(Note: information contained on this article is valid as per January 2021 and is purely for educational purpose. This is not investment advice.)
Are you a new cryptocurrency investor? Still unsure about which crypto to invest in? Don’t worry, we got the basics covered on this article!
Understanding crypto investment themes
The first and largest cryptocurrency by market capitalization, Bitcoin was created in 2008-2009 as the first currency that is peer-to-peer and not controlled by any single government. Many investors invest in Bitcoin because they believe Bitcoin to be a scarce asset like gold. The total supply of Bitcoin is limited by the Bitcoin protocol to be 21,000,000 BTC. Currently, about 18,500,000 BTC has been created / mined, leaving us with about 2,500,000 BTC left.
The most popular investment thesis / narrative for Bitcoin is “digital gold”. Due to Covid-19 pandemic, central banks around the world (such as USA, Euro, etc) are forced to print significant amount of money to keep the economy going. As a result, since mid-2020, several large corporations and Wall Street hedge funds (particularly from USA) have publicly announced they are investing in Bitcoin. Many believe that Bitcoin, just like gold. can provide protection against monetary debasement due to global money printing that is happening around the world.
To learn more about investing in Bitcoin, please read:
Launched in 2015, Ethereum is the second biggest blockchain platform after Bitcoin. Ethereum is a general-purpose blockchain platform that allows anyone to write and create any kind of program. Ether (ETH) is the native cryptocurrency of the Ethereum blockchain. All transactions that happen on Ethereum blockchain require ETH to be consumed / burned as “gas”.
Developers around the world have created various decentralized applications (dApps) on top of Ethereum. While some applications are games (such as Cryptokitties), the most prominent use case of Ethereum is for creating tokens (such as USDT, IDRT, etc) and Decentralized Finance projects (such as Uniswap, Synthetix, Aave, etc).
- ETH as “gas / oil” for Decentralized Finance Some people invest in ETH as a bet that there will be more and more users of Ethereum and Decentralized Finance (DeFi) in the future. Because any kind of transactions on Ethereum blockchain require ETH to be consumed as gas , the demand for ETH will grow proportionally to the number of transactions / usage that happens in DeFi.
- ETH as collateral for Decentralized Finance ETH is frequently used as the main collateral for borrowing from DeFi lending protocols, such as Aave or Compound. As more people lock up ETH as collateral in DeFi, there will be lesser number of circulating ETH in crypto exchanges to be sold. This reduction of ETH supply can drive up price.
Decentralized Finance (DeFi) tokens
Decentralized Finance is a general term for various projects that aims to replicate traditional finance capabilities on the blockchain. The goal of DeFi is to grant everyone around the world access to alternative financial solutions (such as borrowing / lending) without needing to go through banks or traditional financial institutions. Think of DeFi as financial services that are transparent, permissionless, and global.
As of the time of writing, almost all DeFi applications are built on top of Ethereum blockchain. Most of DeFi projects have an associated token (called “governance token”) that grants token holders special rights, such as voting on protocol upgrades/settings and receiving portion of fees that the project generate. Below are various examples of DeFi projects and its governance token by category:
- Borrowing/Lending Protocol: Maker ($MKR, https://makerdao.com/), Compound ($COMP, https://compound.finance/), AAVE ($AAVE, https://aave.com/)
- Wealth/Asset Management: Yearn ($YFI, https://yearn.finance/), Harvest ($FARM, https://harvest.finance/)
- Decentralized Exchange: Uniswap ($UNI, https://uniswap.org/), Sushiswap ($SUSHI, https://www.sushiswap.fi/)
- Derivatives & Synthetic Assets: Synthetix ($SNX, https://www.synthetix.io/), Hegic ($HEGIC, https://www.hegic.co/)
Investing in any particular DeFi project is similar to investing in early-stage startup: it is more high risk, high return even compared to investing in Bitcoin**.** The market capitalization of DeFi tokens is much smaller compared to Bitcoin or Ethereum, making the price much more volatile. This volatility might be interesting to short-term traders that can successfully buy low and sell high. For a successful long term investment, you need to research and understand various fundamentals about the project, such as a) the team, b) the product, c) the design of the token economics, and d) the community. You also need to stay up to date with the latest development, by following official social media channel of each individual project (twitter, discord, telegram). You can also spread your investment across multiple projects to reduce risk – while some projects might fail, others might generate a big jackpot / profit.
Short-term trading or long-term investing?
Similar to participating in a traditional stock market, there are two main ways you can profit from cryptocurrencies: by short-term trading and by long-term investing.
Short-term trading involves buying and selling cryptocurrencies within days, hours, or even minutes. You can generate profit from the price volatility of crypto assets by buying low and selling high in a short period. As such, short-term trading requires ability to predict price action in a relatively short timescale. If you want to trade short-term, usually it is more important to know about technical analysis (such as Support and Resistance), historical price volatility, and public sentiment of a particular crypto asset compared to understanding the fundamentals / intrinsic value of the crypto asset.
On the other hand, long-term investing is a strategy where you buy and hold a crypto asset for weeks, months, or even years – eventually selling when the price of your cryptocurrency has appreciated by significant amount over long time period. To be a successful investor, you need to be able to assess two basic questions:
- What is the price I’m paying for the crypto asset today?
- What can the price of the crypto be in the future?
Compared to short-term trading, long-term investing requires you to know more about the fundamentals / intrinsic value of the crypto asset. You want to invest in cryptocurrencies and projects that will likely to grow much more larger in the future.
Extra tips for investing in cryptocurrencies
- Do not invest more than what you can lose. Cryptocurrency prices (especially those with smaller market caps) can be volatile and unpredictable in the short term.
- Do not blindly believe price predictions that random people tell you on social media or the internet. Do your own research.
- Follow and read the latest news related to any cryptocurrency you have invested in. You can easily read the latest news for your favorite crypto in Pintu app!