A decade after they were introduced to the public, cryptocurrencies are finally regarded as a solid investment asset for storing value and making profits. The days where Bitcoin was considered a scam or a fad are long gone.

The current bullish cycle on the markets has drawn masses of new investors to the markets, both institutional and retail. With that said, there a few good ways of getting into cryptocurrency, and a million bad ones.

For this reason, we wrote this beginner’s guide that should introduce you to the technology behind cryptos and the challenges of the cryptocurrency market. We will explain the basics behind bitcoin and altcoins and the different ways you can profit from them. Additionally, we go over some essentials such as where to buy cryptocurrencies and beginner errors to avoid.

Finally, we will conclude our article with some market metrics that should help you even further in your quest of getting into cryptocurrency. As a bonus, you will find a ton of useful resources throughout the article, helping you understand some crucial aspects of cryptocurrencies more in detail.

Let’s get started.

What is Bitcoin?

Before we delve into detail over the crypto market, we need to talk about the original cryptocurrency – Bitcoin. This digital asset was created way back in 2009 by the mysterious Satoshi Nakamoto, whose identity remains unknown to this day.

Bitcoin was Satoshi’s answer to our currently flawed financial system, which is marred by centralization and inflation. As such, Bitcoin is the first entirely digital peer-to-peer monetary system, where value can be exchanged over the internet without the need of intermediaries.

Furthermore, Satoshi created Bitcoin as a deflationary digital currency. To achieve this, it boasts the following characteristics:

  • A limited maximum supply of coins – more precisely, there can be only 21 million Bitcoin in existence. This is in contrast to FIAT money, of which governments can print more as they see fit. 
  • A scheduled mining rewards halving – new Bitcoins are obtained through a process called mining, which grants mints a fixed number of coins every 10 minutes. A protocol in Bitcoin’s code cuts this reward by half approximately every 4 years. 

Both these characteristics decrease the number of available Bitcoins put into circulation. As it becomes more scarce over time, its value increases, providing a solid store of value for investors.

Bitcoin-vs-Fiat-money

However, Bitcoin’s existence wouldn’t have been possible without the innovative technology behind it.

What is blockchain?

Bitcoin relies on a technology called blockchain, a public digital ledger that records every transaction on the payment network. This ledger is distributed across millions of computers, eliminating the need for a trusted third party.

Through this decentralization, blockchain revolutionized the financial system as we know it. In a nutshell, it brings:

  • Transparency – blockchains are public, meaning everyone can access the ledger of transactions. 
  • Security – because of the distributed nature of the ledger, blockchain networks are extremely difficult to compromise. They do not present a single point of failure for malicious actors to exploit. 
  • Accessibility – most cryptocurrency networks are permissionless. This allows anyone across the globe to participate in their economy and access advanced financial products. 
  • Ownership – thanks to the cryptography that is used to secure them, cryptocurrencies allow their holders to be their unique custodians. 

The initial usage of blockchain was to provide a vessel for transferring digital currencies online. However, all of this changed with the introduction of smart contracts, a major update of the tech.

what-you-can-do-with-blockchain

Released on with the Etereum blockchain, smart contracts bring something entirely new to the table. They allow developers to run decentralized applications, create their own cryptocurrencies, and virtually tokenize anything of value, like NFTs, for instance.

As such, smart contacts have helped blockchain to penetrate a wide array of industries including supply chain, healthcare, gaming, art, and many more.

What are altcoins?

Bitcoin’s success spawned a significant number of other cryptocurrencies  (more than 9700), each one trying to innovate the space in one way or another.

For instance, some might try to offer a faster network paired with cheaper transactions. Others might be aimed at providing ecosystem services and technology advancements.

In either case, these alternative cryptocurrencies, or altcoins, increase the number of profit opportunities for investors. If you are only getting into cryptocurrency, there are several types of altcoins that are worth mentioning:

  • Payment networks – these cryptocurrencies are similar to BTC, in the regard that they can be mainly used for digital currency transactions. 
  • Privacy coins – these privacy-focused coins allow you to transfer value without revealing any details about your transactions. 
  • Utility tokens these tokens provide services within their native network. They can be used to pay for transactions, governance of the network, or deployment of dApps.
  • Stablecoins – these are cryptocurrencies that are pegged 1 to 1 to a FIAT currency like the USD. They are backed by a reserve of an equal number of real-life assets, and their value will always be equal to the asset they represent.

How can you profit from cryptocurrencies?

When getting into cryptocurrency, this is any beginner investors’ concern. Fortunately, you have a wide array of options at your disposal of how to make profits from crypto, including:

Investing & HODLing

Maybe the best entry-level strategy when getting into cryptocurrency is simply investing and holding onto your funds to sell them later at a higher price.

Bitcoin, for instance, has shown steady growth over the years. Using a simple dollar cost average strategy can help you build wealth and steadily acquire a solid portfolio of an appreciating asset.

DCA-vs-Lump-sum-investment

Mining

Mining is the consensus mechanism used in Proof of Work (PoW) blockchains such as Bitcoin. This process ensures some vital functions of these blockchains including:

  • Minting new coins
  • Securing the network
  • Validating transactions

To provide this service, specialized computers spend energy solving increasingly complex mathematical equations (hashes). The computer that solves the puzzle then receives the newly created coins and the transaction fees as a reward for their efforts.

Staking

Staking is a more energy-efficient consensus mechanism for validating transactions used in Proof of Stake (PoS) blockchains, like the Binance Smart Chain. Investors can lock their holdings to secure the network and will receive the transaction fees and new coins as a reward.

It’s a much more democratic way to profit from holdings, as it doesn’t require investing in expensive hardware, just the coins you want to hold.

Trading

For those that are a bit more experienced in the markets, trading is a highly profitable venture when getting into cryptocurrency. Trading is the act of speculating on cryptocurrencies’ price action and profiting from market movements.

There are different types of trading such as:

  • Spot trading – the most common type of trading, involves trading positions of cryptocurrencies instantly, once a certain price is reached. You can use different swing trading strategies for spot trading to make profits. 
  • Options trading an options contract gives you the right, but not the obligation to buy or sell a cryptocurrency at a predetermined price and date. It’s a great way of hedging against risk and making profits with relatively low starting capital. Find out more about options trading on Bitlevex here
  • Futures trading futures trading is an obligation to sell or buy a cryptocurrency at a predetermined price and date. It’s a riskier alternative to options trading.  
  • Arbitrage trading arbitrage consists of buying a certain cryptocurrency on one exchange and selling it on another for a better price. 

As your trading knowledge increases, you will develop a certain trading style, as depicted in the video below.

DeFi

A more recent addition to cryptocurrencies’ usability is the decentralized finance ecosystem. This collection of applications aims to provide traditional products such as lending, borrowing, or trading crypto in a completely decentralized manner. As an investor, there are multiple ways to profit from DeFi:

  • Lending platforms – you can lend your cryptocurrencies to other users on the network and receive interest for the service you provide.
  • Yield farming – using decentralized exchanges and lending platforms generates fees. By providing liquidity with your tokens, you can receive a portion of these fees, as well as get rewarded with platform proprietary tokens that can have huge profit potential.
Best-DeFi-Products

Currency

And finally, you can use them as a currency to purchase goods and services on the internet. Compared to traditional banking methods, they provide better processing times and much lower transaction fees, especially for international money transfers.

How to store cryptocurrencies and where to buy them

If you are getting into cryptocurrency, you are certainly interested in the best ways of acquiring them. However, it is extremely important that you create a cryptocurrency wallet beforehand.

You see, cryptocurrencies are entirely digital assets that require a specific software solution in order to use and spend them. You can learn how to do this in our comprehensive wallet guide.

Once you have your wallet ready, you can choose one of the following methods of purchasing cryptocurrencies:

P2P marketplaces

These platforms connect cryptocurrency users and act as a trusted third party to ensure a smooth crypto trading process between peers. They have the advantage of accepting dozens of different payment methods such as gift cards or various digital wallets. Popular choices are LocalBitcoins and Paxful.

Crypto exchanges

These trading platforms allow you to use convenient payment methods such as credit cards or bank accounts. They will transfer the purchased crypto into an online wallet that is ready to interact with their trading platform.

However, a big disadvantage is that these wallets are centralized and you lose the full custodianship of your coins until you withdraw them onto your private crypto wallet. Some of the most popular exchanges are Binance, Coinbase, and Kraken.

Brokerages

Crypto brokerages are marketplaces where users have access to a small selection of popular coins for purchase. Usually, these platforms allow you to use a wide array of payment methods and will transfer your coins directly into your wallet upon purchase.

Some popular retail crypto brokers are Coinmama and Paybis.

PayPal and other payment processors

Recently, PayPal added the option for its 300 million users to be able to buy, sell, and hold a select few cryptocurrencies on their digital wallets.

Users can also use them as a payment method throughout the merchant network on PayPal, increasing their usability considerably.

However, a big disadvantage when buying crypto through payment processors like PayPal is that your crypto remains locked to that wallet. You will not be able to withdraw them to a private address, which means that you never gain true ownership of your coins.

What is KYC?

Worth noting is that before you purchase crypto through any of the aforementioned methods you will most likely be asked to pass a KYC procedure. KYC (know your customer) refers to the ID verification process required for purchasing cryptocurrencies in countries where they are legal.

It allows authorities to link a certain cryptocurrency wallet to an individual. It’s mainly set up by government agencies to decrease the illegal use of cryptocurrencies and reduce tax evasion.

Important cryptocurrency market metrics

Before you purchase your first coin when getting into cryptocurrency, there are a few key market characteristics you need to be aware of. The following attributes can be decisive regarding its price and perceived value:

  • Market pairs a market pair is the price quote for a cryptocurrency versus a base currency. For instance, BTC/USDT refers to Bitcoin in US dollars value, whereas ETH/BTC refers to Ether in Bitcoin value. 
  • Market cap – the market cap is the total value of all coins in circulation of a cryptocurrency at the current market price. 
  • Circulating supply – is the number of coins currently in circulation. 
  • Maximum supply – refers to the maximum number of tokens that can ever be created. It’s an important metric to have in mind, as some coins do not have a limited supply of tokens, which makes them inflationary by design. Furthermore, this metric can be used to predict the perceived value of a coin. For instance, if a cryptocurrency has a maximum supply of 300 billion, it would be unrealistic for it to reach $100.
  • Volume – is the number of coins traded during a given period. High volume represents a high interest in a certain cryptocurrency.  
  • Liquidity – liquidity represents how easily a cryptocurrency can be sold at the current market value. This is quite important, as it shows whether you can get rid of a coin easily if it price starts suddenly dropping. 

You can visit either CoinMarketCap or CoinGecko for a quick overview of the markets.

Wrap up

Hopefully, our article gave you a good outline of the basics of cryptocurrencies and their ecosystem.

To summarize, we talked about:

  • Bitcoin, blockchain, and some of their advantages. 
  • Altcoins and the different types you will encounter. 
  • Some of the major methods of making a profit with cryptocurrencies. 
  • How to store and where to buy cryptocurrencies. 
  • Some important cryptocurrency market metrics. 

All in all, getting into cryptocurrency can be quite a profitable enterprise, in case you tread carefully. To this end, make sure you read our article on the risks of cryptocurrencies before you venture any deeper into the markets. It will allow you to complement the knowledge acquired in this article and avoid costly beginner errors.