The rate at which the world is going digital is increasing. The financial markets are not left out as digital coins are becoming more popular. Digital coins are sometimes called Cryptocurrencies and are referred to as a type of currency which uses digital files as money. Wikipedia defines it as a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a digital ledger or computerized database using strong cryptography to secure transaction record entries, to control the creation of additional digital coin records, and to verify the transfer of coin ownership.
The most popular forms of cryptocurrency are Bitcoins and Ethereum. Bitcoin was the first cryptocurrency which was released in 2009 and later on, other forms emerged and trading became more popular. In investment with cryptocurrency, there are two forms of trading; the short-term trading where the currency is bought for a short period of time say from a day to few months while the second is the long term crypto-trading which trades for a year or more.
When an average individual hears about cryptocurrency, it sounds more of a scam or an unreliable investment and hence, doubts if investment in cryptocurrency is a profitable investment. These are five things every potential investor of cryptocurrency should know:
Cryptocurrency markets are decentralized.
Cryptocurrencies are not backed by any policy from the central bank or directly from the government unlike investment in shares/stocks, deposits in banks that are backed up by the government. Basically, these currencies run across a network of computers and are bought and sold via exchanges and stored in digital wallets. One important thing an investor should take note of is that If there is any form of default from any party while investing in cryptocurrencies, the government may not be able to help you get your money back the way it would have helped if you stored your money in a bank.
How the market works
Just like any economic commodity, the value of a Cryptocurrency is determined by the forces of supply and demand of the currency. This concept could be relatable to the stock-exchange system. The market for cryptocurrency is quite volatile as its value can change any minute or at any hour. An investment worth thousands of Naira now can worth lesser an hour later. An investor must be very knowledgeable about how the market operates so as to make gains or profit.
Digital technology, especially in the financial sector, is very much exposed to scams and as a wise investor, one must be able to identify one. While investing, you must watch out for those who promise you a large return within the shortest frame of time, those who promise you free money or promise to double your money without any detailed and sensible information, and those who you cannot trace their company or those who make unclear claims about their company. They are clear pointers to what a scam could be.
Stocks/Shares VS cryptocurrency
One big question at the back of any investor is ‘which is best; investment in shares or investment in cryptocurrencies’. Both investments have their own pros and cons. It is, however, important to note that for long term investments, investing in stocks and shares is advisable as it is backed up by the government and grants you legal ownership, unlike cryptocurrencies.
Risk and returns
The concept of risk and returns is a keynote every investor must know. Investment in cryptocurrency is very risky and a high return can be promised if it is a long term trading. However, due to its riskiness, an investor may also lose out. For short term trading, earning a high return is dependent on how good you can analyse the market. It is a game of chance but having the knowledge of how the market operates and being able to predict the future will give you a better chance of winning the game.
While this serves as a guideline when investing in cryptocurrencies, it is important to consult with a professional for advice.