10 Things to Consider Before Investing in Digital Currencies
While the meteoric rise in the popularity of digital currencies that took place in 2017 undoubtedly inspired many to get involved in the industry, others continue to take a more measured approach. For those that recently entered the digital currency landscape, or are yet to begin, there are many factors worth considering. Whether looking into buying Bitcoin or any altcoin, much of the analysis will start out the same.
How much you want to invest
As with making any investment, the first question worth asking yourself is how much you want to invest. At this step, it is important to ensure that you are not investing more than you are willing to lose, and that you are not putting yourself in a difficult financial situation.
At the same time, considering how much you are looking to get back from your investment is important in this step, as it should help you decide the value of your investment in the industry.
Your risk tolerance
Another aspect to consider when making an investment is your risk tolerance. This plays heavily into the first step, as considering how much you are willing to invest should correlate with your tolerance for risk.
Ultimately, the digital currency industry can be quite volatile. While this means that some have received unprecedented returns on their investments, others can be left losing more than they expected to. In addition, some digital currencies are more volatile than others, making them more or less attractive options depending on how much you are willing to risk.
How you will store your digital assets
In the same way that cash is often stored in a wallet, a ‘digital currency wallet’ is used to store digital assets. These wallets take the form of either software or hardware, and are applications that store vital information about your digital currency holdings.
Keeping your digital currency wallet both safe and private is a vital part of holding digital assets, as a failure to do so could lead to a loss of your investment.
Before investing, research the market to find an appropriate digital currency wallet for your needs, ensuring that your chosen wallet supports the digital currency you are hoping to buy.
When purchasing digital currency from some exchanges, the exchange will often allocate you a web-based digital currency wallet, where your funds can either be stored or transferred to the wallet of your choosing.
Where to buy digital currencies
There are many places to buy digital currencies.
One extremely prevalent way of purchasing digital assets is through an online exchange or trading platform. Exchanges permit the sale and purchase of several digital currencies at the best available rate, and often require personal information to confirm your identity – in order to comply with legal obligations.
Users also have the option of purchasing vouchers, such as Flexepin vouchers in Canada, that can be redeemed at several exchanges.
It is possible to find a Bitcoin ATM in several countries. At one of these locations, investors can purchase digital currencies like Bitcoin with cash or card, and can later trade the currency on an online platform if desired.
The community behind the coin
In many ways, the rise of digital currencies is a social movement. Most discussion about the industry occur in the virtual world, and online communities can help guide the decision making process for investors.
On platforms like Twitter, Reddit, and Telegram, digital currency communities are driving the industry and play an instrumental role in its past, present, and future. These communities can be a great place to ask questions or better your understanding of the asset.
However, it is worth being skeptical when engaging with communities that are passionate about a specific coin, as they may have some bias. When considering any source, always compare it to your own research.
The technology and its value
Despite the reputation of digital currencies other than Bitcoin as being ‘altcoins,’ digital assets do not necessarily serve as alternatives to one another. In fact, digital currencies often serve entirely different purposes.
Before getting financially involved, it could be helpful to research a digital currency to learn about the underlying technology and what makes the asset valuable.
As an example, Bitcoin (BTC) looks to serve as a decentralized payments platform, with proponents praising use cases like its function as a store of value. Ether (ETH) on the other hand, looks to serve as a technological platform for innovative projects like decentralized applications (DApps) and smart contracts.
Where the digital currency is heading
In addition to understanding the value of the underlying technology behind your chosen digital currency or currencies, it is worth considering where the asset is heading.
Understanding the motive of the project’s core team or contributing developers can help you envision where the project is heading. Additionally, understanding what these figures hope to accomplish with their coin can help you decide if your ideology is aligned with them, and if their ideas are worth investing in.
The project’s whitepaper
Most blockchain-based projects in the space publish a whitepaper; which is expected to demonstrate the evidence of solving a problem based on creativity and the application of scientific principles.
Coinsquare News recently published a thought leadership piece from ColliderX, a large Canadian blockchain research organization, about what seperates a good blockchain whitepaper from a bad one.
Overall, considering a project’s whitepaper, as well as the project’s team and means to deliver on its goals, can help determine if investing in the digital asset is right for you.
The tax implications
It may also be worth it to consider the tax implications of your investment before entering the digital currency market. These implications largely vary depending on your country (or even state/province and city) of residence, and are continually evolving as the industry continues to grow.
Speaking to an accountant or listening to a credible source about how your digital currencies investments could affect you next tax season could help to save you from unnecessary complications down the line.
The media surrounding your chosen currency
While media is far from a definitive be-all and end-all of a digital currency’s value, it is important to see what people are saying in the space. If your chosen currency is often the subject of scandal, it may be worth it to proceed with some skepticism before investing.
On the other hand, positive news may reaffirm your decision to invest, especially as digital assets grow and develop in the space.
The caveat, however, is that you should always be on the lookout for incorrect news or falsely propagated statements. It is important to consider the source, leverage multiple accounts where possible, and consider the biases of where you are getting your news from.
Editor’s Note: These 10 points are designed to provide enough insight for a potential investor to consider their next steps towards investing. However, digital currency investing may not be the right choice for you and this guide should not be considered investment advice. You should always conduct your own thorough research before putting any of your money into any investment.
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