What started out as an academic concept has catapulted into one of the hottest markets in the world, and offers rookie female investors in particular the opportunity to boost their finances from an app on their phones. But how much do you need to know about cryptocurrencies to get in on the action? Aoibhinn Mc Bride investigates
Bitcoin is often the byword for digital currencies, as it was the first one created in 2008 by an anonymous entity that goes by the pseudonym Satoshi Nakamoto, and remained the only cryptocurrency in existence until 2011. But as of January 2021, there are over 4,000 cryptocurrencies in existence, and that number is expected to keep rising as the market continues to grow and more people invest. In fact, cryptocurrencies look set to eclipse traditional stocks as a more accessible means of investment, and in 2020 there was a 21 per cent increase in the amount of people investing in cryptocurrencies compared to a 12.5 per cent rise in those buying traditional stocks and shares. But with so many currencies out there and so many websites, Instagram accounts and cryptocurrency brokers purporting to give prospective investors all the tools, tips and tricks needed to start playing the market, it can be daunting to know where to begin, especially as the foundation of cryptocurrencies was formed on the premise of cutting out the middleman and giving crypto owners full autonomy over their assets.
So where should you start? And do you need a lot of money to start investing? In the most basic terms, cryptocurrency is digital coins that aren’t attached to a bank, country or regulatory body, unlike traditional currencies like the dirham, euro, dollar or pound, known as fiat currencies. If you want to start trading in cryptocurrency, you need to get a crypto wallet, which is essentially a digital payment system like PayPal. Wallets can be procured online in hardware or software form, and popular ones include Coinbase Wallet, Gemini, Ledger Nano X and Trezor One. Both hardware and software wallets store your cryptocurrency, but hardware wallets store the assets offline in a physical device, whereas software wallets download your assets onto your computer or smartphone. Hardware wallets are considered to be the most secure, and are best if you plan on investing large amounts, but don’t plan on trading frequently, while software wallets are better for small amounts and frequent trading. Most cryptocurrency exchanges also offer exchange wallets to store your assets for you, but generally these are not recommended, as exchanges store assets offline and are therefore the custodian of your asset, much like a traditional bank holds funds. However, custodial wallets, which are highly secure and managed by a third party, are seen as a safe way to store assets offline if you don’t want to set up your own hardware wallet. Whatever you choose, safety is key, and preventing hackers from gaining access to your assets should be prioritised.
Once you have your wallet in place, a cryptocurrency exchange will allow you to purchase different cryptocurrencies for traditional currency, and exchange digital currencies. When choosing a cryptocurrency exchange, consider how easy or difficult it is to use (Coinbase is considered one of the easiest to navigate for novices), the fees they charge (easier user experiences and interfaces tend to cost more, so as you progress you may want to shop around for better fee structures), how secure they are and if they list the assets you are interested in buying, as not every exchange works with every coin. Just like the market itself, you don’t have to limit yourself to just one exchange, and spreading your cryptocurrency assets across multiple platforms can help to minimise susceptibility to hackers. You can also choose to go with an exchange that offers fiat/crypto pairings (e.g shows the value of cryptocurrencies against fiat currency values, and is generally easier to comprehend for beginners or those starting out). Some of the most secure exchanges include Coinbase, Robinhood, Gemini and Kraken. Crypto/crypto exchanges like Binance and Huobi work slightly differently in that they only trade in crypto values.
The next step is identifying what you want to buy and the amount, and also deciding on what kind of strategy you want to implement, e.g do you want to sit on your investment for a certain amount of time and play the long game or exchange your assets for different currencies on a more regular basis, depending on the market? Capital gains and losses are based on how much your cryptocurrency is worth, while crypto income or dividends can be earned simply by holding, staking or lending your assets. As the adage goes, variety is the spice of life, and when it comes to cryptocurrencies, the best way to play the market is to diversify your portfolio and invest in more than one coin. This is also important to reduce the risk factor. And because some exchanges only offer cross-crypto pairs and don’t trade in fiat currency at all, the pairing possibilities are endless.
However, just like traditional stock and foreign currency exchanges (FOREX), the cryptocurrency market can be volatile, and is more susceptible to highs and lows, so you shouldn’t invest all of your life savings in cryptocurrency, and the money you do invest should be diversified across a couple of different currencies. Take Bitcoin, for example – in 2011, Bitcoin’s value jumped from $1 to $32 before bottoming out at $2, however by 2017 Bitcoin’s value peaked at just over $20,000, but fell to around $7,000 in 2019 before hitting highs of $64,000 in April 2021. In order for a digital currency to be valuable, enough people must start to invest in it, however other factors can influence its value like how secure it is (some cryptos have been hacked in the past due to bugs in the system), economic instability (countries like Venezuela, which have experienced currency hyperinflation, have seen increases in the use of Bitcoin as a means to store personal wealth) and it being recognised as legal tender by governments (in September 2021, both El Salvador and Ukraine became the fourth and fifth countries respectively to recognise Bitcoin as legal tender). The Central Bank of the United Arab Emirates (CBUAE) has also announced that it plans to launch its own digital currency within the next five years as part of its 2023 to 2026 strategy to position itself among the world’s top 10 central banks. Known as CBDCs or Govcoins, the currency will act much like traditional cryptocurrencies do, and those who invest in Govcoins will have a digital wallet with the central bank where money can be exchanged and deposited. And in Europe, Germany is leading the way as the first country to regulate and legislate cryptocurrencies by allowing ‘Spezialfonds’ or special funds (those unique to Germany that are institutional investment funds) to invest as much as 20 per cent of their portfolios in cryptocurrencies.
Stefan Erben, co-founder of CryptoExplorer, says he gets asked the same questions about getting started and ultimately succeeding at cryptocurrency trading every day, which is why he decided to launch CryptoExplorer Academy in 2020, a complete online platform to help people get started with cryptocurrencies. “I think one of the biggest mistakes new investors make is the lack of basic investment knowledge. The crypto market is still partly like the Wild West, and unfortunately a few scammers take advantage of that. Many new investors have a hard time distinguishing realistic investment opportunity from risky or fraudulent projects,” he advises. “The rapid and steady increase in value over several months quickly leads one to believe that prices will continue to rise. You start to calculate what would happen if the investment increases tenfold again, and you start to dream. Of course, it is important to dream, but when making investment decisions it is better to act with reason than to rely on your hopes. Like most markets, cryptocurrencies have their ups and downs. And the price drop always comes when you least expect it! I had to learn this the hard way in 2017, and watched a lot of the unrealised gains disappear. The volatility in this market is enormous, and the easiest way to beat it is to hold for the long term. That has paid off so far.”
Iranian-American author and wealth management expert Kiana Danial offers a free online masterclass, risk management toolkit and advice through her company Invest Diva, which aims to give women in particular the tools they need to take control of their financial future. She has been able to build an investment portfolio of over $2 million without making investing her full-time job. “Some people just dive into the markets and try to figure investing out on trial and error, and end up losing all of their money. I totally relate to these kinds of people, because I was one of them. When I started, I lost $15,000 in trial and error, and trying to figure it out on market noise, so I decided to invest in myself and get the foundation right,” she says on her YouTube channel. To help clients navigate the market, she has devised the Invest Diva Diamond Analysis to explore the market from five angles: fundamental, sentimental (market sentiment), technical, capital (personal risk management) and overall, and advocates diversification to reduce risk. However, Erben, who began trading Bitcoin when he was just 19, admits he had “no idea what Bitcoin was really about” at the time, and was only interested in the price, so contends that it is possible to dabble in the market if you keep your expectations realistic and trading activity to a minimum. “If you want to invest in the crypto market for the long term, then it’s relatively easy. But day-to-day trading and taking advantage of smaller fluctuations takes a lot more skill and requires a lot of time and money,” he shares.
“Generally speaking, I would say that you don’t need that much information if you look for it in the right places. The problem as a beginner is rather to know where to get serious information, and how to distinguish it from the fake and wrong information. The question that everyone should ask themselves is, the first cars can already drive autonomously, our smartphones are getting more and more functions every year, and artificial intelligence is giving us unimagined possibilities, so why shouldn’t our money finally evolve and receive smart features?”
