If you’re thinking about investing in crypto, it can be an exciting time to do so.
There’s a lot of volatility in the crypto market, but there are also plenty of opportunities.
For example, instead of simply buying and holding these digital assets, you can earn passive income from them.
There are a few primary ways to do that.
One way to earn on your crypto holdings is to open a savings account. The interest rates can be somewhat impressive when you compare them to savings rates on cash accounts.
Another way to earn interest is called staking. Staking is a way to earn rewards, but only if you hold certain types of cryptocurrencies. With staking, you stake some of your holdings to earn a percentage-rate reward. It’s like a savings account that earns interest. The reason you’re able to earn rewards when you stake your crypto is that it’s being put to work on the blockchain.
To be eligible, the crypto has to use Proof of Stake, which is a verification process for all transactions.
You can also lend your crypto to a borrower. It’s like more conventional forms of peer-to-peer lending. You chose a platform that serves as the go-between. You make your crypto available for lending, and someone borrows it. They then pay you back, and you earn interest.
With all that in mind, these are relevant factors when you’re deciding which crypto to invest in. Other factors play a role as well, such as the potential long-term applications.
The following are things you should think about as you decide on which type of cryptocurrency to invest in.
Look at the History
At one point, Bitcoin was the only option for crypto, but it’s been a long time since that was true. There are a number of other types of cryptocurrencies that have come onto the marketplace, like Ethereum, Litecoin, Dogecoin, and many more.
You want to look at the history of the options you’re thinking about investing in before you make a decision.
For example, how long has the currency been around? How has it performed over that time, and what’s the exchange rate for the currency currently?
Bitcoin is, of course, the first digital currency in the world, and it still leads in terms of market cap. The history of bitcoin has seen it survive several market crashes, so that can hold appeal in and of itself. The price of bitcoin also influences the price of smaller currencies.
Ethereum is the second biggest cryptocurrency in the world, and the technology powers much of the decentralized finance industry or DeFi. Ethereum was the first currency that introduced smart contracts. These are small pieces of code on the blockchain.
There are some scalability issues with Ethereum, however. For example, it has high fees and network congestion.
Binance coin or BNB has had years of stable prices, relatively speaking. The coin started to soar at the start of 2021, although it’s slipped since then. Check out Binance review.
Overall, Binance remains one of the more stable crypto investment options, and it’s the world’s largest crypto exchange. There is a lot of functionality, but it’s very volatile.
Binance was created by a company rather than tech developers, and some worry about possible security issues.
Cardano was built by the same people who played a role in the creation of Ethereum, and it’s sometimes called the Ethereum-killer because it can execute smart contracts.
The above are just a sampling of the cryptos that are available.
Read the Whitepaper
If you’re starting to research crypto from an investment perspective, one of the best things to do right away is read the whitepaper.
Every coin should have a whitepaper, which is where all the information is stored about the coin. The whitepaper will provide background on the purpose of the project and the technology that underlies it.
You’ll also find data including historical performance, and this should be where there’s a differentiation made between the coin and others.
If a coin doesn’t have a well-written whitepaper, you should rethink investing in it.
Compare the Market Cap
Market capitalization or market cap is the total value of all the crypto coins mined or created. In the stock market, the market cap is the dollar value of all the shares of a company’s stock.
In crypto, the market cap is calculated through the multiplication of the total number of coins mined by the price of one coin at any particular time.
Market cap can give you an idea of the potential stability of an asset.
A cryptocurrency that has a larger market cap is more likely to be more stable as an investment relative to one with a smaller market cap, although there’s no way to escape the overall volatility of crypto.
If you’re looking at a digital currency with a smaller market cap, it’s going to be more affected by fluctuations in the market, and that can mean you see huge gains but also dramatic losses.
There are three categories of cryptocurrencies based on market cap, which is similar to companies that are traded on the stock market.
Large-cap cryptos include Bitcoin and Ethereum. They have a market cap of more than $10 billion. They are considered a lower-risk investment option since they have a longer track record of growth and more liquidity. A higher volume of liquidity means that people can cash out without dramatic impacts on price.
Mid-cap cryptos have market caps that are between $1 billion and $10 billion. They are considered to have more potential upside not yet tapped into but also a greater level of potential risk.
Then, a small-cap currency has a market cap of less than $1 billion. There are potential opportunities for big upside but also major losses.
Market cap helps you see more about the total value of a cryptocurrency as one comparison tool, but you also need to think about your own tolerance for risk and financial situation when you’re thinking about any investment.