Investing in Cryptocurrencies as a beginner

In today’s day and age, investing in Cryptocurrencies is perhaps the most popular form of alternative investment nowadays. The frenzy initially caught the attention of the new generation due to its novel and exciting nature but as it gained acceptability from various financial institutions around the globe, the mania slowly spread among the millennial generation as well. Today, you can buy a Crypto ETP (Exchange Traded Product) from various banks and mutual funds all over the world.

How to choose the right coins to invest in as per your investment goal

If you are new to the world of Cryptocurrencies and are interested in investing in them, the first thing you need to consider is that Cryptocurrencies are a highly volatile, high risk form of alternative investments. Their movement is still not well understood in the financial markets and the digital assets are virtually unregulated. 

Hence, the portion of your portfolio you decide to allocate to Cryptocurrencies must be determined after scrutinizing some of these crucial aspects.

Cryptocurrencies are extremely volatile, which makes it challenging for an average investor to make calm, rational, and hence, profitable decisions. Most new entrants get greedy when it comes to Cryptocurrencies, as most tokens have shown massive growth in recent years. But blindly rushing into this exotic alternative investment often leads to disastrous outcomes. So what should you do?

My personal suggestion would be to allocate a tiny portion of your portfolio to Cryptocurrencies; typically, I suggest that to be between 5%-10%. Unlike stocks or bonds Cryptocurrencies do not pay dividends or interest rates; therefore, you should be aware of drastic price fluctuations as capital gains are all you got.

With the amount of investment decision, now comes the tricky part, of choosing the right coins for you to invest in.

There are thousands of Cryptocurrencies in circulation and selecting the right ones can be a difficult decision. It is imperative to keep in mind that Cryptocurrencies were not designed to be investments. They are mediums of exchange and are widely being seen as an alternative to sovereign currencies such as the dollar, yen, and euro. 

A common mistake new investors make when analyzing Crypto tokens is making decisions based solely on the market cap and maximum supply of the coins. Albeit, these aspects have a significant influence on the price and prospects of a coin there are some other crucial aspects that must be considered to make a better decision. These include the prospects of the coin as a future medium of exchange, as well as the value-added benefits they provide.

Let me give you an example to better understand the concept.

Take Bitcoin and Ethereum. Bitcoin has a maximum supply cap of 21 million coins whereas Ethereum can supply 18 million coins every year. If you consider only this aspect, it makes Bitcoin more attractive, due to its scarce supply. However, in reality Ethereum has been undergoing a steady and better rise than Bitcoin throughout 2020 and 2021. (Before the recent market crash)

Ethereum is even predicted by analysts to overcome Bitcoin in the near future. This can be attributed to the “value-added benefits” I discussed earlier. Unlike Bitcoin, Ethereum is more than just a Cryptocurrency. As an innovative open-source blockchain technology, Ethereum can support financial transactions, smart contracts, and decentralized applications (dApps). The platform serves a myriad of purposes and can be employed in different segments such as gaming, tokenization of art, Non-Fungible tokens etc. It’s blockchain and smart contracts are so well established that many new coins including polygon are based on the Ethereum blockchain.

This example shows that supply limit alone is not a good estimator and focus should be given to the value-added services and the company behind the token.

The market follows the basic principles of supply-demand and in crypto’s case the demand is mostly influenced by hype, prospects, and the news and major moves by the companies behind the Cryptocurrencies.

Now what having an improving market cap does is bring the coin into the limelight, making it seem more attractive, hence more people start investing in it as they believe there must be something good about it. Now this in effect further drives up the coin’s price and puts more money in the pockets of the coins’ owners. This allows the creators to make improvements and work towards better sustainability of the coin.

Everything I have discussed above is a good starting base you can utilize to start analyzing the coins and consequently choose the right coins for yourself.

How to start investing through Binance (how to make an account & operate)

Now that we have discussed a starting base, let’s take a look at how you can obtain these currencies.

Some of the largest and most prominent exchanges are Binance, Coinbase, and Kraken. You can think of these exchanges as brokerage firms primarily for Cryptocurrencies with a transaction fee involved in buying and selling. 

Today, we shall be discussing how you can start your investing journey through Binance. The application itself has tons of exciting features and modes of investing, however, for the purpose of this article we shall be sticking to the basics.

So, to get started, you first have to download the application, register yourself and create an account on Binance. The registration process is quite simple, all you need to do is provide either your email address or your phone number and create a strong password.

Once registered, Binance will require you to verify your identity. In this stage, you will have to upload a picture of your passport. Once submitted you will be required to open your front camera to prove without a doubt that you are indeed the person you claim to be.

Once the registration and verification part is complete which usually takes about 1-2 days, you are all set to begin your investing journey!

When you open the application on your mobile phone, at the bottom of your screen you shall see five tabs: Home, Market, Trade, Futures, and Wallets. 

The futures tab allows for futures trading which is somewhat of an advanced form of investing, so we’ll be discussing that in a later post.

When you open the markets tab, you shall be able to view all the tokens available for buying and selling on Binance. Here you shall see a bunch of options but to buy the tokens of your choice simply click on “Spot” and search up any coin from the search bar at the top. 

You may also mark the coins of your interest as your favourites by clicking on the star on the top right so you don’t have to search up each coin every time you want to see their standing and performance. 

To buy/sell coins through Binance simply click on the coin you want to make a transaction with and at the bottom you shall be given the options to “buy” or “sell”. Once you choose one of those options you shall automatically be transferred to the “Trade” bar. 

Here you shall see the word “Market” with a drop down menu right next to it. The drop down menu shall have four options: market”, “limit”, “stop loss”, “OCO”. 

At this stage you only need to concern yourself with the first two options.

The market option allows you to buy/sell the coin of your choice at the prevailing market rate. If buying you simply enter the amount of USDT you would like to buy the coin for and your transaction is executed at the market rate. Vice versa while selling you enter the amount of coins you would like to sell and your coins are sold at the market rate.

The limit option allows you some flexibility. For example, the current market price of coin X is 2.1 and you believe it will be profitable if you buy the coin at a price of 1,9, you can place a “limit buy order”. By selecting the limit option and entering your target price (1.9) right below it along with the quantity in which you would like to buy the coin. Once done your order is placed and whenever the market price reaches your target price even if for a few moments, your trade will automatically be executed. The same is true for selling via a “limit sell order”.

Lastly, you have the wallets tab. The wallets tab is further divided into different sections of your wallet. The Spot section contains all the coins you have purchased through spot trading (what we’ve discussed above). Whereas the Overview section shows you the aggregate holdings you have by adding up all the coins you have in all the different sections of your wallet.

Conclusion

To conclude, Cryptocurrencies are revolutionizing the financial world; the decision to invest is up to you. Some traders consider it to be a goldmine while others regard it as nothing more than a bubble, which will destroy the people that hitch their wagon to it.

With the rapidly rising inflation rates which eradicate money’s worth, as well as the reduction seen in interest rates, especially during the covid period, investing has become a necessity in today’s world, and not just to increase one’s wealth but rather to maintain its value. 

A golden rule of investing is to ‘not put all your eggs in one basket”. It is always desirable to have a well-diversified portfolio to minimize risks and Cryptocurrencies can potentially be a great addition to your investment portfolio. However, the decision of whether it is the right investment for you or not depends on the degree to which you’re risk-averse and your investment goals.

Dr. Ali Yasin Sheikh Ali, Senior Researcher, SIMAD University

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