Cryptocurrencies have high liquidity, an unclear legal status, and the title of one of the major innovations of the 21st century. Below we discuss some factors that novice investors into cryptocurrencies have to pay heed to in 2024.
Over the last year, Bitcoin grew by 268% – from US$ 27,000 to US$ 73,000. Ethereum, the second most expensive cryptocurrency, grew by 2.3 times since March 2023 to US$ 4,000, according to CoinGecko monitoring service.
Looking at these figures, you may fall prey to the FOMO (Fear Of Missing Out) effect. The crypto sphere has earned a reputation of a new Klondike only that it is located in the digital world.
At the same time, you should not forget that cryptocurrencies are high-risk investment objects by definition. You have to work with them in a cold-blooded and well-organized manner.
How to start investing in cryptocurrencies
Similarly to other investment instruments, investments in crypto are based on three pillars: the seed capital, risk-management, and trading strategies.
One of the main questions for investors starting to work with cryptocurrencies is as follows: How large should the seed capital be? In comparison to traditional stock exchanges, the crypto sphere is more democratic: experts recommend starting with investing US$ 1,000. Please note that investing in altcoins (all crypto coins other than Bitcoin) would be a riskier enterprise. There are many of them but chances are that you might end up investing in a fraudulent scheme. Returning your money would be close to impossible in this case.
A general recommendation is to invest 3% to 10% of your total investment amount in cryptocurrencies. Your ultimate investment amount will largely depend on your tolerance to risk.
Crypto investments can also be long-term and short-term. Some people invest in bitcoin and then live the cryptocurrency in a ‘cold’ wallet for 3 to 10 years. Other people prefer investing in short-term (90 to 180 days) projects that can bring between 10% and 50% of profits.
Find the right door
The first thing to do is to find the platform that you are going to use for trading in cryptocurrencies. Binance is the largest such platform but there are other well-known and highly functional platforms such as ByBit, Huobi, KuCoin, and OKX, for example. They offer a wide range of instruments that you can use for crypto trading. In addition, there are lesser-known exchanges and some of them allow trading in cryptocurrencies anonymously. You have to realize, however, that the lesser the capitalization of a trading platform is, the higher is the chance that the price of a particular coin may be artificially inflated or reduced.
Registering with a crypto exchange usually takes only a few minutes. You create a user account, enter the password sent to you by email and there you go: you can start trading. Nevertheless, many exchanges carry out KYC procedures, in accordance with the contemporary requirements. You may have to make a passport selfie or supply a scanned copy of your passport or other similar ID. Crypto exchanges do not charge any registration fees.
After creating an account, the user gets access to the so-called ‘hot’ wallet. You can instantly use the coins in your ‘hot’ wallet for trading. At the same time, there are certain minuses associated with ‘hot’ wallets. The coins are de facto at the disposal of the crypto exchange and you can lose them if the exchange collapses. This is not only a theoretical scenario. FTX, one of the largest crypto exchanges, faced a liquidity crisis in the fall of 2022 and its users lost 1 to 2 billion dollars.
Alternatively, you can keep your coins in a ‘cold’ wallet. A ‘cold’ wallet resembles a flashcard: it is autonomous. However, you have to transfer the coins from your ‘cold’ wallet to the crypto exchange before you can start trading. A compromised solution would be installing an autonomous wallet application onto your notebook or smartphone.
Are operations with cryptocurrencies legal?
The answer depends on the particular country: in some countries, cryptocurrencies are legal, in other countries they are not regulated, and in still other countries, their use is prohibited.
El Salvador was the first country to announce that bitcoin was legal. Since September 7, 2021, Bitcoin has become an official legal tender in El Salvador alongside the US dollar that has been the country’s official currency for more than 20 years now. In 2022, the Central African Republic (CAR) also recognized Bitcoin as an official means of payment.
The European Union introduced a new legislative act (MiCA) in June 2023 that regulates issuance and use of cryptocurrencies and stable coins on the territory of the EU.
It is legal to trade in Cryptocurrencies in the USA, Australia, Canada, France, Russia, and other countries.
On the other hand, some countries disallow the use of cryptocurrencies for various reasons including financial, economic, regulatory, and social ones. As of 2023, Bitcoin was prohibited in Bangladesh, Bolivia, Morocco, Iraq, Egypt, Nepal, Qatar, Tunisia, Dominican Republic, Afghanistan, China, North Macedonia, Ghana, and Algeria.
Countries prohibit the use of cryptocurrencies in an attempt to control capital flows, to conform to the international AML standards, and to protect their national currencies and traditional financial institutes.
We must note that the situation may change overtime and some countries may well adopt new regulations as far as the use of cryptocurrencies is concerned.
Risks and narrow places
Bitcoin halving has recently taken place and halving traditionally raises the price of the coin. For this reason, many experts expect to see a bullish market that usually attracts more capital and launches multiple new projects.
In this light, you should remember that investing in any project requires meticulous research of its financial model, its founders, and participants.
In addition, you will be well-advised to use only official crypto wallets and never share your data with people that you do not know very well. Do not register at suspicious websites because you might lose money if you do.
Keep your password to your crypto account secret. Never share it with anybody and do not keep it in a document file on your computer let alone a social network account or a cloud service. The safest way is to write it down on a piece of paper and keep it in a secure place such as a safety deposit box, for example. If you proceed wisely, investments into cryptocurrencies can bring you a hefty profit.