How Safe Are Cryptocurrency Investments?
Are you interested in investing in cryptocurrency? If yes, one question you’ll have is how safe are cryptocurrency investments? Nigeria is one of the world countries where cryptocurrencies like Bitcoin, etc are massively used. The government via the CBN has placed restrictions on crypto-related transactions with bank accounts such that any associated bank account will be sanctioned. However, this has not derailed Nigerians from carrying out cryptocurrency transactions.
Before you go ahead to buy Bitcoin or any other cryptocurrency, you must understand how it works. In this article, I’ll be explaining how cryptocurrency investments work and if they’re safe or not.
Why does it mean to invest in cryptocurrency?
When someone says “invest in cryptocurrency” what do they mean? It’s simple, they’re simply asking you to buy a cryptocurrency and wait for the price to appreciate. That’s the basic method of making money via cryptocurrency.
Cryptocurrencies are simply digital money and the advantage that they have other fiat currencies is that they are global. For example, you cannot make use of Naira in the United States without first changing it to the US Dollar. This brings about the difference in foreign exchange. The same thing applies when you come back to Nigeria, you must exchange the dollars for naira before spending.
With cryptocurrencies like Bitcoin, it is different. You can spend Bitcoin in Nigeria or the United States without converting to anything. Also, the rate stays the same no matter the country. This shows that cryptocurrency has higher user numbers which amount to many transactions per day. In other words, cryptocurrencies are very volatile.
This is why you see that the price of popular cryptocurrencies like Bitcoin, Ethereum, etc changes every minute of the day. If a particular cryptocurrency is in high demand, its price increases. If it’s in low demand, its price decreases; following the law of demand and supply.
When you invest in cryptocurrency, you buy a particular coin and hold (or HODL in cryptocurrency terms). You wait for months or years for the price to appreciate and then you sell your coin off and make a profit.
For example, assuming you buy 2 BTC at a rate of 1 million Naira each, you can wait for about a year. In a year, the price of 1 BTC could be 2.5 million. If you sell the two BTC you bought for 1 million at this new rate, you’ll get 3 million naira profit.
Is it safe to invest in cryptocurrency?
Investing in cryptocurrency is highly profitable and very risky at the same time. Do you know a lot of people that have become crazily rich from their crypto investments? Well, that’s because they made a profit. Many others have lost crazy amounts of money from bad crypto investments.
The price of a particular coin you purchased can skyrocket in no time and in the same way, it can fall. From the example discussed earlier, a 3 million naira profit was made. Supposing the price of BTC reduced to 500,000 from 1 million, you would be making a 1 million naira loss from your investment.
This is why it is always advisable to only invest what you can afford to lose. That’s the only way you can be safe. If the price appreciates in your favour, you take the gain and if it doesn’t, you can handle the loss.
A major mistake Nigerians make when investing in crypto is by investing via platforms most of which are scams. To invest in crypto, you only need to create an account on a reliable crypto wallet provider like Luno, Coinbase, Binance, etc. Next, you purchase your crypto and it’ll be sent to your wallet address. You can sell it whenever the price suits you.
You do not need to go through “crypto investment platforms” that promise you a particular percentage of interest weekly or monthly. As mentioned earlier, most of them are scams and what the legit ones do is simply trading.
Investing vs Trading
Investing in crypto is very different from trading crypto. When you trade crypto, you buy and sell coins daily while when you invest, you buy and hold for long before selling. Day traders make money from the frequent changes in cryptocurrency prices.
To make a significant profit in trading, you need a huge sum of money. This is because cryptocurrency prices will mostly change by a little difference per day. The difference is only larger noticeable after a long period.
Using the previous example where a 3 million naira profit was made after a year. That’s a 300% increase in 365 days. If you were to average this, you’ll get just a 0.8% increase per day. If you were a day trader trading with a million naira, you’ll make just 8,000 Naira per day. Hence, if you want to increase your daily profit, you have to increase your investment capital. If 10 million were invested instead of 1 million, you’ll be making 80,000 per day.
This is only a plain explanation. The price of cryptocurrencies doesn’t always increase every day; it can go both sides. Therefore, day trading is a lot riskier than investing because huge amounts are involved the profit percentage is low. This is why you should avoid it unless you’re well trained and you understand how the market works.
To reduce the risk of day trading, traders can make a profit both ways. Traders can make money if a cryptocurrency price increases and also if it decreases. It’s like a bet; you just state on which outcome you believe will happen. This is the major advantage with trading over investing/long-term holding. As an investor, you can only make money if the price appreciates.
Also, there are professional trading tools used with features like stop loss, stop limit, etc. Day traders also trade using leverages and spread to reduce loss risk.
Cryptocurrencies are changing the world’s finance. As a Nigerian, it’s safe to invest in crypto if you understand how it works and you make use of reliable wallet service.