Cryptocurrencies have been around since 2009, when Bitcoin was introduced to the world. Since then, hundreds of other types of cryptocurrencies have emerged, and investment in them has become a popular way to diversify one’s portfolio. But how does investment in cryptocurrency function? In this article, we will explore the basics of investing in cryptocurrencies, including how to buy and sell them, how they are valued, and what risks investors should be aware of.
Buying Cryptocurrencies: A Beginner’s Guide
The first step in investing in cryptocurrencies is to understand how they can be bought and sold. There are several ways to buy cryptocurrencies, but the most common method is through a cryptocurrency exchange. These exchanges allow users to buy and sell various types of cryptocurrencies, and they typically charge a small fee for each transaction.
One popular cryptocurrency exchange is Coinbase, which allows users to buy and sell Bitcoin, Ethereum, Litecoin, and several other types of cryptocurrencies. To buy cryptocurrencies on Coinbase, you will need to create an account and verify your identity through a process called KYC (Know Your Customer). Once you have completed this step, you can link your bank account or credit card to your Coinbase account and purchase cryptocurrency using those payment methods.
Another popular method of buying cryptocurrencies is through initial coin offerings (ICOs). An ICO is a fundraising event in which an issuer sells new tokens to investors in exchange for cryptocurrency or fiat currency. ICOs are often used by startups and other companies that are developing new blockchain-based technologies, and they can be a way for these companies to raise funds and gain exposure to the cryptocurrency community.
Valuing Cryptocurrencies: A Complex Process
One of the key challenges of investing in cryptocurrencies is determining their value. Unlike traditional stocks and bonds, which are valued based on factors such as earnings and dividends, cryptocurrencies have no inherent value and their worth is determined by supply and demand.
There are several methods used to value cryptocurrencies, including the market capitalization method and the price-to-earnings ratio (P/E ratio) method. The market capitalization method calculates the total value of a cryptocurrency by multiplying its current market price by the total number of coins in circulation. The P/E ratio method, on the other hand, compares the current price of a cryptocurrency to its expected earnings for the next year.
Despite these methods, determining the value of cryptocurrencies can be a difficult task, as their value is highly volatile and subject to rapid fluctuations. For example, Bitcoin’s value skyrocketed from less than $10 in 2009 to over $60,000 in April 2021, before falling back to around $30,000 in May 2021.
Risks Associated with Investing in Cryptocurrencies
Investing in cryptocurrencies comes with several risks that investors should be aware of. One of the most significant risks is the volatility of cryptocurrency prices, which can fluctuate rapidly and unpredictably. This can result in significant losses for investors who are not prepared for these fluctuations.
Another risk associated with investing in cryptocurrencies is the lack of regulation and oversight in the industry. Cryptocurrencies are largely unregulated, which means that there is no government agency or other body responsible for protecting investors from fraud or other types of criminal activity. This can make it difficult for investors to determine which cryptocurrencies are legitimate and which ones are not.
In addition to these risks, investing in cryptocurrencies also carries the risk of hacking and theft. Cryptocurrency exchanges and wallets have been targeted by hackers in the past, resulting in