12-12-2022 by TuTarjeta
There are several ways to invest in cryptocurrencies. It all depends on your goals and your knowledge of the market. From passive investing to day trading to network fees to staking, we explain in this guide the existing ways to invest in cryptocurrencies.
Here are some recommendations to choose which project to invest in. If you are new to investing in digital assets, this guide is for you.
Invest in cryptocurrencies for the long term
Investing in cryptocurrencies is, in theory, the easiest way to invest. It is about exchanging euros for a sum of cryptocurrencies, with the hope that it will increase in value in the future. Therefore, the goal will be to make a capital gain on resale.
Bitcoin (BTC) remains the most traded cryptocurrency. Bitcoin can be used to purchase goods and services in various countries. However, it is still considered by many to be a speculative financial asset to invest in. Still, investing in Bitcoin is seen less and less as a long shot. Today, the largest financial institutions buy crypto, sometimes in bulk, in particular bitcoin.
Long-term investment is more accessible for beginners, since it will be enough to buy cryptos and store them in a wallet, the DCA (dollar cost averaging) method is often adopted as a less stressful passive investment. A wallet (crypto wallet) is like a virtual or physical safe that can hold and secure crypto assets.
Therefore, we take the bet that the value of Bitcoin, for example, increases. If so, it's up to you when you want to hit your profits (or limit your losses). Some investors settle for a 25% capital gain to resell, while others prefer to wait until their investment has at least doubled.
This long-term strategy requires few transactions and does not require you to be regularly active in the cryptocurrency market.
What is cryptocurrency?
Cryptocurrencies are digital assets based on a technology called Blockchain. These crypto assets allow peer-to-peer exchanges without intermediaries such as banks or insurance companies. Anyone who interacts with the blockchain is in control and responsible for their money. At any time, the user can transfer his goods without the permission of a third party, regardless of the amount or the recipient.
What is the blockchain?
The Blockchain (chain of blocks) allows the storage and exchange of value through the Internet without a centralized intermediary (banks, state, notary, etc.). A blockchain is a ledger that can be compared to a public ledger. This account book stores and secures data through complex algorithms, using cryptography. Each user can check the validity of this string. The blockchain is like an account book that everyone can read and modify, without anyone being able to modify or destroy its content.
cryptocurrency trader
Trading consists of betting on the movements of a price, up or down, through an online broker. It is a short-term strategy in general. Many cryptocurrency traders practice day trading: they execute one or more market orders per day. While investors are interested in the long-term performance of a cryptocurrency, traders take advantage of the daily price volatility of cryptocurrencies to make immediate profits.
However, being a profitable trader takes a lot of practice. Without real skills or understanding of the market, trading is like a lottery. If the potential gains are multiplied by ten thanks to the effect of leverage, so are the risks of loss. Therefore, it is highly recommended to train yourself properly and prepare your strategy well before embarking on a trading activity.
Here are some strategic trading concepts to explore if you are interested in this investment method:
range trading;
scalping;
Arbitration;
bot trading
transaction fees
Every crypto asset transaction requires a fee to be entered into a blockchain data block.
These fees allow the miners or validators to be remunerated because they are the ones who "incorporate" their transaction into the block chain, which allows it to be validated. They protect the network against attacks (spam, hacks, manipulation attempts).
On some blockchains, fees may vary from time to time depending on traffic and network congestion at the time of the exchange.
Cryptography
Cryptography occurs when a transaction is requested. To be validated, a kind of mathematical equation must be solved by computers using complex algorithms. The computer skills required make the equation impossible for humans to solve. The two main crypto consensuses are Proof of Work (PoW) and Proof of Stake (PoS).
The proof of work (PoW) consists of putting all the computers that mine cryptocurrencies into competition, with the aim of being the first computer to solve the puzzle and validate the blockchain block.
This process is commonly known as "mining" and computers "miners". Mining requires significant computing power. Therefore, these machines can consume a large amount of electricity because many computers compete for one and the same thing, the next block.
Proof-of-Stake ( PoS ) allows choosing computers ("validators" and not "miners" in the case of PoS) for the creation of a particular block. This approach allows for a fairer reward system and lower energy consumption.
Staking: a passive investment that generates interest in cryptocurrencies
Staking consists of investing a sum of "locked" cryptocurrencies in order to obtain regular interest. In blockchains, it is a means to participate in transaction validation and/or network security. Therefore, your investment contributes to the proper functioning of a blockchain.
It is possible to stake on blockchains using a verification model called "proof of stake". It is a much less power consuming operation than the "proof of work" model. In fact, the latter requires miners to use the computing power of their computer hardware to validate blockchain transactions.
It is an interesting option if you plan to keep a cryptocurrency in the medium or long term (at least 1 year). Instead of leaving your tokens in a wallet waiting for them to increase in value, you earn daily, weekly or monthly interest that accumulates.
How does staking work?
Staking is therefore a means of validating new transactions that are added to a blockchain. Participants start by committing their investment by purchasing the native cryptocurrency of this blockchain. The blockchain protocol will then choose validators to confirm the blocks of transactions between the participants. The more they invest, the more likely they are to be rewarded.
Every time a block is added to the blockchain, new crypto tokens are created and distributed on the network. To access this type of investment, all you have to do is create an account on an exchange platform that offers this service. If you decide to withdraw from a participation program, a withdrawal period may apply. In some cases, however, the sums are locked for a fixed period.
Get started by learning more about the proof-of-stake cryptocurrencies you're interested in, how their proof-of-stake works, and what staking rewards are expected for each.
Finally, here is a summary of the pros and cons of this investment.
Benefits of betting:
contribute to the security and operation of a blockchain;
invest in a more environmentally friendly blockchain;
take advantage of compound interest by making your cryptos work.
Disadvantages of betting:
some protocols require invested sums to be locked for a certain period of time;
the withdrawal of the sums invested in the staking may take several days.
Yield Farming
Yield Farming is a method that also allows you to passively generate interest in cryptocurrencies. Except that, unlike staking, it is no longer about locking up a sum, but about lending it to a decentralized finance platform. These cryptos will be locked in a pool of cash, in the form of a shared smart contract or investment fund.
Locked funds help provide liquidity to a decentralized financial protocol, used to enable trading and lending. When a user borrows crypto from this liquidity pool, he will repay the sum with interest, which will then be redistributed among investors who have saved their cash in this pool.
For example, if a trader wants to exchange Ethereum (ETH) for Dai (DAI), he pays a fee. These fees are paid to liquidity providers, in proportion to the amount they have invested. The more capital provided to the liquidity pool, the higher the rewards.
Complex yield farming strategies are quite a deterrent for newbies who have not yet started investing in cryptocurrencies. However, the returns on investment can be higher than those of staking.
Choose a platform to invest in cryptocurrencies
Players have multiplied in this very lucrative market. This is why we find it essential to help you select a trustworthy crypto exchange platform.
There are criteria to consider when choosing a platform:
its date of creation;
the cryptos exchanged;
its costs;
accepted deposit methods;
the opinions and feedback of its customers;
the level of liquidity of the platform.
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