Risks Of Investing In Ethereum
While the Ethereum platform utilizes blockchain technology, it currently has just one lane for conducting transactions. This can lead to transactions taking longer to process when the network is overloaded. Transaction fees are also high. The blockchains gas price the amount of ether needed to conduct a transaction on the Ethereum blockchain rose 13% in March due to high demand for block space, CoinDesk reported. Although The Merge will resolve those issues, some have grown tired of waiting. The Dydx cryptocurrency derivatives exchange, for example, is moving to its own blockchain.
Security has also been an issue. In 2016, for example, a hack that took advantage of a security flaw led to the loss of more than $50 million worth of ether. And in May, the network experienced a security issue following the launch of a new blockchain that runs alongside Ethereums mainnet. However, that blockchain is on a test network, so users werent affected. The final Merge upgrade is expected to make the blockchain more secure.
The Ultimate Guide To Crypto Investing Strategies
23 July 2021
Olivier Arsonneau
DAO Member
As many of us know, the investment landscape is a rich, dynamic and ever-changing environment. We all have heard about or seen people investing in properties, stocks, bonds and the crypto market. While the latter has seen exponential growth in the last year, it also has its share of risks. Consequently, for the average investor, going into crypto can be very challenging and sometimes overwhelming.
Most new crypto investors face a range of questions: How can they get started on their investment journey? What are the risks of investing in crypto? What is the right investing approach for the crypto market? Fortunately, these questions can all be answered by having a clear investment strategy from the outset.
This article will explain what an investment strategy is, why it is important to have one and examples of some popular strategies. Then we will cover how to choose the right strategy based on your goals and needs.
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How Ethereum Is Different From Bitcoin
As we mentioned above, Bitcoin was designed to be a currency. It uses the same underlying technology principles, but uses them to facilitate monetary transactions.
Ethereum, on the other hand, was designed to facilitate software processing using a token system called Ether. That Ether has become more valuable as a result of people becoming interested in the technology. That Ether is what people want to invest in.
However, there are a lot of apps being developed on Ethereum, and even some major financial companies are getting involved in the space. It could be interesting to see what develops from this over the next few years.
Ethereum is also the basis for transacting in NFTs and other collectables online. So, if you want to buy an NBA Top Shot or other NFT, you need ETH.
Finally, Ethereum is much cheaper than Bitcoin. Bitcoin currently trades for over $20,000 per unit, while Ether trades at closer to $1,000.
Examples Of Two Different Investment Strategies
Lets take here again our two investor types discussed earlier.
The first investor wishes to go on holiday overseas in the short term. He will be looking for quick profits for that to happen, so his investment approach will be more active than passive. Moreover, as he plans to invest for a short time, he will be looking to maximise returns in order to achieve his goal, thus making him more tolerant of risky investments .
With this in mind, he decides to invest a lump sum, splitting it between growth investing, trading and the long-short strategies. Because he is actively investing, he doesnt set a schedule to monitor his performance, but is instead keeping an eye on things on a daily basis as he trades.
The second investor from our previous example has a completely different profile: his primary goal is to accumulate wealth in the long term for his retirement plan and for his kids education. He has plenty of time to build his wealth, and he also wants to preserve his capital as his two objectives are vital for the future. He doesnt want to experience a loss that will leave him unable to cover his lifestyle costs.
This investor is conservative and will certainly go for passive investing strategies, which are generally known to be easier to follow and bring generally more profits over time.
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Save With An Online Bank
Online banks typically offer more interest than a traditional bricks-and-mortar bank. For someone who is just starting out with savings, I would suggest building up that rainy day fund and invest it into a safe liquid account like an online bank, says Michael Solari, CFP, Principal of Solari Financial Planning, LLC. Before you can start building a mountain of wealth, it is important to protect yourself from falling into a ditch.
While online banks offer more interest, the only downside is that they don’t have physical locations, which makes it difficult to do things like talk to a teller or deposit cash.
See our list of Best Online Banks.
Here are the top online banks that have the highest savings accounts rates and free interest checking accounts:
How To Secure Bitcoins
Whether you want to speculate on Bitcoins price or believe that it is the future and are prepared to hodl it till the end of time, you will need a secure way to store the coins you purchased. There are two types of crypto wallets: hot and cold. The former are connected to the Internet, making it easier to carry out basic transactions. On the other hand, cold, or as they are also called hardware, wallets are not connected to the Internet and thus are a lot more secure. However, that doesnt mean hot wallets are not safe at all: they are still a good way to store your coins. Hot wallets are used for storing smaller sums of crypto or if the owner wants easy access to their funds, while hardware wallets are usually used by people who want to hodl their cryptocurrency.
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How To Invest $5000
Once you are in good financial health with managed debt and a solid retirement plan, you can focus on how to invest $5,000.
Your money can work for you in several different ways. Here are a few suggestions:
What is the best way to invest $5,000?
Understand Your Risk Profile
Investing and risk go hand-in-hand, and cryptocurrencies are known for being a very risky asset class.
The figure above highlights the risk-return tradeoff, showing that potential returns depend on the degree of risk you take, and both are linked to the type of investment you choose. You can see that cryptocurrencies are at the top: while offering the highest potential rewards, investing in them is also riskier than other investments, mostly due to the markets volatility.
We can even see this within the crypto market, where smaller altcoins often have higher returns than Bitcoin or Ethereum, but they are also riskier because there isnt as much history behind the project.
So should you put everything into the riskiest asset because you want bigger profits?
Generally, no – most investment strategies will include some level of diversification. Understanding how much you invest in riskier assets versus safer assets will depend on your level of risk tolerance.
Risk tolerance refers to the level of uncertainty or loss an investor is prepared to tolerate while carrying out his investment strategy. This one depends on many factors, such as:
These factors will all help you determine your risk tolerance, which can be measured on a scale from conservative to aggressive .
Now we will consider the three main investor profiles, based on their risk tolerance.
Conservative investor
This kind of investor is able to take risk when necessary, but would prefer to avoid it.
Moderate investor
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Give Your Retirement Savings A Boost
Risk level: Low – High Good for: Retirement planning
If you already have a retirement account like a 401, IRA, or Roth IRA, adding your $5,000 to it can help it earn even more.
Plus, depending on which account you have , you may even get some tax benefits.
Traditional IRA contributions are tax-deductible when it’s time to fill out a tax return, while contributions made to a Roth IRA can be withdrawn tax-free once you’re ready to withdraw .
Pros and Cons of Retirement Accounts
- Money grows tax-free
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How To Buy Ethereum
If you’re interested in investing in Ethereum, and specifically Ether, you need a digital wallet connected to a cryptocurrency exchange. Ethereum doesn’t trade on any major stock platform. You can’t go to your online discount broker and buy Ethereum. You have to convert it into your wallet.
We recommend using Coinbase as a digital wallet because it’s incredibly easy to use, allows you to invest in Bitcoin and Litecoin as well, and they will give you a bonus for signing up. If you sign up with this link you’ll get a $5 in Bitcoin bonus if you open a new account and making your first trade.
It’s important to remember that Ether is a currency, and should be treated as such by investors. You don’t buy shares of Ether like you would stocks or ETFs. Instead, you are exchanging your dollars for Ether tokens. There are no dividends, no payouts. Your only hope is that in the future, other people on the Internet will pay you more for your tokens than you bought them for.
If you’re not sure about using a digital wallet, and want to invest via an ETF, you can’t do it yet. However, there is a Bitcoin ETF – GBTC, and you can invest in it or in Ethereum directly on eToro. You can also buy ethereum on a variety of platforms, including:
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What Is Bitcoin And How Does It Work
The concept of digital money that you use online is not that complicated in itself. After all, most of us will be familiar with transferring money from one online bank account to another.
Cryptocurrencies like bitcoin are digital assets that operate like normal currency, but with notable differences. They use peer to peer payment methods, without the banks taking a cut with every transaction. There are no physical versions of the coins either.
Each bitcoin is created using an encrypted code, which is a string of numbers and letters. The same equation used to create the code can unlock it .
Other important points about bitcoin:
- Cryptocurrencies, like bitcoin, ethereum and cardano, are a form of payment that uses blockchain technology to send data in cyberspace
- Each bitcoin must be mined
- It is finite: only 21 million bitcoins that can be mined in total
- Cryptocurrencies are decentralised meaning they are not regulated by a financial authority, like a government or central banks
- Most platforms will allow bitcoin purchases using credit cards
Cryptocurrency Vs Crypto Stocks
When most people think of investing in cryptocurrency, they think of investing directly in the currency itself. But it’s possible to invest in crypto without actually investing in crypto.
A crypto stock is a company that is involved in cryptocurrency in some way. That could mean the company offers crypto as a form of payment, it may have invested in crypto, or maybe it builds the technology behind digital currencies.
Take Tesla, for example. The company announced this year that it made a $1.5 billion investment in Bitcoin, and it also accepts Bitcoin as a form of payment.
NVIDIA is another example of a crypto stock. The tech company designs and builds graphics processing units , which are often used in the creation of cryptocurrency.
If you were to invest in Tesla or NVIDIA, you wouldn’t be investing in cryptocurrency directly. However, if crypto does become mainstream and is adopted as a standard form of currency, these companies could benefit from it. As a result, your investments could thrive.
Crypto stocks are generally safer than investing in cryptocurrency directly. This is because crypto is only a portion of these companies’ businesses. If digital currencies fail to see long-term success, the companies themselves likely won’t crash along with them.
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Jump Start Your Kid’s College Fund
Risk level: LowGood for: Parents or grandparents
Whether you just welcomed a new baby or have a little one in middle school, jump-starting their college fund can be a smart move. After all, anything will help reduce the burden of student debt.
Consider setting up a 529 College Savings Plan. This allows you to invest after-tax money into the plan. From there, the money will grow tax-free over time and will be ready to use for costs associated with higher education.
Pros and Cons of 529 Savings Plans
- Tax-free growth
- Can come with tax benefits
- Less student debt later on
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Bitcoin Is Still A Volatile High
Bitcoin’s value may have skyrocketed overall but it’s certainly been a shaky takeoff.
To illustrate, here’s the performance of the Vanguard S& P 500 ETF widely considered to be a pretty stable investment for the past five years:
versus the performance of bitcoin over the same time period:
Yes, bitcoin has vastly and objectively outperformed VOO, but the peaks and valleys are more extreme if you bought some bitcoin in late 2017, for example, and were forced to sell during the pandemic, you’d have lost up to 60% of your investment.
Is that to say bitcoin is a bad investment? Not necessarily just a volatile one that belongs only in the riskiest corners of your portfolio.
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Can You Lose All Your Money In Bitcoin
Yes you certainly can. Crypto is very risky and not like conventional investing in the stock market.
Bitcoins value is based purely on speculation. This is different to company stocks where the share price will move depending on how the business is performing.
Important: cryptocurrencies are unregulated by the UK watchdog, the Financial Conduct Authority. Crypto platforms are only regulated for anti-money laundering purposes.
There are three main ways to lose all you money with bitcoin:
- The value plummetsand you sell: crypto is volatile with its price determined by sentiment. Though technically you only lose money if you sell an investment for less than you bought it for. This is known as crystallising your losses.
- Your memory: experts estimate 20 per cent of all cryptocurrency has either been forgotten about or lost with a current value of around $140billion, according to Crypto data firm Chainalysis
- Cyber crime: hackers and scammers are thought to steal around $10million worth of cryptocurrency every day, according to Atlas VPN
Some people choose to take their holdings offline and store it in a physical device called a cold wallet, otherwise known as a hardware wallet or cold storage that is similar to a USB stick. While this protects from online attacks you risk losing your holdings.
As with any investment, do your due diligence and dont pin all your hopes on one company or one cryptocurrency.
So What Is The Efficient Method To Invest $5000
Isnt that the $5000 question? Regrettably, there is no such thing as a typical investor there is no efficient method to invest $5,000. The best way to invest $5,000 depends on several criteria, including when you expect to retire if you have a family or want to start one, how long you have to invest the money, and how much debt you have.
The best answer to this issue, in the end, is perhaps not in one place. Maintain a diverse portfolio and keep your current and future financial requirements in mind.
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For Most Beginners: Coinbase
- Pros: Extremely user-friendly a publicly traded company earn free crypto with Coinbase Learn.
- Cons: High trading fees can’t control wallet keys.
Coinbase is a household name for crypto buying for a reason. It’s not only the first crypto exchange to go public it’s also the softest landing pad for crypto beginners.
Coinbase knows that crypto investing can be a little intimidating, so it designed its buying process to be as streamlined as possible. You pretty much just sign up, attach a payment method and boom buy crypto like it’s Amazon.
Plus you can earn free crypto by watching short training videos on Coinbase Learn.
The chief drawback to Coinbase is that it charges higher-than-average fees: up to $2.99 per transaction plus a spread fee of around 0.50% between purchase and sale prices.
But due to convenience, safety and customer service, many traders stick with Coinbase for the long haul. Find out why in our Coinbase Review.
Before You Start Investing
Before you start investing, make sure your finances are in good shape. Here are a few things you’ll want to focus on before growing your wealth.
Pay down your debtsIf you have existing debt with a high interest rate , it’s best to pay that down first.
Any interest that high can easily cancel out what you earn from investments. On the other hand, debt with low interest rates and a fixed term may not be a cause for concern. Be sure to review your existing debts first.
Create a healthy emergency fundMost experts recommend having 3-6 months’ worth of expenses stashed away in something like a high-yield savings account.
This is an important resource to have in case you lose your job, have a medical emergency, or need some home repairs. Be sure to have an emergency fund set up and well-funded before investing.
Get a retirement plan in placeAsk yourself two questions:
If your employer is matching contributions to your 401 account, you should be taking advantage of them. To avoid leaving money on the table, contribute the maximum amount that your employer will match before investing your $5,000 in other ways.
In addition to a 401, consider other tax-advantaged retirement accounts like a traditional IRA or a Roth IRA.
401 Company Match
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