Bitcoin Basics: What You Need to Know Before Investing in Crypto

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Cryptocurrencies are digital tokens which have a value and act as a form of payment.

They are decentralised, meaning no one entity has control over them, as opposed to fiat currency which is controlled by Governments and banks.

Whenever someone uses a cryptocurrency the transaction is added to a blockchain – a decentralised digital ledger of all activity maintained by a network of computers which ensure it remains accurate and secure.

The top two cryptocurrencies are Bitcoin and Ethereum. Tether, which differs slightly in that it’s a stablecoin, is the third largest cryptocurrency by market cap.

A stablecoin is designed to remain pegged to an underlying fiat currency which, in the case of Tether, is the US Dollar. This means its price remains steady and is predictable, unlike other cryptocurrencies which can be highly volatile.

There are also thousands of altcoins (any coin other than Bitcoin) and meme coins, such as Dogecoin and Shiba Inu.

There are also NFTs, or non-fungible tokens, which are unique chunks of data and a form of digital asset that represent items such as images, videos or audio clips.

A growing number of people who are using and investing in cryptocurrency and blockchain technology believe it’s the future of money.

However, many people aren’t convinced and believe the crypto market is a bubble waiting to burst, often, somewhat lazily, comparing it to the Dutch Tulip mania which began in 1634.

Make sure you understand crypto before investing

It’s incredibly important to gain a thorough understanding of cryptocurrency and how it works before deciding if it’s the right investment for you.

Cryptocurrency is still considered an extremely high risk investment and there is a chance you could lose all your money, especially if you buy into unknown altcoins that are suddenly rise to prominence on social media.

These often turn out to be ‘rug pulls’ – meaning they have no use case and have been deliberately designed to attract investment before the developers pull out their money and crash the crypto’s price.

This can happen because it’s remarkably easy and inexpensive to create a cryptocurrency for anyone with a bit of technical know-how.

So it’s fundamentally important that you do your own research into a crypto coin before parting with your hard-earned cash.

Be prepared for wild price swings

Cryptocurrencies can experience large price swings in a short space of time which can be nerve-wracking for even experienced investors.

You need to consider if you have the appetite for this sort of risk and if you’re prepared to lose your investment, or certainly see it significantly reduced in value.

The mistake people new to crypto often make is trying to time the market to take advantage of these price movements. This is difficult even in traditional markets, but it’s even harder in the crypto world.

There are many factors that can influence a crypto’s price. Even a simple tweet from an influential personality can send prices soaring – or crashing – within minutes.

This was demonstrated by Elon Musk in 2021 when he initially decided to accept Bitcoin as payment for his Tesla cars, then decided against it due to environmental concerns.

Bitcoin soared on his first Tweet and tumbled back down on his second, causing many investors, particularly those who came late to the party and bought the hype, to lose money if they panic sold.

There’s very little regulation in crypto markets

Crypto markets are still largely unregulated and as such the same rules and protections that apply in traditional financial spheres don’t apply.

For example, in the UK traditional bank deposits are covered by the Financial Services Compensation Scheme, but crypto is not.

Learn everything you can about cryptocurrency and how it works and research individual coins thoroughly if you’re planning to invest. There’s no shortage of information online, just make sure the source is reliable.

Also, consider your appetite for risk and your approach to investing – do you want to be a frequent trader or hold (HODL) for the long term? HODL is a term often used in crypto circles and means Hold On for Dear Life.

Would you cope with the volatility and hold your crypto if the price tumbled, known as having diamond hands? Or do you have paper hands, meaning you’d sell at the first hint of trouble?

What are the things I need to know before investing in crypto?

Firstly, you need to decide which coins to buy. There are literally thousands to choose from and sorting the wheat from the chaff can be an onerous task.

Do as much research as you can and try to find coins that have a genuine use case and an active team/community behind them, rather than an unknown coin that’s being hyped on social media but has no discernible value.

Some investors have been lucky enough to make fortunes virtually overnight, but they are few and far between and often connected with the developer of a crypto project.

Most people who invest without understanding what they’re buying lose their money.

Read as much as you can about crypto

There’s a plentiful supply of crypto news sources, guides and videos online explaining more about crypto and how to go about investing in worthy project.

You can also check out our seven ways to research cryptocurrency before investing guide.

Make sure you understand what you’re investing in before parting with your cash otherwise a rash decision could turn out to be a costly mistake.

Once you’ve decided which coin you wish to buy, you need to choose an exchange to buy it on.

There are dozens of exchanges operating around the globe, and many of them offer much the same functionality. However, the range of coins they offer, and the fees can vary a significantly.

Before signing up to an exchange make sure it is a) reputable b) offers the coin you wish to trade and b) has competitive fees.

Buying Bitcoin for the first time – a beginner’s guide

Taking your first steps into the world of crypto can be daunting, but it doesn’t have to be!

As I’ve already said, the internet is awash with information (a lot of it good!) and there are hundreds of help forums you can tap into if you get stuck.

You can find instructions on how to do pretty much anything, including setting up an account and buying your first coins.

In fact, you can find some (hopefully) useful information right here on The Crypto Adviser, so why not read our guide to getting started with Bitcoin here?

You can also familiarise yourself with some of the terms that avid cryptoheads use on social media and message forums with our guide to some of the popular words and phrases used in the cryptosphere.

Remember, educate yourself before parting with your cash – it’s the best protection against loss.

Don’t expect a Lamborghini!

There’s a popular internet meme called ‘Where Lambo?’.

It represents a novice crypto investor who has bought a small amount, say £100/$100, worth of an obscure altcoin that’s been shilled on TikTok and the like and is expecting to make their millions overnight.

When this inevitably doesn’t happen, they’re confused. After all, they expected to be putting a down payment on an Italian supercar within days of their investment.

So what happened?

They fell for one of the hundreds of scams that exist in the cryptosphere.

Someone has spent a few hours and a couple of thousand pounds/dollars creating their own crypto which has absolutely no worth.

They’ve then promoted it across social media as the next big thing and probably raked in a few gullible talking heads to do their work for them as well.

Celebrities and other well-known figures are known to have accepted payment to promote coin while knowing practically nothing about it.

The hype builds, people start blindly buying in, and the price soars.

But like a Mayfly’s life, the gains are ephemeral and, after the creator has taken as much money as they can from investors, the coin’s price crashes to zero.

Even is you get in early and try to sell at the brief peak you’ll often find that you can’t because there’s no liquidity available to make your trade.

Maybe a handful of people get lucky if they know exactly what they’re doing and time their actions perfectly, but the vast majority will have thrown their cash down the drain.

Don’t get sucked in by the ‘whole coin’ fallacy

Most people are unlikely to ever own a whole Bitcoin unless they were one of the lucky ones who bought early.

Either that, or quantum computing cracks Bitcoin and renders it worthless overnight!

For now though, let’s assume this won’t happen any time soon.

You see, there will only ever be 21 million Bitcoins in existence and many of those have been lost through accident or damage.

Buying a fraction of Bitcoin will cost you a significant amount, so some people assume that when a new altcoin is being sold at a fraction of this price it’s going cheap.

After all, you can snap up dozens if not hundreds or thousands of this ‘bargain’? And what if it goes the same way as Bitcoin…

Of course, this is possible but also highly unlikely and in some cases impossible. Many altcoins are minted in the billions and trillions meaning there’s no shortage of supply, like there is with Bitcoin.

If you consider the market cap a project with a trillion coins in circulation would have to achieve to be worth the same as Bitcoin, well, you can see it’s simply not going to happen.

But that doesn’t stop people assuming that if they can buy a lot of whole coins they’re on their way to becoming a millionaire if it ‘goes to the moon’.

It’s important to do your sums, alongside your research.

Conclusion

Hopefully that’s covered a few of the fundamental aspects of crypto and the basics of buying your first coins.

Let me know if there’s a specific aspect of crypto you’d like me to write about, or if you’ve got any questions.

I’m happy to help where I can, but I can’t give financial advice or recommend which coins to buy.