Are you looking to diversify your investment portfolio with new opportunities? As more people explore options beyond traditional assets, such as Forex, stocks, and gold, cryptocurrency has become a popular choice. With the user penetration rate of cryptocurrency expected to rise from 18.78% in 2024 to 22.20% by 2028*, it’s clear that many are eager to dive into this exciting field. If you’re new to crypto, it’s essential to understand that, like any investment, it comes with its own set of risks.
This beginner’s guide will break down what cryptocurrencies are, the different types available, and what to consider before making an investment. Plus, you’ll get a simple step-by-step guide to help you start your journey into the world of crypto with confidence.
Similarly, precious metals like gold and silver have long been valued as investment assets. Known for their stability and historical significance, these metals remain a cornerstone in many investment portfolios. Trading in precious metals, much like in cryptocurrencies, involves understanding market dynamics and the risks involved. Whether through direct purchases, futures, options, or ETFs, investing in gold and silver offers a tangible and traditional counterbalance to the digital nature of cryptocurrencies.
This guide will also touch on how you can invest in these metals, helping you diversify your investment approach in both digital and physical assets.
What is a cryptocurrency?
A cryptocurrency is a type of digital currency that operates without the control of any central authority, like a government or bank. Unlike traditional money, cryptocurrencies aren’t backed by a central institution. Instead, they work through a decentralized network of users online. These digital “coins” or “tokens” are protected by encryption and use a technology called blockchain to keep transactions secure.
You can use cryptocurrencies to buy things online, though fewer merchants accept them compared to regular currencies. When you make a crypto payment, a network of computers checks the transaction to ensure it’s valid before processing it.
Blockchain acts as a public ledger that records all transactions. After a transaction is verified, the recipient can access their funds using a private key, which is a secret code. Many people invest in cryptocurrencies, hoping their value will increase over time, similar to how they might invest in stocks or gold.
A platform like XM is great for trading in crypto CFDs like BTCUSD (Bitcoin) and ETHUSD (Ethereum). Facilitated by several advantages, they allow you to trade 24 hours a day, 7 days a week, with zero commissions and leverage up to 500:1. Whether you’re going short or long, XM offers tight spreads and no re-quotes, making it an attractive investment alternative besides Forex.
Overall, cryptocurrencies offer both a new way to spend money and a potential investment opportunity, though they can be quite volatile and involve certain risks.
What are precious metals?
Precious metals are not just valuable for jewelry or as a store of wealth; they also have important industrial applications. The four main precious metals traded are gold, silver, platinum, and palladium, each with unique uses and benefits across various industries.
Trading precious metals on XM offers distinct benefits. You can trade gold and silver online with no re-quotes and leverage up to 1000:1. XM also provides zero-swap Ultra Low Standard/Ultra Low Micro accounts and the flexibility to go short or long using the same account, all without extra fees.
Types of cryptocurrencies
Cryptocurrency refers to digital currencies that use blockchain technology for secure transactions. As of May 2024, there are over 2.4 million cryptocurrencies*. Bitcoin, created in 2009 by Satoshi Nakamoto, is the most well-known and first cryptocurrency, operating on a blockchain with a proof-of-work system. Its value has surged to over $60,000 per coin in 2024*.
Altcoins are alternative cryptocurrencies. Ethereum, launched in 2015, supports decentralized applications (DApps) and smart contracts, making it a significant player in the blockchain space. Tether (USDT) is a stablecoin pegged to the U.S. dollar, minimizing volatility and appealing to cautious investors.
Solana (SOL) is known for its support of decentralized finance (DeFi) and uses a unique proof-of-stake and proof-of-history method for fast transactions. Binance Coin (BNB) is used primarily for trading and fee payments on the Binance exchange, one of the largest cryptocurrency exchanges in the world.
A platform like XM helps investors understand these distinct features and use cases, so that they can make a more informed decision. Their Research & Education center offers daily updates on everything happening in the world of trading.
What to consider before investing in cryptocurrencies?
Before investing in cryptocurrencies, it’s essential to do thorough research and consider several key factors:
- Understand the crypto project: Each cryptocurrency has its own purpose, technology, and use cases. It’s crucial to understand the specific details of any cryptocurrency you are considering, including its underlying technology, potential applications, and the team behind it.
- Assess your risk tolerance: Cryptocurrencies are known for their volatility, with prices that can fluctuate significantly in a short period. Be honest about your ability to handle these price swings and the potential for significant losses.
- Define your investment goals: Think about how investing in cryptocurrencies fits into your overall financial plan. Avoid relying solely on crypto for critical financial goals like retirement. It’s important to diversify your investments and not put all your eggs in one basket.
- Explore indirect investment options: If you’re hesitant about directly investing in cryptocurrencies, consider alternative options such as cryptocurrency-related stocks, exchange-traded funds (ETFs), or companies involved in the crypto industry. This approach can provide exposure to the crypto market with potentially less risk.
- Be aware of volatility and scams: Cryptocurrency markets can be highly volatile, and the lack of regulation means scams are a real risk. Carefully vet any potential investment and be cautious of promises that seem too good to be true.
- Long-term perspective: Approach cryptocurrency investing with a long-term view. It’s easy to get caught up in the excitement of rising prices or the panic of a market drop. However, making investment decisions based on emotions can lead to poor outcomes. Ensure that your decisions are based on a well-thought-out strategy rather than short-term market movements.
How to invest in cryptocurrencies
Choose a cryptocurrency trading platform:
- Cryptocurrency brokers: Platforms like Robinhood and SoFi simplify buying crypto but may have higher fees and limited coin transfer options. They often provide integrated wallets for security.
- Cryptocurrency exchanges: Coinbase, Gemini, and Binance. US offers more features and lower fees but may be more complex for beginners.
Set up an account:
- Create an account by providing personal information and verifying your identity through KYC (Know Your Customer) protocols. This may include submitting a photo ID.
Add funds to your account:
- Fund your account using bank transfer, wire transfer, or debit/credit card. Note that credit card transactions may incur additional fees and interest rates.
Buy your cryptocurrency:
- With your account funded, select the cryptocurrency you wish to invest in (e.g., Bitcoin or Ethereum) and specify the amount. Most platforms allow fractional purchases, so a large initial investment isn’t required.
How to trade in gold?
Trading in precious metals like gold can be done through various methods, each with its own advantages and considerations. Here’s a simple guide to some common ways to trade in these valuable assets:
Ways to invest in precious metals
Common stocks and mutual funds:
Invest in precious metals through mining company stocks or mutual funds. Mining stocks generally reflect the metal prices, while mutual funds are managed by professionals, reducing individual research needs.
Futures and options:
These advanced tools allow significant bets on metal price movements with high leverage. They offer liquidity but come with substantial risk, making them suitable only for experienced investors.
Bullion:
Buying physical bullion, such as gold bars or coins, involves direct ownership. This method requires secure storage and is more suited for long-term investors due to its illiquidity.
Certificates:
Certificates represent ownership of gold stored by a third party. While they simplify ownership without physical storage, they may lack value in extreme situations.
How much should you invest in cryptocurrencies?
When deciding how much to invest in cryptocurrencies, it’s important to approach it with caution and strategic planning.
Limit your exposure:
Financial experts often suggest investing only 1% to 5% of your net worth in cryptocurrencies like Bitcoin. This conservative approach helps to limit potential losses, given the volatile nature of the market. It’s crucial to never invest more than you can afford to lose.
Consider your overall portfolio:
Your investment in crypto, including BTC/USD should be part of a diversified portfolio. While a small exposure to cryptocurrencies like Bitcoin can potentially enhance your portfolio’s risk-adjusted returns, the exact amount should align with your overall investment strategy and risk tolerance.
Diversify within crypto:
Just as with traditional investments, diversification is key. This means spreading your investments across different cryptocurrencies, as some may have better long-term potential or be less susceptible to market manipulation. Larger, more established cryptocurrencies like Bitcoin and Ethereum are generally considered to be less risky than smaller, less-known coins, but all crypto investments carry significant risk.
Monitor and adjust:
The cryptocurrency market, including Bitcoin and BTC/USD can be highly unpredictable, with even major coins experiencing significant price fluctuations. Regularly review your investments and be prepared to adjust your holdings as needed to maintain a balance that suits your financial goals and risk tolerance.
How to ensure the security of your cryptocurrency?
When investing in cryptocurrencies, securing your assets is crucial due to the risks of theft and hacking. Here are some ways to enhance your security:
Hot wallets: These are online wallets that store your crypto on internet-connected devices like phones or computers. While convenient for quick access, they are more vulnerable to hacking.
Cold wallets: These offline storage options, like USB drives or hardware wallets, are much more secure since they are not connected to the internet. However, losing the device or forgetting the access code can result in permanent loss of your crypto.
Use reputable platforms: Only use well-known and reputable cryptocurrency exchanges and digital wallet providers. This reduces the risk of falling victim to scams or insecure services.
Enhance security measures: Two-Factor Authentication (2FA): Adding 2FA provides an extra layer of security, making it more difficult for unauthorized users to access your account. Strong Passwords: Use strong, unique passwords for your accounts and change them regularly.
Be vigilant against phishing scams: Be cautious of unsolicited messages or emails asking for your personal information or login credentials. Always verify the authenticity of such communications.
Never share your access information: Keep your passwords and key codes private. Sharing this information can compromise the security of your crypto assets.
By taking these precautions, you can significantly reduce the risk of losing your investment to cyber threats.
Pros of investing in cryptocurrencies
Potential for high returns:
Cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) have delivered significant gains for investors in their relatively short history. This potential for high returns is one of the main attractions of investing in cryptocurrencies.
Decentralization:
Unlike traditional currencies controlled by central authorities, cryptocurrencies operate on a decentralized network. This means they are not subject to government regulations or monetary policies, which can offer a level of independence from traditional financial systems.
Diversification:
Cryptocurrencies can diversify an investment portfolio. They have been compared to assets like gold, as both are seen as stores of value not controlled by any central authority. This makes them a potential hedge against inflation or market instability.
Transparency and security:
The blockchain technology that underpins cryptocurrencies offers a transparent and secure way of recording transactions. It’s difficult to alter or hack these records, which adds a layer of security to crypto transactions.
Cons of investing in cryptocurrencies
Volatility:
Cryptocurrencies are highly volatile, experiencing significant price swings that can be unpredictable. This volatility can lead to substantial losses, making crypto a risky investment for those who can’t handle such fluctuations.
Security risks:
While the blockchain itself is secure, individual investors are vulnerable to hacking and scams. This is especially true if they do not take proper precautions to protect their digital wallets.
Lack of regulation:
The cryptocurrency market is not as regulated as traditional financial markets. This lack of oversight can lead to risks, such as fraud, and means there is less legal protection for investors in the event of disputes or losses.
Uncertain future:
The future of cryptocurrency is uncertain, both in terms of regulatory developments and market acceptance. While some see it as a transformative financial technology, others caution against its potential downsides and the possibility of substantial financial loss.
What are the risks and benefits of trading in precious metals?
Benefits:
Inflation protection
Precious metals like gold are known for their ability to protect against inflation. Unlike paper money, they have intrinsic value and cannot be produced at will. This makes them a reliable store of value when the cost of living rises.
Intrinsic value
Precious metals carry inherent value, which means they are worth something even without any additional economic context. This contrasts with assets like stocks, which depend on the financial health of companies.
No credit risk
Investing in precious metals doesn’t involve credit risk. You don’t need to worry about the solvency of an issuer or a company, which is a common concern with other types of investments.
Portfolio diversification
Adding precious metals to your investment portfolio can reduce overall risk and volatility. They often have a low or negative correlation with other asset classes like stocks and bonds, which helps balance your investment risk.
Safe haven
During times of economic or political instability, precious metals are often seen as safe havens. For instance, gold tends to rise in value during times of crisis or financial uncertainty.
Liquidity
Precious metals, particularly gold, are highly liquid. They can be easily bought and sold, making them accessible to most investors.
Risks:
Price volatility
Precious metal prices can be highly volatile. Factors like changes in supply and demand, geopolitical issues, and market sentiment can cause significant price swings.
No income generation
Unlike stocks or bonds, precious metals do not produce income. You won’t receive dividends or interest, which can be a downside for income-focused investors.
Storage costs
If you hold physical precious metals, you need to consider storage costs. Safeguarding gold or silver can require secure storage solutions, which can be expensive.
Supply and demand fluctuations
The value of precious metals can be affected by supply and demand imbalances. For example, if there’s a disruption in mining or a technological advancement that increases production, prices might fluctuate.
Economic and political factors
Precious metals are influenced by economic and political events. For instance, changes in the value of the dollar or interest rates can impact metal prices. Additionally, while they are seen as safe havens, they are not immune to price drops due to market dynamics.
Industrial demand variability
Metals like silver and platinum have significant industrial uses. Changes in technology or manufacturing trends can affect their demand, leading to price variability.
In summary, while trading in precious metals like gold offers benefits such as protection against inflation and a reliable store of value, it also comes with risks like price volatility and no income generation. Understanding these factors can help you make informed decisions about including precious metals in your investment strategy.
Conclusion
Investing can be challenging, whether you’re exploring cryptocurrencies or precious metals. Cryptocurrencies like Bitcoin offer high returns and decentralization but come with risks like volatility and security issues. Precious metals, such as gold, provide stability, inflation protection, and a safe haven in uncertainty but involve risks like price fluctuations and storage costs. To make informed decisions, understand each asset class’s fundamentals and assess your risk tolerance and investment goals.
A platform like XM helps you achieve this with its diverse range of research and educational content. Balancing your portfolio with both digital and physical assets allows you to leverage their strengths while mitigating risks.
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