Updated: Dec 28, 2021
As a newbie, it can be overwhelming to invest in the cryptocurrencies asset class as it has been growing so fast and there is a lot to learn about cryptocurrencies. As of today, according to Coinmarketcap, the total market capitalization of cryptocurrencies is around 2.6 Trillion, and more than 13000 cryptocurrencies are available in 2021.
I can relate to you. When I started, I did not know where to start seeing so much information floating around in Medium, Twitter, and Instagram. I took a deep breath and decided to be slow and steady to learn about cryptos. In this post, I want to share with you my thought process while getting educated in cryptocurrencies
Is Crypto Worth investing?
I strongly believe everyone has a finite amount of energy and time. We can dedicate our resources ( energy and time ) to a select few. When I started, I did not have a clue how cryptos work. But, I was amazed at how this asset class market cap was greater than $SPY (412.9 billion) in such a short frame of time and wanted to spend time learning technologies behind it such as blockchain, security, Proof of work vs proof of stake, Wallets. Later, I also spent time understanding ICO ( how is it different from IPO), DeFi, IDO, etc. I was also excited about the idea of not having a middle layer and taking complete responsibility for your financial transactions through Defi. We already handle all the transactions ourselves. Isn't it. I don't know about you but It has been a long time since I have gone to the bank.
However, I also became aware that you need to be careful about what you invest in as it was very easy to create a crypto token overnight without any underlying value (Doge, Shiba Inu). Also, I became aware that these networks could be hacked and used for criminal activities because of decentralization.
After I was convinced that cryptos are here to stay, I decided to invest in cryptos cautiously.
What cryptos should I Invest?
I came across an article in medium about the same topic and the author was mentioning to play safe by investing in cryptos that are ranked in the top 10 by market capitalization. In the cryptos world, two popular websites cover a lot of information about all the crypto tokens along with their market capitalization - Coinmarketcap and Coingecko.
I jumped on to these sites and was impressed with the amount of information available. We can learn about the crypto concerned in the sites by clicking on the links.
If you see in this list, Bitcoin has 41% of the market capitalization and is the top-ranked. After researching blockchain and crypto security and how bitcoin came into existence after the 2008 market crash, it was a no-brainer to invest in bitcoin. Below is listed some news that got me further excited
Countries like El Salvador accept bitcoin as their official currency
Companies like MSTR, TSLA investing in bitcoin heavily
traditionally, bitcoin networks have been very slow with a processing speed of 7 transactions per second. Lightning peer-to-peer network on top of bitcoin gives the speed needed for transactions on the bitcoin blockchain and hence can scale for millions of small transactions.
More scalability and security through Bitcoin taproot upgrade
Check out Bitcoin vs Dollar post to get some insight into whether Bitcoin will replace the dollar soon.
Second, in the list is Ethereum. while bitcoin primarily focuses on currencies, Ethereum focuses on real-life applications especially in the financial world through smart contracts. so, what are smart contracts? Smart contracts are a piece of code that gets executed on the blockchain when predetermined conditions are met. Typically, they are used to automate the execution of an agreement between the parties so that everyone is aware of the desired outcome without any time loss. Decentralized apps (Dapps) have become very popular because of the smart contracts as there is no need for a middle layer such as bank etc to verify either the agreement or transaction. Tokens like Aave which is specialized in lending are built on top of the Ethereum blockchain.
A lot of Dapps have been built on top of Ethereum and the network is very congested and has become very expensive to us As Ethereum has been working on releases that would increase its speed, scalability, and efficiency ( features like moving from proof of work to proof of staking), a lot of layer1 networks have emerged that are faster than Ethereum and some of them are interoperable with Ethereum
Before I get into these networks, I want to share with you different crypto asset types. Most of the asset types specified below are available on the Ethereum network and are in the process of porting to other layer 1 networks.
Layer 1 Networks ( smart contracts) - Ethereum, Solana, PolkaDot, ADA, Avax, Algo
Layer 2 (Scaling the Layer 1 & Bitcoin Networks) - Lightning, Matic ( for scaling Ethereum)
DeFi - Decentralized finance applications. YFI is the most popular one( Yearn. finance - aggregator of all lending protocols for the highest yield. Other Cryptos in the space are Aave, Compound,etc
Synthetics - Decentralized trading ecosystem to create a synthetic version of stocks cryptos. some tokens are SNX, INS
Stable coins - digital currencies that avoid volatility and are either backed up by gold or fiat currency. Some tokens are USDT, USDC
Trading Exchanges - Centralized and decentralized trading exchanges such as Binance, Uniswap have their tokens - BNB, UNI.
NFTs - Non-fungible tokens have become the latest craze especially in the digital art world. Traditional crypto tokens are fungible like money and are usually used for transactions between the parties What does fungible mean? One dollar bill is the same as the other dollar bill of the same kind and can be replaced. In the crypto world, For example, one ether token on the Ethereum blockchain is identical to the other ether token and can be used to verify transactions between the parties. So, where are NFTs used? NFTs are used to guarantee ownership of an asset in digital form and can be compared to real estate. A piece of real estate is unique and cannot be replaced with another. An NFT is a unique digital asset that is not directly replaceable with another digital asset and is widely available on the Ethereum blockchain. OpenSea, Niftygateway are some of the NFT marketplaces where you could claim the ownership of an asset in digital form. These marketplaces allow you to purchase the NFTs connecting your wallet.
I primarily invest in Bitcoin and Ethereum. I also invest in other Layer1 networks such as Solana (fastest - 50000 transactions per second but expensive at the moment because of proof of history network with proof of staking), ADA ( stable ecosystem specializing in identity management and traceability), and DOT ( interoperability of blockchains). I also invest in LINK (provides data to the blockchain) and LUNA which is crypto burnt for managing transactions related to stable coin provided by Tether. I also like YFI as they would remain a dominant play being the aggregator of all lending protocols. I believe in cryptos and invest in only what I know. I am still learning every day. I would highly recommend you to spend some quality time understanding the crypto space and selecting the tokens that match your investing philosophy.
How to Invest in Cryptos?
Crypto asset type return of investment has been over the roof this year and one on average has been over 800%. That is insane. If you have been investing for a while, there is no guarantee of returns in the future based on the present. Considering the volatility of this asset type, I would highly recommend using a platform that allows you to dollar cost average every week/biweekly/monthly and not invest once.
Crypto, in addition to appreciation, allows you to earn interest for your coins either through staking or by just investing in platforms. $ADA, for example, provides you around 6% for delegating your coins to the validators of the networks ( How the proof of stake with delegation works is a topic for a separate post). Many networks provide staking rewards. It is worth spending time on the research to earn passive income week after week.
Apart from staking, another way to earn money is by moving your fiat money to exchanges such as Block-fi, Voyager, celsius etc. These firms give around 8-9% interest per annum on the dollar invested with them. Also, these firms give around 5-6% on bitcoin, 4-5% on Ethereum. I invest with voyager and they give 12% on PolkaDot. Voyager can buy the cryptos periodically with zero commissions, unlike Coinbase. And money can be transferred periodically to purchase multiple tokens. However, they have not provided any insurance yet. so, it is recommended to store the cryptos in your wallet after purchasing through voyager. Celsius and Block-fi also work the same way though I have not used them personally. I heard Gemini is insured and has decent commissions compared to Coinbase.
The centralized exchanges mentioned above have well-known cryptos and they control your private keys to achieve faster transactions. Nowadays, these exchanges have the concept of hot and cold wallets where minimum cryptos required for a transaction are maintained in hot wallets and the rest are moved to cold wallets. Cold wallets are supposed to be secure than hot wallets.
Another way to purchase lesser-known tokens is through decentralized exchanges like Uniswap. These exchanges do not maintain wallets and can connect to any wallet for the execution of a transaction. Expect a separate post where we will talk about how to connect Uniswap and Metamask.
I truly believe Cryptos (Bitcoin and Ethereum) is here to stay and is worth investing your time and energy in learning about them. However, there might be future regulations that would increase the usage of stable coins compared to other cryptos.
Decentralized applications are going to lead the way into the future. We might need more infrastructure for scalability, security, and efficiency. In the future, there will be multiple networks working together to provide a seamless experience. So, it is worth investing in leaders in the space such as Ethereum, Solana, Polkadot, Avax etc.
We need to take advantage of staking and interest rates provided by these platforms. As always, do not invest money that you cannot afford to lose.
Security is very important. Make sure you have MFA enabled and if possible, use Cold wallets ( you got to store the private keys) to store your cryptos to avoid your account being hacked
Decentralized exchanges gives you more reach to invest in lesser-known tokens that may rise in value soon. It is worth investing some time to connect your wallets to decentralized exchanges available out there.
If you like this post, you might also like top 5 Long term investment strategies. Also, did you know that Breakout trading strategy is one strategy that can be used for trading cryptos, stocks, options, and other derivatives and gives you the best risk-reward ratio (RRR) for the trades placed?
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