Cryptocurrencies have been around since just after the global financial crisis of 2008. Although cryptos are currently enjoying increasing amounts of attention, emerging and existing investors alike still have many unanswered questions about the sector.
Crypto insiders will admit that the space has more than its fair share of jargon and complicated concepts that can be difficult to understand for newbie investors. Further, for such a rapidly evolving landscape, there are always new concepts to grasp.
In this article, we will give you a list of the most asked questions that surround cryptocurrencies. We would encourage you to do more research of your own as it is always a good idea to be as prepared as possible before you part with your money for any investment.
What are cryptocurrencies?
Cryptocurrencies are a new payment form underpinned by blockchain technology. This digital asset allows decentralized peer-to-peer transactions between parties all over the world. Crypto is not controlled by central banks or governments, giving individuals access to a market in which they have autonomy. Crypto also offers itself up to the unbanked, as you do not need all the identifying information that is required with traditional fiat currencies.
How can I invest in cryptocurrency?
Naturally, with all the buzz on the market, many people want to know how to get in on the action. What the question also betrays is that it is not obvious how to get into crypto. Before you invest in crypto, you need to decide if you will trade through a crypto broker or through a crypto exchange. Many online brokers offer crypto trading facilities along with other products, such as FOREX, stocks, indices, and more. You can easily trade crypto through one of these brokers.
Alternatively, you can go directly to a crypto exchange. The advantage of going through an exchange is that it removes the middleman or the crypto broker, and you are not paying fees twice over.
What are the best cryptocurrencies in which to invest?
In general, experts recommend beginner crypto investors stick with Bitcoin or Ethereum, the two largest virtual currencies by market capitalization and trade volume. They are still highly speculative and volatile, but are slightly less risky than the thousands of other coins available. Some of the other popular cryptos are Solana, Shiba Inu, Dogecoin and Cardano.
The crypto world is growing fast, with as many as 10,000 types of crypto in existence at the time of writing. More are added regularly as it is relatively simple to set up new crypto with blockchain technology. It should be clear that, on a practical level, it is impossible to seriously trade any more than a few dozen assets at any one time.
How much of my portfolio should I invest in crypto?
A crucial part of a good risk management strategy is to manage the risk and rewards of your portfolio. It is never a good idea to bet too much of your capital on a single transaction, no matter in what assets you are investing, and this includes crypto. Many trading gurus mention 1% as a rule of thumb that you should never exceed when putting your money into a transaction.
They even call it “the 1% rule.” Some investors can go as high as 2%, but never more. You are recommended to stick to individual trades that make up as little as 1-2% of your capital. It is better to make a profit in small and steady increments than to try to make a big splash at once.
As with all forms of trading, it is best that you diversify your portfolio. Not only do your experience and expertise increase as you trade different instruments, you can balance earnings and losses by spreading your risk across different asset classes.
Is it true that cryptocurrencies are used for illegal activities?
There is a dark side to cryptocurrencies. There is no doubt that illicit activities can be funded through crypto technology, free of the involvement of big government. Money laundering and tax evasion are two common crimes that come to mind. Yet, it is not that simple. Bitcoin, for example, is not a viable choice for conducting illegal business online, since the forensic record-keeping of the Bitcoin blockchain has helped authorities arrest and prosecute criminals in the past. The pseudo-anonymous nature of transactions means there is enough information for law enforcement authorities to trace payment flows.
What is a crypto wallet and how does it work?
A cryptocurrency wallet is a facility that allows you to store your cryptocurrencies. It is named a wallet because it serves the same storage function that a physical wallet performs. However, cryptocurrency coins are stored in the form of private keys, which are long and complex alphanumeric strings of information that denote ownership of crypto funds.
Crypto wallets are not actual wallets, but rather they are hardware or software tools that have been developed to keep crypto private keys, thus allowing the user to access their assets on the blockchain. Crypto traders can manage their crypto assets and execute transactions via their wallets. The cryptographic keys held in every wallet can be used to verify who owns the assets. They can also be used to either spend or receive cryptos.
What is the difference between a hot wallet and a cold wallet?
Hot wallets and cold wallets are differentiated by whether the wallet is connected to the Internet or not. Hot wallets are Internet-enabled and are, therefore, constantly online. This is often useful for users who are active investors who need to receive and send funds all the time. However, this type of wallet is vulnerable to hacking.
Cold wallets are not connected to the Internet and, therefore, pose less security. They are also less user-friendly. With a cold wallet, private keys are stored offline and are safer from hacks. Cold wallets are used to store large amounts of crypto for long periods of time.
What is the difference between investing and trading cryptos?
Some crypto investors will buy the underlying cryptocurrency to hold until the price goes up. They plan to sell it when they are comfortable with the profit margin. Traders still view cryptocurrencies as a quick way to make a profit. This differs from investors who don’t buy the underlying asset, but trade, or speculate, on its performance by taking out contracts for difference (CFD).
Are cryptocurrency transactions traceable?
Crypto transactions for coins such as Bitcoin are pseudo-anonymous. This means they are not completely anonymous, as the transactions can be identified by using a blockchain address. An individual can have multiple addresses, just as they can have multiple usernames and passwords for a single account. Internet Protocol (IP) addresses, or other identifying information, are not required to conduct the transaction. Crypto transactions are logged on a public ledger, which is an advanced record-keeping and public verification mechanism. The ledger keeps the identities of all users anonymous, but their cryptocurrency balances and a record of previous transactions are maintained for scrutiny.
Who controls cryptocurrencies?
Cryptos do not have a central controlling authority, and research and development of its tools have been driven by early investors and early adopters. Crypto is still in a precarious position, meaning that until there is enough support and acknowledgement of the payment form at governmental levels, it will remain an outsider technology form that is prone to volatility. However, its very lack of a central controlling authority is what makes governments and regulators suspicious of it.
Can I make a living from swing trading crypto?
The short answer is yes, with a significant proviso. Becoming an expert at anything takes time, dedication, and often money. All three are required for trading crypto. There are most certainly traders who do this for a living, so why can’t you be one of them? You just need to start trading with a healthy dose of realism that it is an extremely competitive and volatile space with a steep learning curve.
Is crypto a liquid market?
Liquidity refers to whether there are enough active buyers and sellers in the market to make exiting and entering your positions as seamless as possible. Quite simply, there should be enough takers when you need to sell, enough instruments available on the market when you need to buy, and enough money in the system to close these deals. As an accepted fact, crypto is a less liquid market than, for example, the FOREX market. However, it still has coins such as bitcoin and Ethereum where liquidity is never an issue, as these are the dominant assets in the crypto space. Smaller and more obscure coins will almost certainly lack liquidity from time to time.
Can my crypto account get hacked?
Yes, this is an unfortunate reality. Crypto companies frequently get hacked. This happens reasonably often as there are still loopholes because different crypto exchanges adopt different security postures. The vulnerability is usually not in the blockchain, but in the crypto wallets that companies use to store funds.
After doing your research, you will learn that it is a good idea to keep your crypto instruments in an offline storage service like a cold wallet, which is safer as it is more difficult for hackers to access than a more convenient hot wallet. Crypto exchanges invest considerable sums in security measures. They should be making it their business to constantly remind you to be alert and vigilant as you trade.
What are crypto fees?
With cryptocurrencies, users are not subject to the range of traditional banking fees associated with fiat currencies. This means no account maintenance or minimum balance fees, no overdraft charges, and no returned deposit fees, among many others. It also means no punitive payments for zero or negative balances. However, this does not mean crypto is completely free. The most common crypto fee you will encounter is related to paying the crypto miners.
It is good advice for you to understand how the fees work because this is how crypto exchanges can differentiate themselves from each other. The companies that are able to charge lower fees are often those that have innovated and streamlined their operations, so they do not have to pass too many costs on to you.
Are cryptos volatile?
Crypto is a challenger technology trying to upend the established global monetary system. Until crypto achieves a critical mass of acceptance, it will always be volatile. Even today, the cryptos swing wildly on the back of world news and bad press, something that seems to be happening a lot in today’s (late 2022) bearish crypto market.
Is crypto a scam?
Cryptocurrencies are not a scam. They are part of a growing financial ecosystem underpinned by secure blockchain technology. Like any developing industry, it has its weak points, but it is not a scam. That said, several financial experts have claimed that crypto is a bubble waiting to burst. They point to the fact that cryptos do not contain any inherent value, and as long as they are not regulated, crypto firms can take your money and go under in no time.
Is crypto regulated?
No. Crypto is not yet regulated in any meaningful way. Many governments, particularly the US and some in Europe, have started to have serious discussions about how crypto regulation could look. The urgency has been heightened by the recent spate of high-profile bankruptcies and the seemingly constant instances of crypto fraud perpetrated not only by criminals but by crypto firm owners.
There is genuine concern that the pseudo-anonymity and mobility of cryptocurrencies could enable tax evasion. Tax authorities around the world are facing growing pressure to address these and other complex tax and accounting issues. The good news is that with the right levels of government guidance and oversight, the industry could thrive. Without it, the industry could be stuck in its current phase of development.
Is crypto legal tender?
Not yet. Almost no countries accept crypto as legal tender, with El Salvador being the first to accept Bitcoin as legal tender only recently. Some countries, like Japan and Australia, recognize it as digital currency, but this is not to say they classify it as legal tender with the same standing as a fiat currency. Some companies, like Microsoft, accept selected payments in crypto but make it clear that this is not a purchase based on legal tender.
What are the risks?
All financial trading comes with risk, but crypto comes with the greater risk associated with its vulnerability to being hacked, its sensitivity to market movements, and its ability to be manipulated from a supply and demand perspective. Crypto also has a growing problem of fraudulent company owners taking client funds and mismanaging them, with no recourse.
Who owns crypto?
Crypto is a decentralized payment system, which means that it is not controlled by a central bank or a government. Most cryptos run on a blockchain, which is a software system that is maintained by a global network of decentralized computers. Blockchain supports the transmission of the information behind every crypto trade.
What are the advantages of crypto?
At the outset, Bitcoin was intended to provide an alternative payment system that would operate free of a central bank or governmental control and would otherwise be used just like traditional currencies. Some of the main advantages of crypto are that they cannot be counterfeited as military-grade cryptography is the bedrock of crypto exchanges. The system is highly secure.
Cryptos provide instantaneous and irreversible transmission of the value. Crypto also has user autonomy. Conventional currencies, like the USD, GBP and others, are regulated by governments and central banks. As global consumers, we are all users of legal tender, and yet we remain outside the monetary system because we have no say in how the fiat currency is run or handled. With crypto, transactions are peer-to-peer, meaning users can easily send or receive payments from anyone on the network around the world without the approval of another party.
What is crypto mining?
Cryptocurrencies must rely on their communities to take care of the heavy administration related to blockchain maintenance. In the case of Bitcoin, any person who adds a block to the blockchain can reward themselves with Bitcoin. This is called mining, and it is how new Bitcoins are introduced to the system.
Participants in this process are called miners, and they compete for new mining deployments by solving mathematical problems before they can qualify to do the work. Miners can also gain rewards when parties to a transaction attach a small transaction fee to a payment in exchange for it being processed quickly.
Cryptocurrencies will revolutionize the transfer of funds directly between two parties, without the need for a regulated third party like a bank or credit card company. The technology is still improving, but it is expected that robust growth is on the horizon for crypto as regulation comes into play.
There are challenges for cryptocurrency in the near term. With so many of its characteristics falling between a currency, an investment asset, and a technology product, the pace of growth and adoption is unclear as it depends on different market players. For this reason, investors of all experience levels should carry out as much research as they can to understand the ins and outs of the crypto space.