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Buying Your First Cryptocurrency? 7 Factors To Consider

Buying Your First Cryptocurrency? 7 Factors To Consider, FP Markets

Cryptocurrency has become a trending space, as many crypto-assets such as bitcoin (BTC), altcoins, and other digital assets have skyrocketed in value. If you’re thinking about investing or trading in the crypto space, here are 7 factors to consider before making your first cryptocurrency investment.

 

Proof-of-Stake vs Proof-of-Work

There are two major types of cryptocurrency: Proof of Work and Proof of stake. Proof of work is the first type of blockchain invented where transactions are verified through an algorithm that requires a cryptography problem to be solved before a miner can add a block to the blockchain. This process requires computational power or “work”, and the first miner to complete the problem is awarded the fees for all the transactions in the block and the coinbase transaction. While the Proof of work system is highly secure, making it less susceptible to hackers, there are concerns with the sustainability of proof-of-work systems, as they often require large amounts of energy. Proof of stake is a newer system that could potentially solve the sustainability problem. Proof of stake requires that “stakers” put up their cryptocurrency as collateral for the opportunity to validate transaction blocks. The validator who receives the reward is selected randomly rather than based on competition. This requires far less computation and may allow a cryptocurrency to be more sustainable. Generally speaking, proof of work is more secure but often offers less scalability, sustainability and speed. Proof of stake is the opposite, as it is considered less secure but offers more in speed, sustainability and scalability. There are popular cryptocurrencies using each of these technologies. Some examples of proof of work blockchains are Bitcoin (BTC), Ethereum (ETH), and Dogecoin. Examples of proof of stake are Solana (SOL), Cardano (ADA), and Algorand (ALGO).

Buying Your First Cryptocurrency? 7 Factors To Consider, FP Markets

Scarcity

When looking at different cryptocurrencies, consider the aspect of scarcity. Some coins have limited supplies, and some have unlimited supplies. For example, Bitcoin (BTC) has a limited supply of 21 million coins, making it comparable to a limited natural resource and is sometimes considered a hedge against inflation. Conversely, Ethereum (ETH) has an unlimited supply. Ethereum will experience inflation as the supply increases; however, the supply increase is linear, meaning the amount of inflation as a percentage goes down over time. Different cryptocurrencies will have different rates of increasing supply or different supply limits. Always do your own research.

 

Volatility

The crypto market is one of the most volatile, which any crypto investor needs to keep in mind when entering the crypto markets. For some, this may be a deterrent; however, volatility can be an opportunity for the discerning trader, depending on your investment strategy. Generally, however, it’s good advice for beginners in crypto investing to avoid small market cap coins.

 

Diversification

When trading in the digital currency space, it’s worthwhile to consider how much you want to diversify. Some traders and investors like to focus on only one asset, namely “bitcoin maximalists”, who would recommend you only buy bitcoin; alternatively, some investors would rather be diversified into multiple cryptocurrencies. You may prefer to choose which cryptocurrencies you would like to diversify into or use instruments such as ETFs to diversify your crypto holdings.

 

Buying Your First Cryptocurrency? 7 Factors To Consider, FP Markets
Cryptocurrency Properties

When doing due diligence before buying your first cryptocurrency, you should consider what makes a given cryptocurrency unique or valuable compared to other alternatives. Is it valuable because of NFTs or other Defi projects built on that blockchain? Does it have increased security, speed or other innovations in blockchain technology? It’s always important to do your own research and understand the underlying asset before buying your first cryptocurrency.

Unit Bias

One common mistake people make when people start crypto trading is giving in to unit bias. For example, suppose Dogecoin trades at 0.50 US Dollars on the cryptocurrency market and Solana(SOL) trades at $50 US Dollars. This doesn’t mean that Dogecoin is a smaller or cheaper cryptocurrency; it simply means that the unit is smaller. An increase of 0.01 US Dollars is a much larger movement in market cap in Dogecoin than it is for Solana. One good way to mitigate this bias is to look at the market cap of a given cryptocurrency rather than the price per unit, as the unit is relatively arbitrary.

Token vs Coin

Something to consider is whether a cryptocurrency is a token or a coin. A cryptocurrency coin has its own blockchain. A token is a cryptocurrency that exists on another blockchain. For example, ETH is the coin of the Ethereum blockchain; however, other cryptocurrencies exist on the Ethereum blockchain, such as stablecoins like Tether or USD Coin. Tokens are much easier to create than coins as they don’t require their own blockchain. The ease of creation has led to some scam tokens; however, this doesn’t mean that a cryptocurrency is a bad thing, as it is likely to benefit from being part of a large and secure blockchain.

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    FP Markets

    FP Markets is an Australian regulated broker established in 2005 offering access to Derivatives across Forex, Indices, Commodities, Stocks & Cryptocurrencies on consistently tighter spreads in unparalleled trading conditions. FP Markets combines state-of-the-art technology with a huge selection of financial instruments to create a genuine broker destination for all types of traders.

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