Cryptocurrency Investing For Dummies book cover

Cryptocurrency Investing For Dummies

Author:
Kiana Danial
Published: March 6, 2019

Overview

The ultimate guide to the world of cryptocurrencies!

While the cryptocurrency market is known for its volatility—and this volatility is often linked to the ever-changing regulatory environment of the industry—the entire cryptocurrency market is expected to reach a total value of $1 trillion this year. If you want to get in on the action, this book shows you how. 

Cryptocurrency Investing For Dummies offers trusted guidance on how to make money trading and investing in the top 200 digital currencies, no matter what the market sentiment. You'll find out how to navigate the new digital finance landscape and choose the right cryptocurrency for different situations with the help of real-world examples that show you how to maximize your cryptocurrency wallet.

  • Understand how the cryptocurrency market works
  • Find best practices for choosing the right cryptocurrency
  • Explore new financial opportunities
  • Choose the right platforms to make the best investments

This book explores the hot topics and market moving events affecting cryptocurrency prices and shows you how to develop the smartest investment strategies based on your unique risk tolerance. 

 

The ultimate guide to the world of cryptocurrencies!

While the cryptocurrency market is known for its volatility—and this volatility is often linked to the ever-changing regulatory environment of the industry—the entire cryptocurrency market is expected to reach a total value of $1 trillion this year. If you want to get in on the action, this book shows you how. 

Cryptocurrency Investing For Dummies offers trusted guidance on how to make money trading and investing in the top 200 digital currencies, no matter what the market sentiment. You'll find out how to navigate the new digital finance

landscape and choose the right cryptocurrency for different situations with the help of real-world examples that show you how to maximize your cryptocurrency wallet.

  • Understand how the cryptocurrency market works
  • Find best practices for choosing the right cryptocurrency
  • Explore new financial opportunities
  • Choose the right platforms to make the best investments

This book explores the hot topics and market moving events affecting cryptocurrency prices and shows you how to develop the smartest investment strategies based on your unique risk tolerance. 

 

Cryptocurrency Investing For Dummies Cheat Sheet

So, you’ve heard about Bitcoin and other cryptocurrencies, and you’re ready to add these new kids on the block to your investment portfolio — that’s great! You’re now officially a part of the future economy. To make the best decisions for your portfolio, educate yourself on the basics of cryptocurrencies and what you need to get started. Also, be sure to do your homework on a crypto’s fundamentals before adding any new assets to your portfolio.

Articles From The Book

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Cryptocurrency Articles

What Is Cryptocurrency?

Simply stated, a cryptocurrency is a new form of digital money. You can transfer your traditional, non-cryptocurrency money like the U.S. dollar digitally, but that’s not quite the same as how cryptocurrencies work. When cryptocurrencies become mainstream, you may be able to use them to pay for stuff electronically, just like you do with traditional currencies. However, what sets cryptocurrencies apart is the technology behind them. You may say, “Who cares about the technology behind my money? I only care about how much of it there is in my wallet!” The issue is that the world’s current money systems have a bunch of problems. Here are some examples:

  • Payment systems such as credit cards and wire transfers are outdated.
  • In most cases, a bunch of middlemen like banks and brokers take a cut in the process, making transactions expensive and slow.
  • Financial inequality is growing around the globe.
  • Around 3 billion unbanked or underbanked people can’t access financial services. That’s approximately half the population on the planet!
Cryptocurrencies aim to solve some of these problems, if not more.

The basics of cryptocurrencies

You know how your everyday, government-based currency is reserved in banks? And that you need an ATM or a connection to a bank to get more of it or transfer it to other people? Well, with cryptocurrencies, you may be able to get rid of banks and other centralized middlemen altogether. That’s because cryptocurrencies rely on a technology called blockchain, which is decentralized (meaning no single entity is in charge of it). Instead, every computer in the network confirms the transactions.

The definition of money

Before getting into the nitty-gritty of cryptocurrencies, you need to understand the definition of money itself. The philosophy behind money is a bit like the whole “which came first: the chicken or the egg?” thing. In order for money to be valuable, it must have a number of characteristics, such as the following:
  • Enough people must have it.
  • Merchants must accept it as a form of payment.
  • Society must trust that it’s valuable and that it will remain valuable in the future.
Of course, in the old days, when you traded your chicken for shoes, the values of the exchanged materials were inherent to their nature. But when coins, cash, and credit cards came into play, the definition of money and, more importantly, the trust model of money changed. Another key change in money has been its ease of transaction. The hassle of carrying a ton of gold bars from one country to another was one of the main reasons cash was invented. Then, when people got even lazier, credit cards were invented. But credit cards carry the money that your government controls. As the world becomes more interconnected and more concerned about authorities who may or may not have people’s best interests in mind, cryptocurrencies may offer a valuable alternative. Here’s a fun fact: Your normal, government-backed currency, such as the U.S. dollar, must go by its fancy name, fiat currency, now that cryptocurrencies are around. Fiat is described as a legal tender like coins and banknotes that have value only because the government says so.

Some cryptocurrency history

The first ever cryptocurrency was (drumroll please) Bitcoin! You probably have heard of Bitcoin more than any other thing in the crypto industry. Bitcoin was the first product of the first blockchain developed by some anonymous entity who went by the name Satoshi Nakamoto. Satoshi released the idea of Bitcoin in 2008 and described it as a “purely peer-to-peer version” of electronic money.

Bitcoin was the first established cryptocurrency, but many attempts at creating digital currencies occurred years before Bitcoin was formally introduced.

Cryptocurrencies like Bitcoin are created through a process called mining. Very different than mining ore, mining cryptocurrencies involves powerful computers solving complicated problems. Bitcoin remained the only cryptocurrency until 2011. Then Bitcoin enthusiasts started noticing flaws in it, so they decided to create alternative coins, also known as altcoins, to improve Bitcoin’s design for things like speed, security, anonymity, and more. Among the first altcoins was Litecoin, which aimed to become the silver to Bitcoin’s gold. But as of the time of writing, more than 1,600 cryptocurrencies are available, and the number is expected to increase in the future.

Key cryptocurrency benefits

Still not convinced that cryptocurrencies (or any other sort of decentralized money) are a better solution than traditional government-based money? Here are a number of solutions that cryptocurrencies may be able to provide through their decentralized nature:
  • Reducing corruption: With great power comes great responsibility. But when you give a ton of power to only one person or entity, the chances of their abusing that power increase. The 19th-century British politician Lord Acton said it best: “Power tends to corrupt, and absolute power corrupts absolutely.” Cryptocurrencies aim to resolve the issue of absolute power by distributing power among many people or, better yet, among all the members of the network. That’s the key idea behind blockchain technology anyway.
  • Eliminating extreme money printing: Governments have central banks, and central banks have the ability to simply print money when they’re faced with a serious economic problem. This process is also called quantitative easing. By printing more money, a government may be able to bail out debt or devalue its currency. However, this approach is like putting a bandage on a broken leg. Not only does it rarely solve the problem, but the negative side effects also can sometimes surpass the original issue.

For example, when a country like Iran or Venezuela prints too much money, the value of its currency drops so much that inflation skyrockets and people can’t even afford to buy everyday goods and services. Their cash becomes barely as valuable as rolls of toilet paper. Most cryptocurrencies have a limited, set amount of coins available. When all those coins are in circulation, a central entity or the company behind the blockchain has no easy way to simply create more coins or add on to its supply.

  • Giving people charge of their own money: With traditional cash, you’re basically giving away all your control to central banks and the government. If you trust your government, that’s great, but keep in mind that at any point, your government is able to simply freeze your bank account and deny your access to your funds. For example, in the United States, if you don’t have a legal will and own a business, the government has the right to all your assets if you pass away. Some governments can even simply abolish bank notes the way India did in 2016. With cryptocurrencies, you and only you can access your funds.
  • Cutting out the middleman: With traditional money, every time you make a transfer, a middleman like your bank or a digital payment service takes a cut. With cryptocurrencies, all the network members in the blockchain are that middleman; their compensation is formulated differently from that of fiat money middlemen’s and therefore is minimal in comparison.
  • Serving the unbanked: A vast portion of the world’s citizens has no access or limited access to payment systems like banks. Cryptocurrencies aim to resolve this issue by spreading digital commerce around the globe so that anyone with a mobile phone can start making payments. And yes, more people have access to mobile phones than to banks. In fact, more people have mobile phones than have toilets, but at this point the blockchain technology may not be able to resolve the latter issue.

Common crypto and blockchain myths

During the 2017 Bitcoin hype, a lot of misconceptions about the whole industry started to circulate. These myths may have played a role in the cryptocurrency crash that followed the surge. The important thing to remember is that both the blockchain technology and its byproduct, the cryptocurrency market, are still in their infancy, and things are rapidly changing. Let me get some of the most common misunderstandings out of the way:

Risks of cryptocurrency

Just like anything else in life, cryptocurrencies come with their own baggage of risk. Whether you trade cryptos, invest in them, or simply hold on to them for the future, you must assess and understand the risks beforehand. Some of the most talked-about cryptocurrency risks include their volatility and lack of regulation. Volatility got especially out of hand in 2017, when the price of most major cryptocurrencies, including Bitcoin, skyrocketed above 1,000 percent and then came crashing down. However, as the cryptocurrency hype has calmed down, the price fluctuations have become more predictable and followed similar patterns of stocks and other financial assets. Regulations are another major topic in the industry. The funny thing is that both lack of regulation and exposure to regulations can turn into risk events for cryptocurrency investors.

Gear up to make transactions

Cryptocurrencies are here to make transactions easier and faster. But before you take advantage of these benefits, you must gear up with crypto gadgets, discover where you can get your hands on different cryptocurrencies, and get to know the cryptocurrency community. Some of the essentials include cryptocurrency wallets and exchanges.

Cryptocurrency wallets

Some cryptocurrency wallets, which hold your purchased cryptos, are similar to digital payment services like Apple Pay and PayPal. But generally, they’re different from traditional wallets and come in different formats and levels of security.

You can’t get involved in the cryptocurrency market without a crypto wallet. Get the most secure type of wallet, such as hardware or paper wallets, instead of using the convenient online ones.

Cryptocurrency exchanges

After you get yourself a crypto wallet, you’re ready to go crypto shopping, and one of the best destinations is a cryptocurrency exchange. These online web services are where you can transfer your traditional money to buy cryptocurrencies, exchange different types of cryptocurrencies, or even store your cryptocurrencies.

Storing your cryptocurrencies on an exchange is considered high risk because many such exchanges have been exposed to hacking attacks and scams in the past. When you’re done with your transactions, your best bet is to move your new digital assets to your personal, secure wallet.

Exchanges come in different shapes and forms. Some are like traditional stock exchanges and act as a middleman — something crypto enthusiasts believe is a slap in the face of the cryptocurrency market, which is trying to remove a centralized middleman. Others are decentralized and provide a service where buyers and sellers come together and transact in a peer-to-peer manner, but they come with their own sets of problems, like the risk of locking yourself out. A third type of crypto exchange is called hybrid, and it merges the benefits of the other two types to create a better, more secure experience for users.

Cryptocurrency communities

Getting to know the crypto community can be the next step as you’re finding your way in the market. The web has plenty of chat rooms and support groups to give you a sense of the market and what people are talking about. Here are some ways to get involved:

  • Crypto-specific Telegram groups. Many cryptocurrencies have their very own channels on the Telegram app. To join them, you first need to download the Telegram messenger app on your smartphone or computer; it’s available for iOS and Android.
  • Crypto chat rooms on Reddit or BitcoinTalk: BitcoinTalk and Reddit have some of the oldest crypto chat rooms around. You can view some topics without signing up, but if you want to get involved, you need to log in. (Of course, Reddit isn’t exclusive to cryptos, but you can search for a variety of cryptocurrency topics.)
  • TradingView chat room: One of the best trading platforms out there, TradingView also has a social service where traders and investors of all sorts come together and share their thoughts, questions, and ideas.
  • Invest Diva’s Premium Investing Group: If you’re looking for a less crowded and more investment/trading-focused place to get support, you can join our investment group (and chat directly with me as a perk too).

On the flip side, many scammers also target these kinds of platforms to advertise and lure members into trouble. Keep your wits about you.

Make a plan before you jump in

You may just want to buy some cryptocurrencies and save them for their potential growth in the future. Or you may want to become more of an active investor and buy or sell cryptocurrencies more regularly to maximize profit and revenue. Regardless, you must have a plan and a strategy. Even if your transaction is a one-time thing and you don’t want to hear anything about your crypto assets for the next ten years, you still must gain the knowledge necessary to determine things like the following:
  • What to buy
  • When to buy
  • How much to buy
  • When to sell
The following sections give you a quick overview of the steps you must take before buying your first cryptocurrency.

If you’re not fully ready to buy cryptocurrencies, no worries: You can try some of the alternatives to cryptos like initial coin offerings, mining, stocks, and more.

Select your cryptocurrencies

More than 1,600 cryptocurrencies are out there at the time of writing, and the number is growing. Some of these cryptos may vanish in five years. Others may explode over 1,000 percent and may even replace traditional cash. You can select cryptocurrencies based on things like category, popularity, ideology, the management behind the blockchain, and its economic model.

Because the crypto industry is pretty new, it’s still very hard to identify the best-performing cryptos for long-term investments. That’s why you may benefit from diversifying among various types and categories of cryptocurrencies in order to manage your risk. By diversifying across 15 or more cryptos, you can stack up the odds of having winners in your portfolio. On the flip side, overdiversification can become problematic as well, so you need to take calculated measures.

Analyze, invest, and profit

When you’ve narrowed down the cryptocurrencies you like, you must then identify the best time to buy them. For example, in 2017 many people started to believe in the idea of Bitcoin and wanted to get involved. Unfortunately, many of those people mismanaged the timing and bought when the price had peaked. Therefore, they not only were able to buy fewer bits of Bitcoin (pun intended), but they also had to sit on their losses and wait for the next price surge. However, by analyzing the price action and conducting proper risk management, you may be able to stack the odds in your favor and make a ton of profit in the future.

Cryptocurrency Articles

3 Short-Term Cryptocurrency Investing Time Frames

Though it may be scary, it's a time-proven truth in investing: To earn more return, you must take more risk. When aiming to make money in the short term, you must be prepared to lose your investment (and maybe even more!) in that time frame as well, especially in a volatile market like cryptocurrencies. Another term for short-term trading is aggressive trading. Why? Because you’re taking more risk in the hope of making more profit. Investment of any kind requires a constant balancing and trade-off between risk and return. Short-term trading can be divided into different categories within itself based on how quickly you realize the profits — hours, days, or weeks. Generally speaking, the shorter the trading time frame, the higher the risk involved with that trade.

Cryptocurrency investing: profiting within hours

If you’ve ever wondered what a day trader does, this is it! Day trading is one form of aggressive short-term trading. You aim to buy and sell cryptos within a day and take profit before you go to bed. In traditional markets like the stock market, a trading day often ends at 4:30 p.m. local time. But the cryptocurrency market runs 24/7, so you can define your day-trading hours to fit your schedule. Pretty neat, right? With this great power comes great responsibility, though. You don’t want to lose your shirt and get your spouse or partner angry at you. Here are a few questions to ask yourself to determine whether day trading is indeed the right crypto route for you:
  • Do you have the time to dedicate to day trading? If you have a full-time job and can’t stick to your screen all day, day trading probably isn’t right for you. Make sure you don’t use your company time for trading! Not only you can get fired, but you also won’t be able to dedicate the required time and energy to trading either. Double the trouble.
  • Do you have sufficient risk tolerance for day trading?
  • Even if you can financially afford to potentially lose money day trading, are you willing to do so? Do you have the stomach to see your portfolio go up and down on a daily basis? If not, perhaps day trading isn’t right for you.
If you’ve made up your mind that day trading is the right crypto route for you, the following sections share some tips to keep in mind before getting started.

Define crypto trading sessions

Because cryptocurrencies are traded internationally without borders, one way you can define a trading day is to go by the trading sessions in financial capitals of the world like New York, Tokyo, the eurozone (made up of the European countries whose official currency is the euro), and Australia. This method follows similar trading sessions as in the foreign exchange (forex) market.

Some sessions may provide better trading opportunities if the cryptocurrency you’re planning to trade has higher volume or volatility in that time frame. For example, a cryptocurrency based in China, such as NEO, may see more trading volume during the Asian session.

Know that day trading cryptos is different from day trading other assets

When day trading traditional financial assets such as stocks or forex, you can follow already established fundamental market-movers such as a company’s upcoming earnings report or a country’s interest rate decision. The cryptocurrency market, for the most part, doesn’t have a developed risk-event calendar. That’s why conducting fundamental analysis to develop a day-trading strategy is way harder for cryptos.

Set a time aside

Depending on your personal schedule, you may want to consider scheduling a specific time of the day to focus on your trades. The idea of being able to trade around the clock is pretty cool in theory. You can just get on your trading app during a sleepless night and start trading. But this flexibility can backfire when you start losing sleep over it. Remaining alert during day trading, or night trading for that matter, is very important because you need to develop strategies, identify trading opportunities, and manage your risk multiple times throughout the trading session. For many people, having a concrete discipline pays off.

Start small

Day trading involves a lot of risk. So until you get the hang of it, start with a small amount and gradually increase your capital as you gain experience. Some brokers even let you start trading with a minimum of $50.

If you start trading small, make sure you aren’t using margin or leverage to increase your trading power. Leverage is one of those incredibly risky tools that’s projected as an opportunity. It lets you manage a bigger account with a small initial investment by borrowing the rest from your broker. If you’re trying to test the waters by starting small, using leverage will defeat that purpose.

Don’t take too much risk

According to Investopedia, most successful day traders don’t stake much of their account — 2 percent of it, max — with each trade. If you have a $10,000 trading account and are willing to risk 1 percent of your capital on each trade, your maximum loss per trade is $100 (0.01 × $10,000). So, you must make sure you have that money set aside for potential losses, and that you aren’t taking more risk than you can afford.

Secure your crypto wallet

One major problem with day trading cryptocurrencies is securing your crypto wallet. The least secure cryptocurrency wallets are online wallets. Because you’re going to need your capital handy throughout the trading day, you may have no choice but to leave your assets on your exchange’s online wallet, which can expose you to risk of hacking.

One way to enhance your security is to not actually buy and sell cryptocurrencies but rather to speculate the price action and crypto market movements by using brokers who facilitate such services.

Stay away from scalping

Scalping is the shortest-term trading strategy some individual traders choose. It basically means jumping in and out of trades frequently, sometimes in a matter of seconds. If you’re paying commission fees for every trade, not only are you exposing yourself to a ton of market risk when scalping, but you can also get burned out by the fees before you make any profit. Individual traders rarely make any profit scalping. Now, if you’re part of an enterprise that has access to discount commission fees and huge trading accounts, the story may be different.

Cryptocurrency investing: profiting within days

If you want to trade short term but don’t want to stick to your computer all the time, this time frame may be the right one for you. In traditional trading, traders who hold their positions overnight are categorized as swing traders. The most common trading strategy for swing traders is range trading, where instead of riding up a trend, you look for a crypto whose price has been bouncing up and down within two prices. The idea is to buy at the bottom of the range and sell at the top, as you can see. If you’re using a broker who facilitates short-selling services, you can also go the other direction. Of course, in real life the ranges aren’t as neat and pretty as what you see in the example. To identify a range, you must be proficient in technical analysis. A number of technical chart patterns and indicators can help you identify a range. If you choose swing trading rather than day trading, one downside is that you may not be able to get an optimized tax rate that’s created for day traders in some countries. In fact, swing trading is in the gray area for taxation because if you hold your positions for more than a year, you also get an optimized tax rate.

If you’re trading the cryptocurrency market movements without actually buying them, make sure you aren’t paying a ton of commission fees for holding your positions overnight. Consult with your broker before developing your swing-trading strategy.

Cryptocurrency investing: profiting within weeks

This time frame falls into the category of position trading in traditional markets. Still shorter than a long-term investing strategy but longer than day trading, this type of short-term trading can be considered the least risky form of short-term trading. But "least risky" doesn't equal "no risk." For this type of trade, you can identify a market trend and ride it up or down until the price hits a resistance or a support. A resistance level is a psychological market barrier that prevents the price from going higher. A support level is the opposite: a price at which the market has difficulty “breaking below.”

To hold your positions for weeks, you need to keep your crypto assets in your exchange’s online wallet, which may expose you to additional security risk. You may be better off utilizing a broker that provides price-speculation services for this type of trading strategy so you don’t have to own the cryptocurrencies.

One popular position-trading strategy involves the following steps, as you can also see in the figure:
  • Identify a trend (using technical analysis).
  • Wait for a pullback.
  • Buy at the pullback within the uptrend.
  • Take profit (sell) at a resistance.

Cryptocurrency Articles

How Mining Cryptocurrency Works

When most people think about mining, they typically envision tunnels, headlamps, and axes. But in the world of Bitcoin and other cryptocurrencies, mining is a computerized method for verifying the legitimacy of cryptocurrency transactions and entering new cryptocurrencies into circulation. Bitcoin and other minable cryptocurrencies rely on miners to maintain their network. By solving math problems and providing consent on the validity of transactions, miners support the blockchain network, which will otherwise collapse. For their service to the network, miners are rewarded with newly created cryptocurrencies (such as Bitcoins) and transaction fees. To really understand mining, you first need to explore the world of blockchain technology. Here’s a quick overview: If you want to help update the ledger (transaction record) of a minable cryptocurrency like Bitcoin, all you need to do is guess a random number that solves a math equation. Of course, you don’t want to guess these numbers all by yourself. That’s what computers are for! The more powerful your computer is, the more quickly you can solve these math problems and beat the mining crowd. The more you win the guessing game, the more cryptos you receive as a reward. If all of the miners use a relatively similar type of computing power, the laws of probability dictate that the winner isn’t likely to be the same miner every time. But if half of the miners have regular commercial computers while the other half use supercomputers, then the participation gets unfair to the favor of the super powerful computers. Some argue that those with supercomputers will win most of the time, if not all the time. Cryptocurrency networks such as Bitcoin automatically change the difficulty of the math problems depending on how fast miners are solving them. This process is also known as adjusting the difficulty of the proof-of-work (PoW). In the early days of Bitcoin, when the miners were just a tiny group of computer junkies, the proof-of-work was very easy to achieve. In fact, when Satoshi Nakamoto released Bitcoin, he/she/it intended it to be mined on computer CPUs. (The true identity of Satoshi is unknown, and I’m adding “it” because there are even discussions that Satoshi can be a government entity.) Satoshi wanted this distributed network to be mined by people distributed around the world using their laptops and personal computers. Back in the day, you were able to solve rather easy guessing games with a simple processor on your computer. As the mining group got larger, so did the competition. After a bunch of hard-core computer gamers joined the network, they discovered the graphics cards for their gaming computers were much more suitable for mining. My husband was sure among those people. As a gaming geek, he had two high-end computers with Nvidia graphic cards sitting in his game room, collecting dust after we got married. (For obvious reasons, he had to trade his gaming time up for dating time.) When he saw my passion for cryptos, he had to jump in and turn on his computers to start mining. But because he joined the mining game rather late, mining Bitcoin wasn’t turning out to be that profitable. That’s why he turned to mining other minable cryptos.

Mining isn’t a get-rich-quick scheme. To mine effectively, you need access to pretty sophisticated equipment. First you need to do the math to see whether the initial investment required to set up your mining assets is going to be worth the cryptos you get in return. And even if you choose to mine cryptocurrencies instead of buying them, you’re still betting on the fact that their value will increase in the future.

As Bitcoin became more popular, mining it became more popular, and therefore more difficult. To add to the challenge, some companies who saw the potential in Bitcoin value started massive data centers, called mining farms, with ranges of high-end computers whose jobs are only to mine Bitcoins. The figure shows an example of a mining farm setup. So next time you think about becoming a Bitcoin miner, keep in mind who you’re going up against! But don’t get disappointed. You do have a way to go about mining: mining pools.