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Blog 06, Apr

What You Should Know Before Investing in Bitcoin

Consider Why You Are Investing in Cryptocurrency Perhaps the most fundamental question you should ask yourself before making a cryptocurrency investment is why you’re doing it. There are myriad investment vehicles available, many of which offer greater stability and less risk than digital currencies. Are you interested simply because of cryptocurrency’s trendiness? Or is there a more compelling reason for an investment in one or more specific digital tokens? Of course, different investors have various personal investment goals, and exploring the cryptocurrency space may make more sense for some individuals than for others. Get a Feel for the Industry It’s essential for investors—particularly those who are new to digital currencies—to develop a sense of how the digital currency world works before investing. Take time to learn about the different currencies offered. With hundreds of different coins and tokens available, it’s crucial to look beyond the biggest names, like Bitcoin, Ether, and Ripple. In addition, it’s important to explore blockchain technology to get a sense of how this aspect of the cryptocurrency world works. If you don’t have a computer science or coding background, some aspects of blockchain technology likely will be a challenge for you to parse out. There are many primers on blockchain technology that are written for laypeople. Once you’ve identified the cryptocurrency (or cryptocurrencies) for investment, look into how those tokens make use of blockchain technology and whether they provide any innovations that differentiate them from the rest. By better understanding cryptocurrencies and blockchain technology, you’ll be more fully equipped to determine whether a potential investment opportunity is worthwhile. Join an Online Community of Cryptocurrency Enthusiasts Because the digital currency space is such a trendy area, things tend to change and develop quickly. Part of the reason is that a robust and very active community of digital currency investors and enthusiasts are communicating around the clock. Get plugged into this community to learn about the buzz in the cryptocurrency world. Reddit has become a central hub for digital currency enthusiasts. 1 There are also many other online communities with active discussions going at all times. Read Cryptocurrency White Papers More important than word of mouth, though, are the specifics of a digital currency itself. When you’re considering an investment, take the time to find the project’s white paper. Every cryptocurrency project should have one, and it should be easily accessible (if it’s not, consider that a red flag). Read the white paper carefully; it should tell you everything about what the developers of the project intend for their work, including a time frame, a general overview, and specifics about the project. If the white paper does not contain data and specific details about the project, that is generally seen as a negative. The white paper is a development team’s chance to lay out the who, what, when, and why of their project. 2 If the white paper feels incomplete or misleading, then it might speak to fundamental issues with the project itself. Timing Is Key After diligent research, you have likely developed a feel for the cryptocurrency industry and may have determined one or more projects in which to invest. The next step is to time your investment. The digital currency world moves quickly and is known for being highly volatile. On one hand, buying into a hot new currency before it explodes in popularity and value may prompt investors to move equally quickly. In actuality, though, you’re more likely to see success if you monitor the industry before making a move. Cryptocurrencies tend to follow particular price patterns. Bitcoin often leads the way among digital currencies, which tend to follow its general trajectory. 3 News of an exchange hack, fraud, or price manipulation can send shock waves through the cryptocurrency sphere, so it’s important to watch out for what’s going on in the space more broadly. Finally, remember that digital currencies are highly speculative. For every overnight bitcoin millionaire, many other investors have poured money into the virtual-token realm only to see that money disappear. Investing in this space means taking a risk. By doing your homework before making an investment, you help give yourself the best chance of success. What is cryptocurrency? Cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation. Is investing in cryptocurrency a good idea? While analysts caution investors about the volatile nature and unpredictability of cryptocurrencies, some investors are willing to take the risk for the potential reward. It’s critical to do your research beforehand to determine if investing in cryptocurrency is right for you. How do I learn more about the cryptocurrency that I want to buy? To learn more about cryptocurrencies, join an online community of cryptocurrency investors and enthusiasts, such as that found on Reddit, to see what the community is discussing. Read the white paper that outlines specific details about the cryptocurrency project that you’re considering. Every project should have an easily accessible white paper—if it’s not, consider that a red flag. The Bottom Line When it comes to cryptocurrencies, one of the biggest challenges for investors is not getting caught up in the hype. Analysts continue to caution investors about the volatile nature and unpredictability of cryptocurrencies. If you’ve decided to invest in the cryptocurrency market, it’s important—same as with any other investment—to do your research. Consider why you’re interested in this particular investment vehicle, and familiarize yourself with cryptocurrencies and blockchain technology, to be more fully equipped to determine whether this type of investment opportunity is worthwhile for you. Investing in cryptocurrencies and initial coin offerings (ICOs) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date when this article was written, the author owns Bitcoin and Ripple..