Individual consumers and businesses keep investing in cryptocurrencies, driven by the belief that as the demand for specific coins increases, so will their value.
Ethereum is a good example here. Developers can build fintech applications on top of Ethereum without relying on a third-party financial institution. To build and run such apps, they need to spend Ether, the native coin of the Ethereum blockchain. So, the more that are developed on the Ethereum blockchain, the higher the demand for Ether – and the higher its price.
But considering recent events such as the fall of FTX or crypto scams, is investing in cryptocurrencies still a good idea in 2023?
Keep reading to learn more about the state of crypto investing in 2023 and get pointers on how to invest in it the smart way.
Cryptocurrency (also called “crypto”) is a type of digital asset that may be used for a wide range of purposes. Bitcoin, for example, was developed to serve as a form of payment that no centralized institution could control or distribute. Ethereum, on the other hand, lets developers create applications on its blockchain, powering the rise of Decentralized Finance (DeFi).
Cryptocurrencies are named after the cryptographic methods that let users buy, sell, or trade them without involving a third party, such as an agency of the government or financial institution.
At the core of crypto lies blockchain technology. In a tamper-proof setting, it preserves a record of transactions and maintains records of who owns what. Depending on how they are utilized, individual cryptocurrency units are referred to as coins or tokens. Some are intended to be traded for items and services, while others are value stores that may be used to participate in specific programs like games and financial products.
The first cryptocurrency was Bitcoin, established in 2009. Today, it’s the most traded cryptocurrency in the world. Who created Bitcoin? It was a programmer or group of programmers operating under the alias Satoshi Nakamoto, whose true identity has never been established.
Note that the blockchain mechanism that would be the backbone of the cryptocurrency market was first outlined in a 2008 whitepaper by Bitcoin’s unknown developer. The paper presented the idea of a blockchain as a digital log of transactions copied and distributed over a network of computers.
In many circumstances, new currencies are produced when transactions are confirmed through the mining process. That said, while coins like Bitcoin employ mining, not every cryptocurrency needs to use it to generate new coins (think Ethereum).
The method of generating the coin depends on the code of a certain cryptocurrency. For example, instead of mining or mining alone, a cryptocurrency may produce some tokens upon launch as developer rewards or award tokens as an interest to holders of a token.
In its essence, cryptocurrency is a type of software. Code governs every function, from how transactions are logged to how data is saved. That goes for both initial coins like Bitcoin and novel ones like Chia Coin.
What we consider a cryptocurrency, such as one Bitcoin, is just a number recorded on a cryptocurrency’s blockchain. A “token” is another term for that value stand-in.
Cryptocurrency software is decentralized and distributed, meaning it’s hosted on many people’s computers throughout the world rather than a single server run by a single firm. Thus, for many cryptocurrencies, it’s the individuals all over the world operating hardware that adds transactions to the blockchain who are the primary source of new currency.
Otherwise, cryptocurrency tokens are generated by different methods built into the software of the cryptocurrency. Finally, practically all cryptocurrency programming is public, so anybody can examine how coins are made.
Bitcoin mining is the process of digitally validating Bitcoin transactions on the Bitcoin network and adding them to the blockchain record. You can accomplish this by solving sophisticated cryptographic hash problems to validate blocks of transactions that are updated on the decentralized blockchain ledger.
Crypto exchanges work in the same way as online trading platforms – by giving users the tools they need to buy and sell digital currencies and tokens such as Bitcoin or Ethereum. When selecting a cryptocurrency exchange, investors should consider its supported assets, fees, payment methods, and overall level of cybersecurity.
Here’s a list of the most popular crypto exchanges.
A top choice for beginners, Coinbase supports a large variety of cryptocurrencies, has solid security in place, and offers a user-friendly trading experience as well as some advanced trading features. It was founded in 2012 to help users purchase, sell, and store Bitcoin. Today, it’s a publicly listed exchange with a total market value of more than $16 billion – with no headquarters, and operations in over 100 countries.
This is a recognized mobile crypto exchange app that offers a comprehensive digital asset trading and investment environment accessible from smartphones. While many crypto exchange mobile applications provide a watered-down version of the exchange’s web-based platform, Crypto.com placed a great emphasis on developing an app that offers a diverse variety of goods and features, allowing customers to benefit from the exchange’s ecosystem while on the move.
It supports almost 250 coins and operates as one of the world’s major cryptocurrency exchanges, available in 90 countries. However, some users have complained of the platform’s poor customer service.
BitMart is a great choice for trading as it lets customers in more than 180 countries purchase and sell over 1,000 cryptocurrencies. It doesn’t only support a huge variety of coins, but also offers cryptocurrency earning chances and provides a simple cryptocurrency buy/sell feature. While it might be an interesting pick if you’re after lesser-known coins, the exchange became the victim of a large-scale hack in 2021
Kraken Pro, Kraken’s professional-grade trading platform, is a well-received low-fee exchange as it has some of the lowest costs in the crypto exchange industry. It’s a good choice for experienced traders – it opens the door to leverage and futures trading and lets users create complex order types.
The first major crypto, Bitcoin, can be used to perform transactions anonymously between any account holders globally. This has generated concern among governments and regulators.
While some politicians and authorities may oppose its usage due to a lack of control and illegal ties, many countries have adopted legislation under their anti-money laundering and counter-financing of terrorism (AML/CFT) laws in an attempt to minimize its use for these objectives.
We’ve seen a number of nations whose governments asked their financial regulatory authorities to set policies and priorities for financial institutions in relation to cryptocurrencies and their usage in AML/CFT.
Let’s take a look at various countries and regions to understand the diversity in the legal status of crypto.
Since 2013, the Financial Crimes Enforcement Network (FinCEN) of the United States Department of Treasury has provided recommendations on Bitcoin. The Treasury defines Bitcoin as a convertible currency having a real-world counterpart or one that may be used as a substitute for it. The Internal Revenue Service has classified Bitcoin as property for tax purposes too.
The Commodity Futures Trading Commission of the United States ruled in 2015 that Bitcoin and other virtual currencies should be classified as commodities.
Any firm that manages or trades Bitcoin, such as cryptocurrency exchanges and payment processors, comes under the definition of a money services business (MSB) under current US law. As a result, an MSB is subject to the Bank Secrecy Act and is required to register with the United States Treasury and file reports on transactions over $10,000.
Furthermore, the United States Treasury and FinCEN have developed plans and are aiding in legislative processes to implement rules, as well as defining national priorities for bitcoin tracking and reporting.
Bitcoin and other cryptocurrencies are recognized as crypto-assets by the European Union. It is not illegal to use Bitcoin in the EU; nonetheless, the European Banking Authority has declared that crypto-asset activities are outside its control and has continued to caution the public and companies about the hazards of cryptocurrencies.
The European Commission approved a plan for legislation to govern crypto-assets in 2020, which numerous institutions inside the union have accepted. It was changed throughout the next two years, and a final, compromised edition was forwarded to the EC for a vote in October 2022. Many EU nations have been waiting for the result of the Markets in Crypto-Assets (MiCA) proposal before introducing legislation.
Security tokens and non-fungible tokens are not covered by the Act. It is aimed at preventing the fragmentation of financial regulatory frameworks and leveling the financial playing field across the EU. The commission also aims to guarantee that the general public has access to and can use cryptocurrencies responsibly.
Perhaps as a reaction to the 2008 global financial sector meltdown, an individual or group using the alias Satoshi Nakamoto created a protocol for a peer-to-peer electronic payment system. This protocol served as the foundation for distributed ledgers known as blockchains.
Blockchain functions similarly to a global spreadsheet or ledger. It lacks a central database and instead runs on computers donated by volunteers all across the world. A blockchain is open to the public since it exists on a network rather than within a single entity.
To preserve virtual security, a blockchain is encrypted and employs public and private keys. A blockchain enables a person to transmit money to another person without using a bank or financial services provider.
As digital money grows more common and with an estimated 50% of the world’s population owning a smartphone, some predict blockchain technology will replace the traditional banking system. This new financial technology collaboration may pave the way for widely available digital financial goods
NFTs (non-fungible tokens) are digital assets that represent ownership of an original copy of a digital file. They have many similarities to cryptocurrencies and may be purchased and traded on many of the same exchanges.
NFTs differ from cryptocurrencies owing to the cumbersome term in their name: non-fungible. Because cryptocurrencies are fungible, each unit of a particular cryptocurrency is essentially the same as any other. Your one Bitcoin is worth the same as someone else’s. The same isn’t true for NFTs.
Investing in cryptocurrencies is an excellent way to make money from them. You may purchase individual currencies like Bitcoin and Ethereum, or you can invest in a cryptocurrency index fund. The latter is a wise decision because it helps diversify your portfolio and distribute risk. A good example here is Torus, a cryptocurrency for renewable energy investments.
Mining is the most popular technique to profit from cryptocurrencies. It’s the process of validating blockchain transactions and adding new data blocks to the chain. Miners are compensated with Bitcoin for their labor.
You can mine coins using specialized gear or cloud mining services. Cloud mining doesn’t require you to buy or maintain hardware, although the benefits are often smaller than those obtained by hardware mining.
Another approach to monetizing cryptocurrency is lending. It entails lending your crypto to another person in exchange for interest. The interest rate you receive will be affected by the type of cryptocurrency you lend and the amount you lend. This is just one of many interesting applications of blockchain in finance.
Lending platforms are classified into three types: decentralized lending platforms (DLP), centralized lending platforms (CLP), and peer-to-peer (P2P) lending.
This method is based on maintaining a quantity of coins in your wallet for a given amount of time. This is how your crypto assets generate passive income for you. The cryptocurrency and the number of coins you stake influence the amount of interest you can earn.
Trading capitalizes on short-term opportunities in the crypto ecosystem. The bitcoin market is volatile. Asset values can substantially rise or decrease in a short amount of time. However, you must have great technical and analytical abilities to be a good trader.
Affiliate programs are available on many cryptocurrency exchanges, and they allow you to earn money from clients you suggest. This is a great method that doesn’t require any trading or investment. However, you might encounter serious competition in affiliate programs.
Dividends are another method to profit from your crypto investments. If you’ve ever invested in stocks or bonds, you’re definitely familiar with the notion of dividends. To put it simply, dividends are small cash payments provided to shareholders. If a firm makes money in a quarter, the earnings are divided and given to the company’s shareholders.
Some Bitcoin supporters believe that cryptocurrency eliminates the need for central banks to regulate the money supply because these organizations tend to devalue money over time via inflation.
Many regard cryptocurrencies as a possible alternative for groups that have been underserved by the traditional banking system. According to a 2021 Pew Research Center study, Asian, Black, and Hispanic persons are more likely than white adults to have ever invested in, traded, or used a cryptocurrency.
Cryptocurrency and blockchain technology are also appreciated because they offer a decentralized processing and recording system that might be more secure than traditional payment systems.
Staking is a method that allows owners of some cryptocurrencies to receive passive revenue. Crypto staking involves using your cryptocurrency to aid in the verification of blockchain transactions. Staking entails high risk, yet it allows users to expand their portfolio without purchasing additional cryptocurrency.
Many crypto initiatives are in their infancy, and long-term investors may never see the profits they hoped for if the fundamental idea behind cryptocurrency is not realized to its full potential.
Short-term cryptocurrency investors face additional dangers. Because cryptocurrency values vary, many people have made money rapidly by investing at the right time, while numerous others are losing money by doing so immediately before a coin crash.
Such wild price swings may also contradict the core ideals driving the projects that cryptocurrencies were created to support. People may be less likely to utilize Bitcoin as a payment mechanism if they are unclear about what it will be worth the next day, for example.
Bitcoin and other comparable mining efforts have a significant environmental impact. However, there are studies showing that cryptocurrency mining uses renewable energy to a large extent.
Governments throughout the world have yet to fully comprehend how to deal with cryptocurrencies, so legal reforms and crackdowns may have unintended consequences for the market.
Regardless of where you look, you’re bound to come to this conclusion: cryptocurrency is a rather dangerous investment. In general, high-risk investments should make up a small percentage of your whole portfolio – one rule suggests no more than 10%.
Diversifying the types of bitcoin you buy is another way to reduce risk in your crypto portfolio. Crypto assets may increase and decrease at various rates and over different time periods, so by diversifying your holdings, you can protect yourself against losses.
Carry out research before investing in crypto. Coins are often related to a specific technical product. When you acquire a stock, you’re effectively purchasing a piece of a company subject to financial reporting obligations, which can provide insight into its future.
The most trustworthy and widespread projects include publicly available metrics that indicate information such as how many transactions occur on their platforms. The increased use of cryptocurrency may suggest that it is starting to establish itself in the market. Cryptocurrencies frequently make whitepapers available to explain how they will function and how tokens will be distributed.
If you’re looking for an expert to help you launch a new crypto project, get in touch with us – we have more than 9 years of experience in blockchain development and a strong portfolio of realized projects.