Cryptocurrencies such as Bitcoin and Ethereum have attracted a lot of interest among investors in recent years. High profit opportunities and the potential of blockchain technology have attracted both private investors and institutional players. However, crypto investing can be significantly risky, especially for beginners. In this article, we look at the key risks and opportunities of crypto investing, and give practical tips for beginners.
What are cryptocurrencies?
Cryptocurrencies are digital currencies that utilize blockchain technology to ensure the safety and reliability of transactions. Blockchain is a decentralized, immutable database that stores and validates data without a centralized administration such as a bank or other intermediary. This technological solution separates cryptocurrencies from traditional fiat currencies such as the euro or the dollar, which are controlled and issued by central banks.
The peer-to-peer structure of cryptocurrencies enables direct money transfers between users without intermediaries, which makes them an attractive alternative to a centralized financial system. Cryptocurrency transfers are also often faster and more cost-effective than traditional bank transfers, especially in international payment transactions.
Cryptocurrencies have a wide range of uses, and after the first cryptocurrency, Bitcoin, thousands of other cryptocurrencies have emerged, each of which strives to offer unique solutions and innovations. The value of cryptocurrencies is determined by supply and demand in the market, but the price is also affected by other factors, such as the amount of currency in circulation, the maximum supply, and practical applications in the real world.
Bitcoin: The first and largest cryptocurrency on the market
Bitcoin is the world's most famous digital currency using blockchain technology. Bitcoin was founded by an unknown person or group with the pseudonym Satoshi Nakamoto. Bitcoin's project plan, or white paper, was published in October 2008, and the first block, or so-called "genesis block", was mined on January 3, 2009. This day is also generally on Bitcoin's income. Bitcoin's blockchain enables decentralized and secure recording of transactions without intermediaries such as banks. This has made Bitcoin not only the first truly decentralized digital currency, but also a store of value, often referred to as digital gold.
Bitcoins are capped at 21 million, making it a scarce asset. This scarcity based on limited supply differs from traditional fiat currencies, which central banks can print more of without limit. In addition, bitcoins can also be divided into smaller units, satoshis, which allows investing and trading even with small amounts, making the currency more accessible to all investors.
The decentralized nature of Bitcoin ensures that it is not controlled by any centralized entity, but rather by miners who maintain the network, validating transactions and ensuring the network's security. Miners are rewarded for their work in new bitcoins, which means new bitcoins are only created through the mining process. About every four years, Bitcoin also faces an event called halving, where the mining fee is halved. This means that the number of new bitcoins created in each block will decrease over time, limiting the total supply of bitcoins and curbing inflation.
With halvings, the total number of bitcoins will never exceed 21 million, increasing the scarcity of the currency and making it even more valuable in the long run. Bitcoin has managed to establish its position over the years both as a digital currency and as a long-term store of value.
Altcoins: Innovations of Crypto Market
With the success of Bitcoin, thousands of other digital currencies, commonly called altcoins, have appeared on the crypto market. Altcoins often offer new features and different ways to utilize blockchain technology, expanding the applications of cryptocurrencies beyond traditional digital currency. Altcoins can be considered a key source of diversity in the crypto market and a significant force in promoting innovations based on blockchain technology.
Examples of well-known altcoins:
Ethereum (ETH), launched in 2015, is one of the most prominent altcoins and represents the second wave of blockchain development. Ethereum provides a platform for decentralized applications (dApps) and smart contracts. This makes Ethereum much more than just a cryptocurrency – it is a blockchain platform on which a wide variety of applications can be built. Its own cryptocurrency, ether (ETH), is the second largest by market value.
Chainlink (LINK) is a decentralized oracle network that connects blockchains to external data sources, enabling the use of smart contracts based on real-world events. It acts as an intermediary between blockchains and external data sources such as price data, which is critical to the operation of many decentralized applications (dApps). Chainlink's own cryptocurrency is called LINK, and it is used as a means of payment for the services offered by the network and as an incentive for data providers. Chainlink has emerged as one of the most important technologies in the smart contract ecosystem, especially in the DeFi sector.
Stablecoins such as Tether (USDT) and USD Coin (USDC) are pegged to traditional fiat currencies such as the US dollar, thus providing stability to the crypto market in a notoriously volatile environment. Stablecoins are designed to reduce the risks caused by crypto price fluctuations, and are important tools in trading and as stores of value, especially in times of market uncertainty.
Altcoins offer investors a wide range of opportunities to participate in the development of blockchain technology and its application in various industries. Some altcoins focus on providing solutions to specific technological problems or improving the scalability and security of blockchains, while others, such as stablecoins, bring stability and benefit from the integration between traditional and digital markets. The Altcoin market offers investors excellent opportunities to diversify their holdings within the crypto market and benefit from the technical innovations made possible by cryptocurrencies.
Possibilities of crypto investing
Crypto investing offers investors the opportunity to benefit from new financial trends and technological innovations that are just beginning to enter the mainstream. Cryptocurrencies such as Bitcoin and Ethereum have become very popular among investors, and many investors see huge potential for future appreciation.
The crypto market also offers an excellent opportunity to diversify your investment portfolio outside of traditional asset classes. The development of blockchain technology enables new types of financial solutions and digital assets that can revolutionize both the financial sector and many other industries. This development opens doors for investors who want to participate in these future innovations and earn significant returns as the technology and its applications evolve.
Next, let's take a closer look at the possibilities offered by crypto investing:
1. Potentials of high profit
Over the years, the crypto market has offered great returns to investors. For example, the value of Bitcoin has increased dramatically since its launch. In 2010, the value of Bitcoin was less than a dollar, but in 2024 its value has risen to more than 70,000 dollars at best. This example shows the significant potential of cryptocurrencies in terms of income.
Many altcoins, such as Ethereum and Solana, have also gained popularity among investors. Ethereum, for example, has grown to be a major player in the development of blockchain applications, and its value increase has been impressive due to the technological advantages it offers.
2. Utilization of new technology
Cryptocurrencies and blockchain technology enable completely new types of applications that can revolutionize many industries. In the financial sector, for example, we talk about decentralized financial systems (DeFi), where traditional banks and financial institutions are no longer necessary. DeFi applications offer alternatives to loans, savings, investments and other financial services without centralized intermediaries.
Blockchain technology can also be used in other industries, such as logistics, healthcare and smart contracts. These technological developments offer investors the opportunity to participate in innovations that have the potential to change traditional business models.
3. Decentralization
Cryptocurrencies also offer investors a completely new way to diversify their investment portfolio. Alongside traditional investment targets such as stocks and bonds, cryptocurrencies can at best offer protection in economic uncertainty and rising inflation. Many crypto investors believe that the largest cryptocurrency on the market, Bitcoin, can act as "digital gold" and protect wealth against inflation like traditional gold.
4. Liquidity and 24/7 markets
Crypto markets operate 24/7, meaning investors can trade at any time and take advantage of market volatility. This is a significant advantage over the stock market, which is only open at certain times. The 24/7 operation and global reach of the crypto market also means that investors can react quickly to market events and news, regardless of where they are in the world.
Risks of crypto investing
Although crypto investing offers significant opportunities, it also comes with significant risks. The crypto market is highly prone to volatility and also faces regulatory, security and technology challenges. The value of cryptocurrencies can fluctuate significantly in a short time, which makes the market unstable, and on the other hand, regulatory developments in different parts of the world can either promote or limit the use of cryptocurrencies. In addition, technological risks, such as information security problems and scams, require special caution from investors.
Next, let's go through the most common risks associated with crypto investing:
1. Market Volatility
The high volatility of the crypto market means strong and rapid price fluctuations that can occur in a short period of time. For example, the value of Bitcoin and other cryptocurrencies can rise or fall significantly in a single day, which can bring investors both large profits and losses. This makes crypto investing more risky compared to traditional markets, but at the same time it offers the opportunity to profit from fast market movements if the investor knows how to time his actions correctly.
2. Uncertainty of the regulatory environment
Cryptocurrency regulation varies significantly from country to country, and this creates uncertainty for investors. Many governments are still defining how cryptocurrencies should be regulated. In some countries, cryptocurrencies are considered completely legal investments, while in other countries activities related to them are either restricted or completely prohibited. For example, China banned cryptocurrency trading in 2021, which caused an immediate impact on the crypto market and led to significant price changes.
Regulatory uncertainty creates risks for investors, as possible regulatory measures can significantly affect market development and even limit the use of some cryptocurrencies.
3. Information security and technological risks
There are also potential risks associated with storing and using cryptocurrencies. Cryptocurrencies are stored in wallets, which can be either digital or physical. Digital wallets can be vulnerable to hacking, and history has shown that many crypto exchanges and wallets have been hacked. This has resulted in billions of dollars in losses as investors' funds have been stolen.
Physical wallets, i.e. hardware wallets, offer better protection, but they also require attention from the user. If the owner of the wallet loses his private key, which is needed to use the funds, the funds can no longer be returned. This makes storing cryptocurrencies challenging, especially for beginners who may not yet be accustomed to good security practices.
4. Liquidity risks
While major cryptocurrencies such as Bitcoin and Ethereum have high liquidity, it can be difficult for smaller and lesser-known cryptocurrencies to find buyers quickly. This means that if an investor wants to sell a cryptocurrency with a lower market value, he may have to sell it below its current market price. In the case of cryptocurrencies with a smaller market value, liquidity risk can especially hinder the investor's ability to react quickly to market changes or the need to convert their investments into cash.
5. Fraud and scams
The crypto market is relatively unregulated, which has unfortunately created room for various scams and frauds. For example, Ponzi scams and "pump-and-dump" cryptocurrencies have been common. It is especially important for novice investors to be careful when choosing which cryptocurrency projects to invest in, and to only use well-known and trusted trading platforms.
Many crypto scams take advantage of beginners' ignorance and offer investment opportunities that sound too good. It is important to remain critical and research investment targets carefully before making an investment decision.
How can a beginner manage risks?
Although there are many risks associated with crypto investing, there are several ways a beginner can manage them.
Here are some practical tips to help you manage the risks of crypto investing and avoid the most common mistakes:
1. Familiarize yourself with the topic
Before investing in cryptocurrencies, it is essential to understand their operating principles and the factors affecting value formation. This includes the basics of blockchain technology, market behavior and risk assessment. Familiarization helps you make well-considered investment decisions and avoid common mistakes. The cryptocurrency-related content offered by Northcrypto is an excellent starting point for getting to know the topic. Those who combine the knowledge they have acquired with moderate risk-taking and long-term strategic thinking are the most successful in crypto investing.
2. Start with small amounts
Investing in cryptocurrencies does not require large amounts of money, and it is recommended to start with smaller stakes so that you can familiarize yourself with the market without a large financial risk. With smaller investments, you can learn how the market works in practice and get used to price fluctuations without the potential losses being too large.
Taking small steps also allows you to make better decisions as you learn more about cryptocurrencies and market behavior. This way you can gradually increase your investments as you feel more confident.
3. Diversify your investments
There are thousands of different options in the crypto market, and by diversifying your investment between different cryptocurrencies, you can reduce the risk associated with a single currency. In addition, you can also consider diversifying between other asset classes, such as stocks and bonds.
Many investors seek to balance their portfolio by including both stable, well-known cryptocurrencies such as Bitcoin and Ethereum, as well as altcoins with potentially higher risk and return potential.
4. Use safe storage solutions
Safe storage of cryptocurrencies is key to protecting your investments. Hardware wallets offer strong protection against hacking by keeping private keys offline, but their use requires technical know-how and attentiveness.
Beginners should consider storing cryptocurrencies in well-known and reliable cryptocurrency trading places. Although managing your own wallets offers better control over your funds, it brings with it the risk of losing your private keys, and your funds may be lost forever. Exchanges can be a good choice, especially for beginners, but for long-term storage it is still recommended to transfer the funds to your own wallets.
Summary
Crypto investing offers attractive profit opportunities, but it also comes with significant risks, especially for beginners. Cryptocurrencies such as Bitcoin and Ethereum are based on blockchain technology, which enables secure and decentralized money transfers. Investing in cryptocurrencies can offer opportunities such as high returns and diversification outside of traditional forms of investment, but also risks such as market volatility, regulatory uncertainty and data security issues.
Beginners are recommended to start with small amounts and use safe storage solutions, such as hardware wallets or well-known trading places. It is worth familiarizing yourself with the risks related to information security and market regulation, so that investments remain safe and risks can be managed.
Those who combine carefully acquired knowledge with moderate risk-taking and a long-term investment strategy succeed best in crypto investing. The world of cryptocurrencies is full of opportunities, but success requires consideration, planning and readiness to learn new things in a changing environment.
Mikko Soon
Head of Northcrypto Private
Last updated: 23.10.2024 14:30
