How to Start Investing in Cryptocurrency - A Guide for TradFi Investors
Disclaimer: All investors are advised to conduct their independent research into investment strategies before making an investment decision. The article reviews financial products and what we think our readers will find helpful.
Many decades back, traditional finance (TradFi) has looked more or less like the most significant and most familiar financial infrastructure. However, due to the technological development, payment processors, and innovative applications, the inception of Centralized Finance (CeFi) and Decentralized Finance (DeFi) have served as a significant upgrade to the existing financial infrastructure.
Are you optimistic about starting an investment in cryptocurrency?
Cryptocurrency has served as a promising form of investment for years and has been on fire these days, with many investors claiming appreciable returns from their investments. People and institutions have realized that instead of keeping their funds in traditional financial institutions, investing in stable cryptocurrency to earn passive income is another way to a profitable venture. Also, the crypto market offers you more options for trading.
One of the major differences between the crypto and TradFi markets is the number of available instruments. TradFi investors usually trade in currency pairs like EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, and others. On the other hand, there are more than 11,000 different cryptocurrencies available, and the number continues to increase at an exponential rate, giving a wider choice for investors.
Keep in mind that while investing in cryptocurrency is quite yielding, it is still risky. Remember there is no investment free of risk, it is imperative to take the time to assess the risk before investing in any cryptocurrency.
Here is a guide on understanding key concepts before investing in cryptocurrency.
Centralizes Exchanges (CEX) versus Decentralized Exchanges (DEX)
Centralized Exchanges (CEX)
Centralized exchanges are the first crypto digital wallets and exchange providers which offer users more choice and functionality. Centralized exchanges rely on a central authority or intermediary between investors and their assets. This central authority is a single company that manages your assets on your behalf, protects them, and provides certain protections that some investors may need, for example — insurance of your assets in case of a cybersecurity breach. Centralized exchanges are also not suitable for those who want to retain their privacy. They must collect and verify personal information and comply with know-the-customer rules.
Some prominent examples include Coinbase, Gemini, Kraken, and Binance.
Decentralized Exchanges ( DEX)
Some investors will prefer to use an exchange that more closely aligns with the decentralization spirit of the entire crypto industry. Decentralized exchanges or DEXs are not operated by a single individual, company, or organization; instead, the code on which they are built allows peer-to-peer crypto trading without intermediaries. Linear.Exchange is an example of a Synthetic Decentralized Exchange (DEX).
Wallets: Buy, Sell and Store Cryptocurrencies
Crypto wallets are used to buy, sell or store cryptocurrencies. Each wallet is designed with a specific wallet address that is unique. No wallet providers, exchanges, or companies will ever ask you to share this critical information. If you receive an email that appears to be from a legitimate provider but asks you to enter your private key, it is a scam.
This type of scam, called phishing attacks, is rampant as cryptocurrencies have no legal remedies for users if their wallets are stolen. Additionally, if you are buying a large amount of cryptocurrencies to hold long term, hardware wallets such as Ledger and Trezor offer one of the most secure storage solutions. These specially crafted devices keep you offline, reducing hackers’ attack vectors.
Research and understand what you are investing in
You must research and understand which cryptocurrencies you are investing in. Since there are thousands of cryptocurrencies in the crypto market, and hundreds are being launched daily, it’s essential to research each crypto’s function and investment case.
Crypto investment is different from stock investments. In a way, profitable stock investments happen when a company grows its profits and returns a certain amount according to its stock portfolio. However, crypto investments become profitable due to an increase in use-cases, influencer hype, or scarcity.
The Cryptocurrency market is highly volatile and speculative, so investors should only invest what they can afford to lose. Various investors have gained massive profits from even small-value investments by following the correct procedures and methods of investment.