, etc.
- Click the verification link sent to your email and follow the instructions.
- Verify your phone number.
Once you have created your account successfully, the next step is identity verification (KYC) which also varies by the exchange. For most exchanges, this involves submitting your full legal name, a picture of your government-issued ID, and a selfie. The verification process may take a few days.
Depositing Funds and Making the Purchase
When your account is verified, you can start depositing funds and purchasing crypto. The deposit fund option is usually in the wallet section. After funding your account, you can search for the desired currencies, check the live crypto prices, and execute the trades.
Safely Storing Your Cryptocurrency
The next step is storing the crypto you purchase safely. Unfortunately, the cryptocurrency industry is prone to hacks and scams. So, you must select your storage options carefully. The available options include:
- Hot wallet
- Cold wallet
- Cryptocurrency exchanges
Hot wallets are internet-enabled and online. They are suitable for storing small amounts of crypto that you intend to use soon or trade with often. Hackers often target hot wallets.
A cold wallet is a form of offline storage and comes as a physical portable device, often with Bluetooth connectivity. It’s the safest option since it’s almost impossible to be hacked. You can only lose your crypto if you lose the device or forget the private keys.
Cryptocurrency exchanges also offer free wallets to store your crypto. Often these are hot wallets, but some exchanges are now offering cold storage options.
Key Considerations When Buying Cryptocurrency
Understanding the Risks
Before buying crypto it is essential to understand the risks involved and prepare accordingly.
One of the major risks is high volatility. The prices of coins can change drastically, causing a high profit or loss. For instance, in November 2021, bitcoin prices went up to nearly $69,000, then fell to around $16,000 by February 2023. You must be okay with such sharp swings and learn how to use them to your advantage.
Another risk of crypto investments is losing your assets. The most common way of losing crypto is hacks targeting your hot wallet or the exchange you’re using. That is why you should use exchanges and wallets with hacker-proof security. You can also lose your crypto if you forget the password to your digital wallet or lose your hardware wallet.
Legal and Regulatory Considerations
The crypto industry remains largely unregulated, but governments and regulatory bodies are finding ways to implement rules and regulations. Here’s a brief overview of the legality of crypto around the world.
- The Central African Republic and El Salvador adopted bitcoin as a legal currency.
- India and China consider crypto as illegal.
- The United States and many European countries are trying to set up rules and regulations for crypto trading.
Conclusion
Investing in crypto can provide a great alternative to traditional investments. But you must be okay with the high volatility and learn how to store your assets safely.
Ensure you research the currencies you wish to buy cautiously and choose trusted crypto exchanges.
FAQ
How Do Beginners Buy Cryptocurrency?
The easiest and best way to buy cryptocurrency for beginners is through reputable crypto exchanges.
What’s the Best Way To Buy Crypto?
The best way to buy crypto is to research coins and use one of the major cryptocurrency exchanges.
Is Crypto Still a Good Investment?
Crypto can be a great investment with the possibility of high returns. But you must understand how the industry works to take advantage of opportunities when they arise.
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