What are cryptocurrencies and how to invest in them?

What are cryptocurrencies and how to invest in them_

Have you heard this famous quote “If you don't find a way to make money while you sleep, you will work until you die” by Warren Buffett, the fourth wealthiest man in the world? Well, he is right. While there is nothing wrong with hard work, let’s be honest. It’s not going to make you a millionaire. You have to be bold and take risks if you want to succeed.

So, what can do you if you want to try your luck? You’ve probably heard all about Bitcoin in the recent news and how much a single one is worth, right? Cryptocurrencies are the new fad these days, and if you play your cards right, you can get rich in a few weeks. Or lose everything if you don’t know what you’re doing.

Today we’re going to talk about cryptocurrencies, how to buy, sell, and exchange them. You’ll understand how the system works, and I’m also going to give you some tips on safety and security.

And if you’re wondering if you should invest, you should remember Warren Buffett’s words “Never depend on single income. Make investment to create a second source”.

#1. What Are Cryptocurrencies?

Cryptocurrencies might be confusing at first. One definition of cryptocurrency is a digital access, which can be used for exchange and which uses encryption techniques (cryptography) to secure transactions and control the creation of additional units. Sounds complicated, right? And it doesn’t give you the faintest idea what cryptocurrencies are.

To say it simply, cryptocurrencies are digital forms of money. They are not like dollars, euro, yens because cryptocurrencies don’t exist in reality. You can’t touch a cryptocurrency. You can’t see a cryptocurrency. Why do we consider them money then?

The role of all money is to facilitate exchange. You want something ,and you give something of equal value to get it. People send cryptocurrencies in exchange for services and products. So they are a form of money because people consider them valuable and use them.

But unlike other currencies, you don’t use a bank to move the money from your account to the account of the seller/buyer. You just send the money through a peer-to-peer network directly to the recipient. Think about it like you’re handling virtual cash.

We can also compare cryptocurrencies to shares of a company. For example, you owned a couple of bitcoins, which are part of the asset/company Bitcoin. Their price might go up, might go down, just like the price of your shares in a certain company.

What’s important is that you can exchange these coins for another existing cryptocurrency. One that’s more valuable than bitcoins or one you think it is going to be more valuable in the future. Or you can wait until the price of Bitcoin raises and sell your bitcoins. That’s how you make real money out of cryptocurrencies.

Unlike traditional currencies, which you can store in bank accounts, PayPal, or in cash cryptocurrencies can be stored in special digital wallets online or offline. And just like banknotes, if you lose your wallet or the key to it, you lose your cryptocurrencies.

So, the lesson here is – you’re responsible for your cryptocurrency. No bank to manage your account or to protect it from theft. It’s all on you.

#2. Types Of Cryptocurrencies

Most people have heard about Bitcoin, but this is just the tip of the iceberg. Bitcoin is so popular because it was the first cryptocurrency to catch people’s interest. But it’s not the only one. And if you’re serious about investing in crypto, you should know what’s out there on the market.

So, let’s talk about what types of cryptocurrencies exist. First, go to Cryptocurrency Market Capitalization and take a look. You’ll see a lot of digital currencies, and you’ll probably get overwhelmed.

We can classify this digital money into two large groups:

  • “Big” Coins
  • “Alt” Coins

“Big“ coins are those cryptocurrencies, which satisfy these condition:

  • 10 billion or more Market Cap.
    10 billion or more Market Cap.
  • Well-established and supported
    Well-established and supported
  • Have a huge customer base, which uses and trades them
    Have a huge customer base, which uses and trades them
  • Don’t change price too drastically, the equivalent of “Blue Chips” in the stock market
    Don’t change price too drastically, the equivalent of “Blue Chips” in the stock market

For example, Bitcoin, Etherium, Bitcoin Cash, Ripple, Litecoin.

Alt “Coins”:

  • Alternatives to Bitcoin, build on top of that platform
    Alternatives to Bitcoin, build on top of that platform
  • Have less than 1 billion Market Cap
    Have less than 1 billion Market Cap
  • Have the potential to grow bigger
    Have the potential to grow bigger
  • They are more speculative than “Big” coins because they’re not well-established yet and their price can go either way.
    They are more speculative than “Big” coins because they’re not well-established yet and their price can go either way.
  • They offer higher return because you usually buy them at a lower price.

For example, Ark, Verge, Komodo, and Golem.

So, here are some things to remember:

  • Small “Alt” coins are riskier than “Big” ones and the risk doesn’t always guarantee you a higher return than Big “Coins”
    Small “Alt” coins are riskier than “Big” ones and the risk doesn’t always guarantee you a higher return than Big “Coins”
  • Start with a Big coin because they are well-established and it’s certain that they will be around in a few years.
    Start with a Big coin because they are well-established and it’s certain that they will be around in a few years.
  • After you have secured some Big coins, you can move to more speculative cryptocurrencies. 
    After you have secured some Big coins, you can move to more speculative cryptocurrencies. 

It’s possible that some of these Alt coins will turn into Big coins in the future or vice versa. It all depends on the market and what people are buying and selling. So, do your research on the currency you choose.

As Warren Buffett says “Risk comes from not knowing what you're doing.”

#3. How to Make Money with Cryptocurrencies

After we have established the two types of cryptocurrencies, it’s time to talk about how people actually make money out of them.

First, let’s start by explaining two critical economic concepts– supply and demand. Supply is the total amount of a product/service available on the market, while demand is people’s desire to buy the goods for a certain price. And the point where these two forces meet – how much people want something and how available it is - forms the price.

Usually, the curve of the supply changes because a product might get out of stock, and then it might get restocked. You get the picture, right? But since only a limited amount of Bitcoin is going to be created – 21 million to be exact – the supply curve won’t change with time. This is important because it will be harder and harder to get Bitcoin in the future.

Let’s illustrate all this with an example. Back in the beginning, when cryptocurrency was a new concept, there was a little demand because people were still cautious. Therefore the price was low. But with time the demand for Bitcoin grew. And because the amount of bitcoins is limited and there are not enough bitcoins for everybody, the price went up.

So, let’s imagine that you had bought some bitcoins way back when they were worth $100 or less. You sell them a few years later when their price is $1000. So you have earned $900 in return. You’ve made a profit. That’s the simple principle behind investing in cryptocurrencies – buy low, sell high if you want to make real money.

It seems simple, but once you start buying and selling cryptocurrencies you might get caught up in all the excitement. And if you fail to sell your crypto when the price is high because you’re waiting for it to go even higher, the currency might lose its value. You’ll lose all the invested money. You have to make a solid judgment when the right time to sell is. Check this video for more information.

To summarize all we’ve said and to make it easy for you, here are the steps to follow:

  • Do research and find coins with the potential to become the next big thing.
    Do research and find coins with the potential to become the next big thing.
  • Buy when the price is low. It’s imperative that you identify the right time to do this.
    Buy when the price is low. It’s imperative that you identify the right time to do this.
  • Purchase the coin.
    Purchase the coin.
  • Wait until the price gets high.
  • Sell

Of course, instead of selling, you might employ a different strategy:

  • You can hold the coins and wait for the price to go even higher.
  • You can sell a portion of your coins to cover your initial investment and hold the other ones.
  • You can invest in Initial Coin Offerings, something like crowdfunding but with cryptocurrencies.

And remember this prudent advice by Warren Buffett:

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.

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#4. How to Invest in Cryptocurrencies

After we have covered the essential principle of all investments “Buy low, sell high”, it’s time to talk about purchasing cryptocurrency and storing them safely. Let’s start with something easy. Buying your first cryptocurrency.

#1 Preparations for buying your first cryptocurrency

Before we get to the actual part of buying a cryptocurrency, there’s a couple of things you’ll need to get started:

  • Fiat money - dollars, euros, yens, Australian dollars
    Fiat money - dollars, euros, yens, Australian dollars
  • Then you need a place where you can exchange these currencies for cryptocurrencies. There are ATMs available that offer this serves. Or you can get them directly from other people. But for our purposes, we’re going to use Coinbase.
  • You’ll need a bank account or a credit card.
  • A digital wallet to hold the cryptocurrencies.
    A digital wallet to hold the cryptocurrencies.

#4.1. How to Buy Bitcoins

Let me walk you through the actual buying process. First, go to https://www.coinbase.com/. Then enter a valid email address and follow the step to set up and verify your account.

Once you sign up, you’ll see a dashboard with the available Coinbase currencies. It looks like this:

As you can see, we have Bitcoin, Etherium, and Litecoin. It’s tempting to decide to buy Litecoin first, because it’s cheaper than Bitcoins. My advice is to stick to Bitcoins until you build your stock of cryptocurrency.

To continue, you have to verify your identity by providing a driver ID, passport ID or Photo ID, and then you have to add a payment method. Click Buy/Sell button and you’ll see this:

Follows the provided steps to add your bank account/credit card and then you’re ready to go. Next, you should see this box when you click Buy/Sell. Enter the amount of dollars you want to spend and you’ll see the respective amount of bitcoins. Keep in mind that there is a fee for every transaction. There is also a weekly card limit, which you can increase by providing additional verifications.

As you can see, you have the option to repeat this buy. This means that if you spend $100, you can set your account to automatically repeat the purchase every day, weekly, every two weeks, or monthly. It’s up to you.

Next, click “Buy Bitcoin Instantly” and you should see:

Click “Confirm Buy”. Congratulations! You’re the proud owner of your first digital “coins”. Later, you can review your purchaser in the dashboard by clicking on “Recent Activity”.

The excellent thing about Coinbase is that you can keep your bitcoins there for the time being without the need for a digital wallet. It’s quite safe and you can store different currencies at the same time.

#4.2. Setting an Exchange Account

So, we’ve just successfully bought some bitcoins. Now, it’s time to set an exchange account so that you can exchange them for other cryptocurrencies. In this case, we’ll use Bittrex. First, go to https://bittrex.com and register. You’ll see a couple of exchange markets:

  • Bitcoin
  • Etherium
  • USDT

Here’s how it looks like:

So, you can exchange bitcoins for Bitcoin Cash, Ada, Qtum, Ethereum, and so on. The last price column shows you how much a single coin of these alternative cryptocurrencies is worth in Bitcoins.

After you register, you have to go to “Settings” and follow the instructions for Basic Verification. It’s also crucial that you enable the two-factor authentication to keep your account and currency safe. Here’s how it should look:

To do this, simply download Google Authenticator on your mobile device. Then scan the QRCode.

#4.3 Buying Alternative Coins

We have Bitcoins, we have an exchange account, it’s time to buy some alternative coins. First, you go back to coinbase.com and you click on “Accounts”. You’ll see something like this:

If you have bought Bitcoins, you should see the amount and how much they’re worth, and the send button will be active. You hit “Send BTC”, and you should see this image:

So, to send Bitcoins over to Bittrex, you need a BTC address. To get it go over Bittrex, click on “Wallet” and click on the plus next to Bitcoin. You’ll get an Address, which you should copy-paste on the recipient box in Coinbase. Double check to make sure that it’s the correct one.

Next, enter the amount you want to send, and keep in mind that there’s a small fee you have to pay. Then click “Continue” and “Confirm buy”. If you have enabled two-factor identification, you’ll also have to use Google Authenticator to verify the buy.

It might take 10-15 minutes before the bitcoins appear in your Wallet in Bittrex. You won’t see them immediately, so don’t worry. Your transaction has to be processed by the miners and included in the blockchain.

And now, you’re ready to trade bitcoins for other cryptocurrencies. To do that, select the currency exchange you want. For example, BTC-XVG (Verge). You’ll see this screen on the bottom:

Bids are what people are willing to pay for Verge. If you want your order to go through quickly, select the top bid and it will fill the bidding section on the buy form automatically. Click “Buy” and then you’ll have to wait for your order to get fulfilled and included in the market history.

If you want to get it at a lower price, you can scroll through the pages or offer your price, but there is no guarantee when or if your order will get fulfilled because the highest biddings are processed first. The good thing is that you can cancel your order, and it won’t cost you bitcoins.

So, what can you do if you don’t want to wait? Turn your attention to the Asks column. This shows you at what price people are willing to sell their Verges. The price is usually higher than the one in Bids. When you select one of the Asks, it will automatically fill the bid section in the forma and the transaction will be immediately processed when you click “Buy”.

And that’s how you buy alternative coins. Easy, right? Here a Bittrex tutorial video.

#4.4. How to Find Profitable Cryptocurrency?

Well, now you know how to exchange bitcoins for other digital currency. But how do you choose the right one? As you’ve seen, there are a lot of digital money and some of them have a future, while others don’t. And you want to invest in the ones that will turn into the next big hit so that you can make a profit.

To choose the right cryptocurrency, you’ll have to do research. You might find a lot of blogs and articles on the Net saying you should buy this or that, but you should always do your own research first. So:

  • Take a look at the website. See how well developed it is, how it feels, whether it offers adequate and helpful information.
    Take a look at the website. See how well developed it is, how it feels, whether it offers adequate and helpful information.
  • Learn about the cryptocurrency. Check the vision of the company, what they are trying to accomplish, what their plans for the future are, and so on. Their vision and strategy have to be good enough to convince you to trust their system and invest in their cryptocurrency.
    Learn about the cryptocurrency. Check the vision of the company, what they are trying to accomplish, what their plans for the future are, and so on. Their vision and strategy have to be good enough to convince you to trust their system and invest in their cryptocurrency.
  • Learn about the team. Who’s developing this cryptocurrency and what they have accomplished up to now? Research as much as possible the people behind this enterprise. Find interviews and videos if there any available and check what these people have to say.
    Learn about the team. Who’s developing this cryptocurrency and what they have accomplished up to now? Research as much as possible the people behind this enterprise. Find interviews and videos if there any available and check what these people have to say.
  • Are people chattering about this digital currency? Go to coinmarketcap.com and click on the coin you wish to research. You’ll see a page with several links. Select “Announcement” and it will take you to a Bitcoin forum. You should read through the conversations. The point of this is to learn more about the community, what people are saying about it and whether they believe in it.
    Are people chattering about this digital currency? Go to coinmarketcap.com and click on the coin you wish to research. You’ll see a page with several links. Select “Announcement” and it will take you to a Bitcoin forum. You should read through the conversations. The point of this is to learn more about the community, what people are saying about it and whether they believe in it.
  • Check “Twitter” or “Facebook”  next.
    Check “Twitter” or “Facebook”  next.
  • What’s the story behind the cryptocurrency? What makes it compelling and what gives it advantages before other currency? Answer these questions.

And as Warren Buffett says “Diversification is protection against ignorance. It makes little sense if you know what you are doing”. What Buffett means that it’s better to invest in one or two cryptocurrencies by learning all about them at great length, than to invest in several and spread all your money.

#5. Storing Your Coins Safely

There is one more thing to do after you have started your career in cryptocurrency investments and that is to secure your digital money. Coinbase, as we’ve said is quite safe, and you can leave the currencies you buy there. But when you go to other exchanges, you don’t want your money to stay there for very long. The reasons are simple:

  • These sites might go offline or get shut down and you won’t have access to your coins
    These sites might go offline or get shut down and you won’t have access to your coins
  • Hackers might hack your accounts and email and steal your money
    Hackers might hack your accounts and email and steal your money

And if either of these things happens and you lose your cryptocurrency, you can’t do a thing. Cryptocurrencies are not backed up by banks or governments and there isn’t an investigative organization to deal with theft. You’re the only one responsible for making sure that your money is safe, so you have to be able to control it.

So, what do you do then? You take the cryptocurrency offline and store it:

  • in a hardware wallet
    in a hardware wallet
  • in a dedicated wallet
    in a dedicated wallet

If you’re serious about cryptocurrencies, you have to buy a hardware wallet like Trezor or Ledger Wallet. They are secure, safe and support multiple cryptocurrencies.

Go to the websites and take a look at both. They are not very expensive when you take into account the level of security they offer. Moreover, Trezor gives you the opportunity to restore your wallet, even if you lose your Trezor device.

For dedicated wallets you can try MyEtherWallet. Here are the instructions how to create one. As you’ll notice, they warn you that you’re responsible for keeping your cryptocurrency and wallet safe. And of course, there are mobile, desktop or even paper wallets, which you can try. Here’s more information about these wallets.

One final notice. When you buy and exchange “Alt” coins, you must check to see which wallets it supports. You can find this information either on the website of the cryptocurrency or by Googling it.

#6. Managing your Investments

When you’ve started making investments, you might get so caught up in it and forget something crucial. You have to keep track of all your investment because:

  • You have to see how much profit you’re making
    You have to see how much profit you’re making
  • You’ll have to pay your taxes.

The easiest way to do this is to use CoinTracking, which will allow you to track your trades and keep everything organized. Go to the site and make an account. Then you’ll see a button “Enter Coins”. Click on it and choose Exchange API Imports from the list. After that if you’re using Coinbase, click on “Coinbase API Import” and follow the provided instructions.

And do this in the beginning, because all your trades and sells will be recorded automatically and you’ll be able to see everything you’ve done. This saves you time because you don’t have to do the calculations by yourself.

Cryptocurrencies are a rising star that challenges the traditional banking and financial systems. And as long as people believe in them, they will exist and continue to grow, expand and evolve. Investing now in digital money is a smart move, as long as you’re careful and know the risks you’re taking. Remember “buy low, sell high”, that’s the only principle that matter.

We’ll finish with one more quote by the investment genius Warren Buffett:

“The most important investment you can make is in yourself.”

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(Last Updated On: June 8, 2022)
About the author

    Whale Sumo

    Hwang is a self-proclaimed nerd who loves helping people understand complex concepts. He has a passion for crypto and online privacy and enjoys teaching others about the benefits of both. Hwang is an advocate for individual freedom and believes that knowledge is power. When he's not busy sharing his knowledge with the world, Hwang can be found running full marathons or playing video games.