Investing is something that can be risky, but it also has a huge amount of potential. The finance and investments industry produces more millionaires than any other.
You can invest in all kinds of assets, and one of the most modern types is digital assets. While they’re still new, the popularity of digital assets has grown incredibly quickly. With that said, you need to understand the space well if you want to be successful in it.
In this guide, we’ll take a look at how you can become a digital asset investor and the things you need to know before getting started. Keep reading for more.
What Is a Digital Asset?
There are different types of digital assets, but when talking about investing, people will be referring to cryptocurrencies. Cryptocurrencies are digital currencies that allow people to make transactions online.
All records are maintained on a decentralized ledger using a technology known as cryptography. This makes crypto incredibly secure, and it’s essentially impossible to counterfeit or double-spend. The first cryptocurrency in the world was Bitcoin (BTC) which launched in 2009, and it has remained the most popular and widely used crypto since then.
As cryptocurrencies like Bitcoin are decentralized, they’re not controlled by any central entity. This means that no banks, governments, or financial institutions can manipulate them in any way. This is one of the main reasons why crypto has become so popular as distrust of these institutions is on the rise.
Different Types of Digital Assets
While Bitcoin is still the most popular crypto in the world, many more have been developed over the years. There are now more than 23,000 cryptocurrencies in existence. They all vary in some way, but most fall into one of four key categories.
Payment Cryptocurrencies
This is what Bitcoin and many of the other larger cryptos are classed as. The purpose is simply for use as a method of payment. This can be in the form of an exchange, or as a method of making peer-to-peer transactions.
This is more of a ‘general purpose’ type of crypto. They use dedicated blockchains that don’t support smart contracts of decentralized applications (Dapps).
One common characteristic of these cryptos is that the supply is limited. This makes them naturally deflationary as they become more difficult to mine with time, theoretically leading to a rise in value. For example, there will only ever be 21 million Bitcoins in existence, so the higher the demand, the higher the price.
Some other popular payment cryptocurrencies include Litecoin (LTC), Bitcoin Cash (BCH), Monero (XMR), and Dogecoin (DOGE).
Utility Tokens
Utility tokens have become very popular in recent years. These are cryptographic assets that run on top of another blockchain. This concept was first introduced by Ethereum (ETH).
The idea for this was that Ethereum would serve as an open-sourced programmable money that Dapps and smart contracts could use to disintermediate legacy financial and legal entities. These tokens aren’t capped and are therefore inflationary like a typical fiat currency.
Every utility token has a specific use case. Ethereum, for example, is used to pay transaction fees or to build and purchase Dapps. Some other popular utility tokens include Polygon (MATIC), Chainlink (LINK), and Cronos (CRO).
Stablecoins
One of the main concerns in the crypto space is volatility. The value of an asset can go up or down very fast which is one of the main risks of investing in crypto. Stablecoins, however, don’t face this issue.
They’re backed by physical currencies, so they’ll always be worth the same amount. When a company creates a stablecoin and manages the peg, they’re expected to hold reserves. This is what guarantees the value of the coin.
Those who invest in stablecoins tend to use them as a savings vehicle. Many also use them as a way to hold finances on the blockchain so that they can make regular transfers that aren’t affected by price swings.
The biggest stablecoin is Tether (USDT) which is pegged to the US dollar. This means that 1 USDT is always equal to 1 USD. Some other large stablecoins include USDC and Dai.
It’s important to note that while stablecoins generally aren’t as risky as other cryptos, there’s always some level of risk due to the lack of government regulation and oversight. In May 2022, one of the most popular stablecoins in the world (TerraUSD) collapsed. The value dropped from $1 to just 11 cents, with some investors losing millions.
This is why it’s important to always do your research and invest cautiously. Even when something seems secure, it may not be, and you don’t want to suffer huge losses.
Central Bank Digital Currencies
This is a type of crypto that’s being met with a lot of backlash. CBDCs use the same kind of blockchain technology as other cryptos, but they’re issued by banks similarly to fiat currencies.
Issuing banks maintain full control and authority over CBDCs. One of the largest appeals of crypto investing is the decentralized aspect, so many investors are against CBDCs.
There are some benefits, however. Due to the nature of CBDCs, they should maintain their value well over time. There’s also much less risk of issues like fraud and scams which are a major problem in the crypto space.
Investing in Digital Assets
Investing in crypto isn’t overly complicated, but you want to make sure you know what you’re doing first. There are various exchanges you can buy crypto on, so the first thing to do is find an exchange that you want to use.
Some of the most widely used exchanges include:
- Binance
- Coinbase
- Kraken
- KuCoin
- Gemini
- Robinhood
- eToro
These all have several similarities, but you’ll find small differences in terms of the assets you can invest in, payment methods, prices, etc. It’s also worth noting that some exchanges are only active in certain countries.
Look into the options available to you and consider what you want from an exchange so you can make a choice. The exchange route is ideal if you want to invest on your own, but you could also invest through a hedge fund. TrueCode Capital is a leading cryptocurrency hedge fund that works to help people build wealth through strategic investments.
This can be a good approach if you’re not overly confident in your own investments. We use advanced algorithms to select the investments we make, helping to maximize profits and minimize risk.
Storing Your Crypto
Storage is something that a lot of beginners don’t think about too much, but it can be one of the most important aspects of crypto investing. The storage methods you use will determine how secure your crypto is, so if you want your funds to be safe, consider your options here carefully.
Custodial Storage
When you buy crypto on an exchange, it will automatically go to your custodial wallet. This is your wallet on the exchange, and you can then keep it here, sell it, or transfer it elsewhere.
This is the most simple storage method as you don’t need to set up another wallet. It’s also ideal if you want to be able to make quick trades. With that in mind, it’s also the least secure option.
If your crypto is on an exchange, that exchange technically owns the crypto. If that exchange then collapses, you may lose all of your crypto, and this has happened to investors in the past. Your crypto could also be at risk if the exchange gets hacked.
A lot of investors keep a small amount of their crypto on an exchange so they can trade it if they need to. They then keep the majority of their investments in other more secure wallets.
Hot Storage
Hot storage refers to any software wallets (soft wallets) that typically operate as browser extensions or smartphone apps. There are several popular options such as Metamask and Phantom that you can set up and use for free. They give you full control over your crypto, making it far more secure.
Note that certain wallets only support specific blockchains. Before you send any crypto to a soft wallet, make sure it is compatible. If you don’t, you could end up losing the crypto.
You’ll get a seed phrase when setting up a soft wallet. This will allow you to recover your funds if you can’t access your wallet for any reason. Write this down and keep it safe, as someone could steal your crypto if they get your hands on it.
Cold Storage
Cold wallets (hard wallets) are physical devices that you can use to keep your crypto safe. They don’t hold crypto on them, but they hold your private keys that give you access to your crypto on the blockchain.
Like soft wallets, they have a seed phrase that will allow you to recover your crypto if needed. Again, make sure no one gets this as they could use it to steal your assets.
Hard wallets are the most secure method of storage for crypto. You need to connect a hard wallet to a computer to make any transactions which you must physically confirm.
They’re not constantly connected to the internet which makes them safer than soft wallets. If you’re planning on holding large amounts of crypto for a long time, this is the safest way to do it.
Best Practices
If you want to be a successful investor, your approach is everything. There are various things you can do to help ensure you make the best investment decisions.
Educate Yourself
This is perhaps the most important thing. Make sure you know what you’re investing in, how to invest, how different blockchains work, the use cases of different tokens, etc.
Set Investment Goals
Don’t just invest blindly. Figure out what your goals are and what you’re trying to achieve. You can then establish a strategy that will help you work towards these goals.
Use Reliable Exchanges
As discussed above, there are a lot of exchanges available. Make sure you use a reliable exchange so that you know your transactions and funds will be secure.
Diversify Your Portfolio
A diverse portfolio is key if you want to minimize risk. Don’t just invest in a single crypto, as the value can drop quickly and you could lose a lot of money. Select different assets so that if one loses value quickly, the rest will support your overall portfolio.
Stay Informed
The world of crypto is growing and changing quickly. To be successful, you need to stay up to date with things that are happening.
Follow the latest news, market trends, technological advancements, and regulatory changes. This will help you keep track of important information and could give you an idea of what will be coming in the future.
Manage Risk
It’s fair to say that “high risk, high reward” stands true for crypto. Make sure you understand how much risk you’re taking on with any investments. The more risk you expose yourself to, the more likely it is that you’ll make losses.
Secure Your Assets
Unfortunately, there are a lot of criminals out there who will use hacks and scams to steal people’s crypto. Make sure you keep yours secure and never give anyone your passwords or seed phrases. You should also stay up to date with the scams that people are using so that you can avoid falling victim to any.
Monitor Performance and Adapt
Keep an eye on how your different assets are performing. Follow price movements and how well your portfolio is performing against your goals. You may decide to make certain changes, so keeping track of things will help you make better investment decisions.
Becoming Successful as a Digital Asset Investor
It’s easy to become a digital asset investor, but being successful can be a lot harder. Understanding the space is crucial, so make sure you educate yourself and always do research before investing.
When you do invest, use reliable exchanges and store your crypto securely. Investing through a hedge fund can be a great option if you want the assistance of experienced professionals.
TrueCode Capital can be the perfect place for you to start your investment journey. Even though the 2022 bear market we were able to perform incredibly well, and things will likely only get better during the next bull market. Learn more about our crypto fund today.
