Crypto-investing: what should beginners watch out for?

Crypto-investing: what should beginners watch out for?

 

Crypto-currencies are a very recent asset class. As a result, trading them was originally complex and largely accessible only to experts. Thanks to innovative fintechs and crypto-currency exchanges, however, the situation has changed in recent years. There are now many providers that make access easy, intuitive and secure. But not all brokers are suitable for beginners.


 

But first, how do crypto-currencies work?


Many crypto-currencies are based on blockchain technology. This technology enables all transactions in a decentralized network to be verified and approved. A blockchain is a kind of digital ledger, of which all network users receive a copy. If a user attempts to edit or modify the blockchain without authorization, this version is rejected by the other users. 


Basically, the blockchain is a database that stores vast quantities of information and allows no modification. However, crypto-currencies use a decentralized peer-to-peer network to verify new transactions. They therefore rely on the mutual trust of users, which makes them fundamentally different from traditional currencies.   


Whereas traditional currencies are issued and regulated by a bank or central authority, there is no central institution managing typical crypto-currencies such as Bitcoin or Ethereum. Nor is there a trusted third party (such as a bank) to oversee transfers between two parties. While this is part of the appeal of crypto-currencies, it can lead to problems when making payments.


According to statista.com, there are currently almost 6,000 different crypto-currencies. However, 20 of them hold a 90% market share. It's relatively simple to launch a crypto-currency, which explains the sharp rise in the number of crypto-currencies in recent years - in 2013, for example, there were fewer than 70 crypto-currencies. The most popular crypto-currencies are Bitcoin, Ethereum and Litecoin.


 

Security must come first


Today, there are a large number of brokers offering crypto-currency trading services. For customers, this means they need to do increasingly thorough research before opening their account. In the first instance, the following points should be checked:


                              - Where is the crypto-currency exchange located?

                              - Is it really possible to buy crypto-currencies?

                              - Is there a personal wallet?

                              - Can crypto-currencies be disposed of freely?

 

As many cases have shown in recent years, security is the most important criterion when choosing a crypto exchange. This means that users should pay attention to where the provider is headquartered and which authorities it is subject to. In principle, novice traders are advised to choose crypto exchanges that are European or American, or at least have their own subsidiary in these countries. This is important, as brokers are thus subject to European law, which benefits consumers.


For added security, we recommend opting for a provider approved by the Swiss Federal Office of Financial Services or the Autorité des marchés financiers (AMF). In this way, users can be sure that the provider's activities are monitored and regulated.


In addition to licenses, the topic of security also implies that the cryptobourse complies with the highest security standards and that customer assets are kept in "cold warehouses", confirmed at regular intervals by external checks. Every serious exchange has information on this subject on its website. The absence of such information can be a sign of a less-than-serious provider.


 

Not everyone offers "real" bitcoins for purchase

   

In addition to security, the crypto exchange's offering and other services are also important selection criteria. Some exchanges only offer a limited number of crypto-currencies. For beginners, bitcoin or ethereum may suffice as an investment. But if you want to further diversify your portfolio, you need to make sure that the provider offers a wide range of coins. 


It's essential to bear in mind that, although some providers advertise crypto-investments and have a wide range, they often don't offer "real" Bitcoin, Ethereum and the like, but rather exchange-listed certificates or so-called contracts for difference (CFDs). This can be interesting for experienced investors. For beginners and/or users wishing to buy "real" coins, these providers are not suitable. CFDs, for example, cannot be moved or sent to another wallet, as you are not "physically" buying the underlying crypto-currency.


 

Additional services


People who invest in crypto-currencies and want to earn a return, for example, should make sure that the provider offers other functions in addition to trading, such as staking. Staking involves using crypto-currencies to secure a blockchain network. In return, you receive a reward in the form of other crypto-currencies. Leading providers offer this for different corners, without users needing any additional knowledge. So, simply by holding certain crypto-currencies, you can earn a steady return.


A wider offer and additional services can also be a reason to switch providers. Once you've found a new provider and successfully signed up, you can send your crypto-currencies there from your old provider. It's important to bear in mind that transactions incur fees. 


Of course, fees also play a role. Apart from order fees, the major providers don't charge any other fees for account management or coin custody. Low order fees are often attractive, but they can also mean that the crypto-currency exchange isn't serious or cutting corners in other areas. Beginners in particular should therefore prioritize security and simplicity. 

 


Conclusion


Whether you're a beginner or an experienced investor, there are a few things to keep in mind when choosing your crypto-currency exchange. It's absolutely essential not to be blinded by advertising promises: If something sounds too good to be true, it probably is.