First time buying cryptocurrency is intimidating and challenging. There is a lot to know but also a lot to gain. Here is everything you need to know before your first-time buy!
If you have been somewhat paying attention to where to world is going you’d have heard the term cryptocurrency or at least Bitcoin. If you’re interested in learning a bit more and how to get your foot in the door keep reading.
Is it your First time buying cryptocurrency and are wondering how to invest? Here is everything you need to know before purchasing anything!
What and who is Cryptocurrency?
For quite a few years, cryptocurrencies have become a widely used way to ensure balance, security and integrity in accounts.
Essentially, cryptocurrency is a form of payment that can be exchanged for goods and services. It is basically a way of using digital files as money and they work using a technology called blockchain.
Blockchain is basically technology that is spread across many computers that manages and records transactions. The main appeal of cryptocurrency is its security.
Additionally, there are several common types of cryptocurrency available today:
- Bitcoin – arguably the most known cryptocurrency , it is “cash for the internet”
- Litecoin – peer-to-peer cryptocurrency (buying and selling cryptocurrency between users, without a third party like most tradition exchanges)
- Ethereum – decentralized and open-source blockchain (peer-to-peer and open source basically means developed by a community rather than a business/company)
- Ripple – real-time gross settlement system (no waiting period for transactions. Gross settlement meaning the transaction is settled on one-to-one instead of with third parties and are all final)
- Stellar – open source, decentralized cryptocurrency to fiat currency(real money) with low cost transfers
10 things to know for first time buying of cryptocurrency
Now that you know a few common cryptocurrencies on the market today, it’s time to know what to do before you start buying.
1. Don’t Put In More Than You Can Afford To Lose
Crypto can have more risks than other investments. Nothing is guaranteed accept that it will change and often unpredictably. Additionally, it is often unregulated. There is no insurance or a buyer of last resort.
Prices change wildly from one minute to the next. Risks vary, some cryptocurrencies, like Bitcoin, have been around for a while and are less likely to disappear. However, Bitcoin is not risk free either.
2. Resist “Fear Of Missing Out”
Don’t invest if you’re only worried about missing out. Due to its high risk factor, the only thing you could miss out on is losing everything. FOMO is a gut reaction to something that requires thorough research.
Know what you’re buying into to and know it well. Every cryptocurrency has promoters, don’t fall for peer pressure.
3. Do Thorough Research
This is crucial. Before investing significant amounts of money do your research and then do it again. Read everything you can, go through forums, developer mailing lists, listen to podcasts and read books.
Don’t only research digital currency but other related areas as well. Game theory, economics and investing are good places to start. There are even meetup groups where you can go and ask questions.
Don’t be afraid to ask questions.
Seek-out sceptics and consider their arguments as well. Once you’ve researched do more!
4. To Good To Be True – It Probably Is
There are a lot of promoters who are shameless and will make false promises to prospective buyers. You may hear from a lot of people who say their project will overtake Bitcoin. This goes back to research, there is only one way to know for sure!
“Buyer beware, but also borrower beware”. Some exchanges offer more than 100x leverage which means you can borrow up to 99% of your investment. This is great if the value of the coin goes up but could completely wipe you out if it falls.
5. Verify – Don’t Trust
Just like in every market, there are scammers. That too-good-to-be-true proposal is a red flag. Again, do your research!
6. Not Your Keys, Not Your Coins
Basically, cryptocurrency is like cash or jewelry – the holder is the presumed owner. Once it lost or stolen it’s gone.
It is advised that you don’t trust cryptographic keys to a digital wallet to a third party because these firms are often unregulated. This means that they could very well be subject to hacks or scams.
Safeguard keys for yourself on a hardware device or even by writing the numbers down on psychical piece of paper. Basically, do you trust yourself not to loose the key that unlocks your crypto? If not, you have to be comfortable with someone else storing your valuables which isn’t always a good idea.
Multi-signature wallets can reduce risk because 2 or more people will need to sign off on a transaction. However, this process can be complicated.
Additionally, exchanges like exploits, can hinder you from withdrawing your funds for several reasons (solvency and legal trouble for example).
Basically, the take away is, if you aren’t running your own wallet, you can’t guarantee control over your coins.
7. Look Out For “Unit Bias”
Not all coins are equal. There are thousands of cryptocurrencies, some of which aim to copy Bitcoin and some which try to solve other issues.
Determining the value of a coin means asking how and why was the coin created. Who is working on it and how big is the developer community? Where are updates to the open-source software logged?
More importantly, what is the coin’s security method?
- Proof of Work (PoW) – who updates transactions on the coin’s blockchain – in order to gain the right update the next block of transactions, you need to provide proof.
- Proof of Stake (PoS) – a person can mine or validate black transactions according to how many coins they hold – more coins = more power
There are other security models as well which is all an important part of research!
8. You Can Buy a Fraction of a Bitcoin (And Other Cyrptos)
Contrary to belief, you can buy don’t need to buy a whole coin. You can purchase as little as $10 worth and just play around with it.
9. Know The Tax Consequences
The IRA considers cryptocurrency as property. If you buy a coin for $1 and it doubles in value and you spend that extra dollar you are required to report that capital gain and pay tax on it.
Moreover, centralized exchanges send account information to the IRS. Just because it isn’t as regulated as banks or stocks, the federal government will still ask questions.
10. Buy Using Dollar Cost Average – Don’t Obsess Over Price
The markets fluctuate every day, even every hour. Any crypto investment is a long-term bet, so don’t obsess.
Using dollar cost average (DCA) means buy a set dollar amount of whatever coin you want at regular intervals (daily, weekly, monthly or annually) and don’t look at it.
If you look at it in the long-term, you’re not going to be pressured to sell based on short-term changes.
Hopefully, this article provides some insight for your first time buying cryptocurrency. The take away is to do extensive and thorough research before investing. Additionally, a good way to start off is investing small amounts like $10, and see if it’s right for you.