With the digital age pervading every sphere of our lives, cryptocurrencies have taken the market by a storm. Bitcoin, Dogecoin, Ethereum and the like have made the headlines and caught everyone’s attention, so much so that few governments have endorsed it, while few others have banned it. Wish to know what this buzz is all about? Want to invest in these cryptocurrencies too? Read on!
What are Cryptocurrencies?
Digital currencies that are traded between consenting parties and tracked on a digital ledger without being backed by any real or tangible assets are known as cryptocurrencies. Therefore, they lack intrinsic value. It does not rely on banks to verify transactions. It is a peer-to-peer network.
The transactions are recorded in a public ledger and the store house of the cryptocurrency is a digital wallet.Cryptocurrencies can either be stored in offline cold wallets or online hot wallets – the latter being more accessible.
Security of Cryptocurrency
- It is usually built on blockchain technology which is recorded into blocks and are time stamped.
- It is difficult for hackers to tamper with the said network.
- All transactions require a two-factor authentication process.
- However, there have been instances where even these ledgers have been hacked.
How to Invest in Cryptocurrency?
The investment process involved in bitcoin is the same as the steps involved in investing in stocks –
- The first step is to open a brokerage account at a firm that allows crypto investments.
- One must then deposit funds from his or her bank account into the brokerage account.
- The cryptocurrency must be bought using deposited funds or cash balance.
- This can then be sold for a gain or a loss at a later date.
How Should One Select Portfolios or Allocation?
There are two ways that the investor can proceed in building his or her portfolio, namely Index Investing or Selection Investing.
- Index Investing
This method delegates the responsibility of asset selection to algorithms and mathematical formulas. Cryptocurrencies are divided into asset categories such as utility tokens, platform coins, yield farming tokens, storage coins, etc. and the portfolio will consist of investment according to these categories. Thereafter, the asset number or quantity is decided and the asset weighting is done to finalise upon the investment.
- Selection Investing
In this method, the investor expends a lot of time handpicking his or her portfolio elements after doing extensive research. This places the entire responsibility on the investor itself and is seen as an empowering exercise by many.
Strategies that Can be Used in Cryptocurrency
All cryptocurrency investors can invest in these currencies following either of the 4 strategies mentioned below –
- Rupee cost averaging
It refers to a systematic investment planning form of buying cryptocurrencies i.e. buying a fixed quantity of cryptocurrency at regular intervals. It is useful for those investors who wish to invest with little effort and have it all automated.
- Balanced portfolio
This strategy involves the investor buying the same rupee amount of the currency that he or she is investing in. This offers a good chance at diversification.
- Unbalanced portfolio
This strategy involves the investor buying or investing different amounts in each currency based on how well the currency might perform in the future. This strategy suits investors who have done extensive research about each of the currencies and have a fairly good idea about its past performance and potential performance in the future. This must be resorted to only if one is reasonably sure of his or her investment.
- Profit reinvesting
This is resorted to when the investor is already reaping profits out of a basket of currencies and wishes to branch out to other currencies – new, promising players in this emerging market. It is useful for those who are sceptical and will trust the investment after trying it out for themselves and reaping profits.
Points to Keep in Mind Before Investing in Cryptocurrencies
- Cryptocurrencies are highly volatile and come with a lot of risk currently. It is important to understand the risk associated with it and be calculative about your investments.
- There are multiple cryptocurrency options and bitcoin is not synonymous with cryptocurrency – it is just one among a dozen others such as Ethereum, Litecoin, and Ripple.
- Reading the cryptocurrency’s whitepaper will provide a good insight into the functioning of the cryptocurrency.
- It is advisable to invest when the cryptocurrency is at the peak of the bubble and not to invest when it is crashing.
- The track record of the team members that made the cryptocurrency is critical.
- Market capitalisation of the cryptocurrency matters as they might offer an accurate picture of the growth potential.
- The liquidity and the volume of the trading coin is important.
- Social media activities might offer some good insight and opportunities but investing solely based on the information availed from that end is not advisable.
- A dose of scepticism is a must – in fact most experts must opine that the investor must be prepared for some loss. Therefore, if you are risk averse, then avoid investing in cryptocurrencies altogether.
Some Popular Cryptocurrencies
- Bitcoin – is the first of its kind, fully decentralized, peer-to-peer digital cash to have the highest digital liquidity value.
- Litecoin – has a high mining speed and high liquidity value.
- Ethereum – is the first cryptocurrency to introduce smart contracts that harnessed blockchain technology optimally.
- Cradano – it is an affordable cryptocurrency with two blockchains.
- Ripple – is a venture-backed startup known to offer finance settlement services to banks across territorial borders.
- Dogecoin – though a late entrant to the market, it has risen in the ranks at a very quick pace.
Sites than Can Be Used to Invest in Cryptocurrency
- Bitcoin IRA etc.
Cryptocurrencies in India
- Buying and selling of cryptocurrencies is not illegal, it is just unregulated.
- The Government of India is exploring crypto regulation and crypto exchanges such as CoinSwitch Kuber have been working on self-regulation and KYC for all the investors of cryptocurrencies in tandem with the government.
- Currently, it cannot be used to buy and sell things and hence cannot replace legal tender money, but it can surely be held as an asset.