At first glance, the massive and ongoing expansion of the cryptocurrency market can make it look volatile and intimidating. However, that same fluidity and growth make right now a great time for interested investors to jump into the market. Due to the extremely low barriers to entry that characterize the cryptocurrency market, almost anyone can have a digital currency portfolio up and running in a matter of minutes.
Engaging in cryptocurrencies is one way to diversify a financial portfolio.
Where to Start
Before a new investor begins buying and selling digital currencies, there are a few important steps he or she must take. First, investors need to set up a digital wallet. Digital wallets are the cryptocurrency equivalent of a bank account. They come in the form of apps that investors can download to their computers or mobile electronic devices. Digital wallets come in various forms and investors can select any style that best suits their needs and preferences. Setting up a wallet involves completing a quick initial form and downloading the interface.
Once an investor is done setting up a digital wallet, he or she will have two “keys.” One will be a “public key.” Public keys are like traditional bank account numbers. They are the numbers investors can see and use when transferring Bitcoins and other cryptocurrency tokens to other users in payment for goods or services, or when trading currencies.
The second key created when a wallet is established is a “private key.” This is a personal password or PIN that an investor can use to authorize actions associated with his or her accounts. Like any password, it should not be given out or shared and should be carefully protected to ensure account security.
Investors looking for extra security for their cryptocurrency assets can select one of several methods of “cold storage” wallet management for their cryptocurrencies. Cold storage refers to any system in which a user’s private key is protected from hacking and other forms of digital theft through offline storage. Cold storage is highly attractive to many investors because the digital nature of cryptocurrencies creates unique opportunities for online thieves to not only steal a user’s password (private key) to empty out his or her digital wallet. Because cryptocurrencies are not insured by the FDIC the way traditional bank accounts are and are not mediated by responsible third parties (like banks), investors whose funds are stolen have no recourse. There is nowhere and no one to whom they can apply to have their money refunded, reimbursed or otherwise returned to them.
Users can take advantage of the extra level of security cold storage offers through several different methods of offline password storing.
- Write it down. Quite simply, users can write their private keys down on a piece of paper somewhere. Alternatively, they can print a QR code of the key and keep that printed on a piece of paper. Although this completely protects the users’ online accounts, investors who choose this method risk permanently losing access to their digital accounts and assets if the piece of paper holding the private key is lost, stolen, damaged or destroyed.
- Hardware storage. Users can store their private keys on hardware devices not connected to the internet, such as a USB drive. Again, if the hardware device is damaged or destroyed, investors can lose access to their accounts so it is essential to protect the storage device accordingly. Some hardware-based digital wallets are designed specifically for handling and protecting cryptocurrencies in this manner, such as the Ledger and KeepKey wallets.
- Software storage. Similar to offline hardware wallets, specially designed software wallets use multilayered security programming to keep a user’s private key entirely separate from the internet connections through which transactions are processed. This significantly reduces or eliminates the risk of theft. Examples of this type of cold storage wallet are Electrum or Armory.
How to Buy Cryptocurrencies
New investors can acquire cryptocurrency coins or token the same way they would acquire any other form of currency, by trading another form of money for it. Just as you might go to a traditional bank and swap U.S. Dollars for Euros, you can use an online cryptocurrency exchange (such as Coinbase) to trade the fiat currency of your choice for any digital currency. Most exchanges also let users purchase cryptocurrencies using a credit or debit card.
Exchanges play a third-party role in the movement of cryptocurrencies between users, much the way a bank mediates the exchange of currencies between parties. This can be to an investor’s benefit, as many exchanges offer the opportunity to set up recurring purchases and other conveniences. However, like banks, cryptocurrency exchanges typically assess a small surcharge for their services. The mechanics of the system may also result in minor delays from time to time.
Alternatively, investors may purchase cryptocurrency coins directly from other investors. Apps such as BitStamp allow investors to trade currencies among themselves. Although fees are usually still involved, they generally range from one fifth to one half of the cost of exchange-mediated transactions.
How to Sell Cryptocurrencies
Investors can sell cryptocurrencies using the same apps and exchanges they use to purchase them. Users may choose to sell Bitcoins and other currencies in exchange for different types of cryptocurrencies or for fiat currencies such as the U.S. Dollar or Euros. It is important for sellers to be aware of exchange rates and the impact they may have on the actual total amount of money available for withdrawal when transitioning between digital and fiat currencies.
Cryptocurrency Pricing and Pay Walls
Because cryptocurrencies are not regulated and manipulated by authorized government agencies the way, for example, the Federal Reserve manipulates the U.S. Dollar, their values can be both fixed and variable at the same time. For example, one Bitcoin is worth the same as every other Bitcoin in the digital currency arena. However, the cost to an investor to buy a Bitcoin can be different depending on which exchange he or she attempts to buy that Bitcoin through, when the purchase is made and what currency the investor tries to make the purchase with. These variations are largely determined by supply and demand at the time of the sale. For example, if there is a high demand for a particular altcoin in Japan when an investor there attempts to buy some, then he or she might pay a significantly higher price per coin than an American investor attempting to buy the same currency on a different exchange in which there is lower demand. Learn more basic cryptocurrency information here.
Investors also have the option to view and manage their purchases the same way stock traders organize and arrange the purchase and sale of stocks. These methods can help investors moderate the impact of pricing variability on their portfolios.
- Fixed coin purchase or sale. Investors can choose at any time to buy or sell a specific number of cryptocurrency coins. If they are buying coins, then they (or the exchange app they are using) will scoop up the lowest priced coins first and move up the cost scale until the total number of desired coins has been purchased. For example, if you wanted 20 Bitcoins, then based on what was available at the time you might end up buying 10 of them for $3 each, six of them for $4 each and the final four coins for $5 apiece. Likewise, when selling coins, you might get different amounts for different coins sold based on what people were willing to pay for them.
- Fixed price purchase or sale. In this type of sale, investors pre-set their exchange app to buy or sell coins when they are available at a certain price threshold. For example, you might decide to sell 30 Bitcoins, but only when other investors are willing to pay $6 or more for each one.
As an extension of these policies, some investors holding large amounts of a particular currency may initiate what is referred to as a “buy or sell wall.” This happens when an investor places a large order for a particular currency at a specific price. Generally, the price he or she does not want the currency to fall below. For example, if an investor wants to ensure that the price of cryptocurrency X does not fall below $15, then he or she can initiate an order for several thousand coins at that price. Once the order has been opened, the exchange the investor is using will attempt to fill his or her order before processing any others. This means that until enough coins can be found to fill that order, the coin’s value will remain stable at $15. Buy and sell walls of this nature allow for some manipulation of currency value by large users but can also create stability in a market. Learn more about cryptocurrency investment strategies here.