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How and why invest in cryptocurrencies

How and why invest in cryptocurrencies

Cryptocurrencies are a new world that has been around only about a decade. Still, they have gathered much attention from investors, traders, analysts, and the like. Yet, the traditional world is still a bit skeptical about entering the world. This might be due to a lack of familiarity with this sector, but also due to the very different services or options it offers. Before one decides to invest and choose its path on how to do that, one must ask why to invest in cryptocurrencies in the first place.

Cryptocurrencies are a phenomenon that has been gaining more traction since day one. In the short history of this market, we have already witnessed several bull and bear markets, different bubbles, manias, or trends. Yet, cryptocurrencies did not always have the best image. Many argued that they are only used to finance illicit activities, for money laundering, or that investing in cryptocurrencies is nothing else than pure gambling.

These arguments might have impacted investors who decided not to invest in cryptocurrencies. However, these arguments are not valid, leading to a shift in their perspective. Thus, the questions of how or why to invest in cryptocurrencies might be back on the table.

Why should anyone buy cryptocurrencies?

It might look appealing to invest in cryptocurrencies primarily for possible gains. It is not unusual to see double-digit returns in a single day or triple-digit returns annually. Bitcoin, for instance, has had an average of around 200% growth annually since its inception. However, Bitcoin and all the other cryptocurrencies offer much more than that. Here are only a few reasons why investing in cryptocurrencies is ever more popular.

Hedge against the inflation

Probably the most mentioned reason for being invested in the cryptocurrency world, aside from the speculative nature of the investment, is the “hedge against the inflation” narrative. Since the total supply of Bitcoin is known and unchangeable, everyone can see what the total number of coins mined is, how many will be mined in the next few days or weeks, or when the next halving will occur hammering the miner rewards by half.

Moreover, the total supply of bitcoins does not change. On the contrary, it stays the same, no matter the price. Thus, many people treat investing in cryptocurrencies, especially Bitcoin, the same as investing in gold. They use this investment as a tool against the unprecedented and unpredictable monetary policies, which, as we see now, can lead to rising inflation.

Long term investment

Hand in hand with the narrative of buying cryptocurrencies as a hedge against inflation goes another prevalent narrative. Since cryptocurrencies have been around only for a bit more than a decade, analysts consider cryptocurrencies mainly a long-term bet that needs time.

Many compare especially the adoption of Bitcoin, the first successful cryptocurrency, to the adoption of the Internet. According to that comparison, the cryptomarket is currently at the same stage as the Internet was in 1998. Thus, those who bet that cryptocurrencies will follow the Internet path are mainly aiming to hold for the long run. In cryptocurrencies, they call this buy-and-hold strategy “hodl,” which originated from the misclick but got popular really fast.

Payment option

It might sound surprising to some, but there are investors that are buying cryptocurrencies not only to hold on to them but to use them. For some of them, cryptocurrencies offer cheaper options for money transfers, mainly seen in Salvador, where remittances from the United States contribute about 25% of the country’s GDP. Yet, there are no providers that would offer cheap services of this kind. In El Salvador, where Bitcoin was accepted as a legal tender only a few months ago, more people already have the government-created Bitcoin wallet Chivo that have bank accounts. And that is only one country.

Personal remittances Received as a % of GDP – El Salvador

Personal remittances Received as a % of GDP – El Salvador. Source: World Bank staff estimates

Solely in South America, several other states are already looking at legalizing Bitcoin as a payment option or legal tender, just like El Salvador did. These include Argentina, Panama, Paraguay, Brazil, or Cuba. Therefore, if this happens and some of these countries will follow El Salvador, cryptocurrencies will gain not only more trust and credibility but also payment options, which some consider another reason why to invest in cryptocurrencies.

Answering the crucial question before entering the crypto world

Cryptocurrencies are creating a whole new asset class, which means that investing in them is different. That is one of the reasons why investors have to ask the right questions before they join this fast-paced environment to choose the best investment strategies. Generally speaking, investing in cryptocurrencies can be divided into three easy-to-comprehend categories, which differ significantly. The following simple question can help anyone decide which route the cryptocurrency investor should take:

  1. Do you want to buy cryptocurrencies easily and comfortably?
  2. Do you want to buy them for the lowest price?
  3. Or, do you want to buy them anonymously?

Buying cryptocurrencies comfortably

If the biggest priority is comfort, the best way to buy cryptocurrencies might be through traditional finance apps. It is highly possible that the investor, who is looking at cryptocurrencies, is already using some traditional finance app anyways, making the purchase of Bitcoin, Ethereum, or Litecoin very simple. For instance, some of the best apps are CashApp, PayPal, Robinhood, SoFi, or Revolut. These platforms offer different cryptocurrency services that support buying and selling various cryptocurrencies.

Yet, the comfort of these purchases comes with a price. While the actual price of the cryptocurrencies is usually similar to the prices on the cryptocurrency exchanges, most of the platforms do not offer a “withdrawal” function. That simply means that the cryptocurrencies that are bought via such means are not actually cryptocurrencies. In most cases, these are only derivatives of the cryptocurrencies because the investor is not the owner of the private keys, which essentially represent the coin or token that was bought. The cryptocurrency world uses a phrase to describe this phenomenon, and it goes as follows:

Not your keys, not your coins.

While we will introduce the concept of public and private keys in upcoming articles, it is essential to note that buying cryptocurrencies via these services in most cases only represents buying a derivative that tracks the price of the given cryptocurrency. Unless the investor can withdraw the cryptocurrency to their own wallet, they do not own any coins or tokens.

Buying cryptocurrencies cheaply

If the investor wants to buy cryptocurrencies, the attention should focus on centralized cryptocurrency exchanges. Coinbase, Gemini, Kraken, Binance, and Bitfinex are just a few of them that offer cryptocurrency-related services such as buying, selling, withdrawing, or depositing cryptocurrencies. Most of them do much more than that, but that will be covered in the following articles.

The advantage of these cryptocurrency exchanges is that most offer the best possible prices on the market. And while high fees are commonly connected to Coinbase or other exchanges, it is important to note that, unlike buying through the traditional financial apps, buying cryptocurrencies through centralized cryptocurrency exchanges actually means you own the coins or tokens of the given cryptocurrency.

This means that if anyone buys cryptocurrencies through these centralized exchanges, in the vast majority of cases, they can withdraw the cryptocurrencies to their own wallets and keep them safe and secure. This improves the security of their investment and means that the investor is the owner of the given coins and tokens.

Yet, centralized cryptocurrency exchanges might have some limitations regarding investment volumes. While, in theory, most of them provide unlimited services when it comes to buying and selling cryptocurrencies, these come at the cost of numerous verifications that the investors have to undergo before they can invest or withdraw their investments to their hardware wallets. For instance, the daily withdrawal limit is 5 000 dollars for an unverified account at Kraken.

Kraken cryptocurrency limits

Kraken cryptocurrency limits, calculated in USD. Source: Kraken.com

While verifying usually means only sending copies of a few documents such as ID, passport, home address, photo, or bank statements, it can sometimes take several days or, in more severe cases, even weeks for the accounts to get verified. This mostly happens when the bull market is on, and everyone wants to buy more and more cryptocurrencies. The services of centralized exchanges can get clogged easily. While there has been a considerable improvement in processing the verification application, the process is still far from perfect.

Buying cryptocurrencies anonymously

As one can imagine, there are also various other options for how one can buy cryptocurrencies. Several of them are designed in such a way as to promote mainly the anonymity of the buyers or sellers. That means that these means of the purchase offer safer options for buying cryptocurrencies and greater anonymity and privacy. As was portrayed in the previous examples, both the traditional financial apps and the vast majority of the centralized cryptocurrency exchanges need KYC (Know-Your-Customer) verifications. This is, however, not the case with decentralized exchanges or Bitcoin ATMs.

Decentralized exchanges (DEXes)

So-called DEXes, decentralized exchanges, offer different solutions that are primarily oriented around the privacy of the buyers and sellers. Uniswap, SushiSwap, 1inch, or Pancakeswap are among the most popular DEXes. The technicalities around DEXes are much more complicated than it looks, which is a reason why we will introduce them in different articles. What one needs to know now is that they offer the buyers complete privacy since none of them require any KYC verifications or proofs of identities of any sort.

While these DEXes can offer exciting services for anyone, who values their privacy, they are fairly new and have several drawbacks. These are, for example, complicated interfaces, rather common hacks or exploits, or problems with liquidity. We will look more closely at the benefits and disadvantages of decentralized exchanges later. Still, for now, everyone needs to be aware of them since they are getting more attention every day.

Bitcoin ATMs

There is also another exciting alternative to buying cryptocurrencies anonymously. That is represented by Bitcoin ATMs, which work similarly to the traditional ATMs. The only difference is that the investor usually receives the cryptocurrencies straight to the wallet, not any bank account or platform. Some of these ATMs even offer cash withdrawal options.

But why is this in the “anonymous” section? Because it is common to be able to buy cryptocurrencies without any proof of identification or verification through Bitcoin ATMs. That is also why prices in Bitcoin ATMs are usually a bit higher than the market prices. There is usually a fixed fee per purchase but also a floating fee. The floating fees can be as low as 2% above the market price to as high as 20%.

Bitcoin ATM in Bratislava

Bitcoin ATM in Bratislava. Source: coinatmradar.com

However, even if one decides to buy cryptocurrencies anonymously, Bitcoin ATMs might not solve all the problems. Even if they offer an anonymous purchase, there is usually a limit of 1,000 dollars/euros/pounds per purchase without the KYC verification. This means that buying more significant amounts can take a long time. Some Bitcoin ATMs might not even allow it if the buyer uses the 1,000 dollar total buy-ins. Unlike with other options, with Bitcoin ATMs, one would need to go and find a Bitcoin ATM physically, but if you want to do so, here is an extensive map of most of the Bitcoin ATMs in the world.

If all of this information is confusing or new, there is nothing to worry about. Since we understand the complexity of investing in the cryptocurrency world and know how overwhelming it can be, we are here to help.

Published: 22. December 2021
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