Best Cryptocurrencies to Invest in 2024

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How Cryptocurrency Investments Work and What Risks Are Involved

Cryptocurrency is an asset whose issuance is not controlled by a central bank or other regulatory authority. It has no physical form and exists only in digital format. The issuance and accounting of cryptocurrency are carried out through a decentralized system of algorithms. Cryptocurrencies can be created by companies, organizations, and even individuals.

Cryptocurrencies operate based on blockchain technology, which is a distributed network of interconnected computers used for encryption and storage of data. Essentially, blockchain is a database that records all transactions.

Cryptocurrency is used for savings and investment purposes but is not widely accepted as a medium of exchange. Currently, there are more than 10,000 cryptocurrencies in the world. Apart from Bitcoin, the most popular ones include Ethereum, Tether, Ripple, Litecoin, and Dogecoin.

How Cryptocurrency Value is Determined

The value of cryptocurrency is subject to significant volatility. The price is influenced by the following factors:

  • Transactions and statements by major investors in cryptocurrency.
  • Actions and statements by regulatory bodies.
  • Changes in the infrastructure supporting cryptocurrency trading.
  • Changes in the market for mining equipment.

Primarily, the price of cryptocurrency depends on market conditions and trends. The trend is determined by the sentiment of the community and can be upward, sideways, or downward. During an upward trend, many issues become insignificant in terms of affecting the cryptocurrency's price. Conversely, during a downward trend, even a small problem in the market can have a significant impact on the price.

Since the cryptocurrency market has a high proportion of retail investors, it is characterized by high emotional involvement among participants. This is a unique feature of the cryptocurrency market. Cryptocurrencies react to almost everything – from macroeconomic factors, mostly related to US monetary and credit policy, to technical news about advancements in technology or blockchain system hacks, and even rumors and jokes by Elon Musk about Dogecoin.

Is It Worth Investing in Cryptocurrency and What Are the Risks?

Due to the high volatility, cryptocurrency is considered a high-risk investment. There is a possibility of losing a significant portion of your funds when investing in cryptocurrencies. Therefore, investors in the cryptocurrency market should have an aggressive risk profile. They must be willing to accept the possibility of losing their entire investment capital in exchange for potential significant future profits.

Large funds often hedge their positions by purchasing cryptocurrencies because digital assets do not always correlate with other markets. This includes some large pension funds, which are traditionally conservative.

The global interest in cryptocurrencies is driven by the growing demand for alternative financial instruments and the overall democratization of the global financial system.

The most significant cryptocurrency is Bitcoin, which accounts for about 50% of the total market capitalization of all cryptocurrencies. It has the highest value and the longest history, making it a key indicator of the cryptocurrency market's movements. Ethereum is the second most significant in terms of market capitalization and importance among investors.

The most popular cryptocurrencies among investors, which have gained recognition within the community, include Bitcoin, Ethereum, Binance Coin, Ripple, and Cardano. These coins are often chosen by institutional investors. However, there are also young projects that manage to attract market participants' attention. Investors allocate a small portion of their investment portfolio to these altcoins with the expectation of higher returns. Investing in such altcoins can be compared to investing in startups. Approximately 90% of startups fail, 10% survive, 5% establish themselves in the market, and only 1-2% achieve significant success.

Potential Returns on Cryptocurrency Investments

The price of cryptocurrency can change rapidly and dramatically. It is possible to earn profits on cryptocurrencies. If we consider funds, their returns can reach 100-300% per year over a four-year cycle. However, it is also possible to lose all investments due to cryptocurrency price declines or wallet hacks. Hacking a wallet is not easy, but such a risk exists.

On the cryptocurrency market, it is possible to earn 10,000% in a year, but it is also possible to lose all investments entirely. There is no limit to growth or decline. Many altcoins lose up to 99% of their value, while others can skyrocket into the top 10 by market capitalization within a couple of months, starting from almost zero.

How Cryptocurrency Investments Work

There are several ways to invest in cryptocurrency:

  • Buying cryptocurrency: You can purchase cryptocurrencies on one of the cryptocurrency exchanges. Another option is to participate in an initial coin offering (ICO) to buy new tokens.
  • Mining: This involves the process of creating new cryptocurrency and earning new coins. By solving specific tasks in the blockchain, a new block of transactions is created, and virtual coins are emitted.
  • Affiliate programs: This is a way to earn cryptocurrency by collaborating with a cryptocurrency exchange, cryptocurrency exchange platform, cloud mining service, or ICO project. The platform rewards you for attracting new investors. The payment can be fixed or based on the size of transactions made by new participants, such as a percentage of the transaction fees.

It's important to note that investing in cryptocurrencies carries risks, and it's essential to conduct thorough research, understand the market dynamics, and be prepared for potential losses. It's advisable to consult with a financial advisor before making any investment decisions.

DeFi Investments 

DeFi (decentralized finance) – financial instruments in the form of services and applications created on the blockchain. DeFi offers various services to customers using cryptocurrencies. For example, an investor can lend coins at high interest rates, a method known as "yield farming."

The choice of investment method in cryptocurrency is individual. An investor can rely on fundamental analysis and their own research. This can involve searching for undervalued assets that may become trending and grow, or it can involve working with young projects.

One approach that may suit an investor is to work with cryptocurrencies in a way that they find more understandable. Mining cryptocurrency requires significant investments (starting from $10,000). Affiliate programs are suitable for those who enjoy understanding blockchain projects and testing DeFi beta versions.

Key Risks and Ways to Minimize Them

When choosing an investment method, each investor should consider their own investment goals and familiarize themselves with local regulations.

When investing in cryptocurrency, it's important to be aware of the risks involved.

Key risks include:

  • Cryptocurrency price volatility.
  • Legal risks associated with regulatory actions (such as cryptocurrency bans in certain countries).
  • Hacking attacks and fraudulent activities.
  • Inability to reverse erroneous cryptocurrency transactions.

The most effective way to minimize risks is through portfolio diversification.

Regulation of Cryptocurrency

Different countries regulate cryptocurrencies through various legal acts. The issue of cryptocurrency market operation is not regulated worldwide, so cryptocurrency does not have a definitive legal status. However, there are exceptions. For example, Bitcoin has been recognized as legal tender in El Salvador, and Nigeria has implemented a digital currency by its central bank (CBDC).

Due to the lack of effective regulation in the market, events such as the collapse of one of the largest cryptocurrency exchanges, FTX, and the collapse of the Terra cryptocurrency project, whose two coins were in the top 10 by market capitalization, have occurred. To avoid such problems in the future, the market needs transparent regulation with evolving rules.

Pros & Cons of Investing in Cryptocurrency

Pros:

  • Low entry barrier
  • High transaction speed

Cons:

  • High volatility
  • Risk of complete loss of funds
  • Lack of regulation
  • Lack of security guarantees

The main advantage of cryptocurrency investment is the potential for high returns. It also offers a low entry barrier and complete control over the cryptocurrency for the owner. Another benefit is that cryptocurrency becomes an additional tool for diversifying an investment portfolio.

The cons are directly related to the pros. The flip side of high profitability is high volatility. And the complete control the owner has over the cryptocurrency also means full responsibility for its security.

For effective cryptocurrency investments, it is necessary to assess the risks involved and follow a clear plan. The steps may include studying the cryptocurrency market, educating oneself about cryptocurrency investment, defining investment goals and acceptable risk levels, forming an investment portfolio and diversifying it, ensuring the security of savings, and following the chosen strategy while actively monitoring the market.