Cryptocurrency New Investor’s Guide
With the recent chaos in the financial markets, both stock and crypto, there’s been a massive influx of new investors to our community. As of the time of me writing, we’re the number 8 fastest growing community on Reddit! I think it’s important that we use this chance to educate our newcomers so that they’ll be better equipped to navigate this often confusing space and hopefully be able to contribute to the discussion in the future.
The objective of this post will be to explain some of the most important concepts that you’ll encounter while investing in cryptocurrency. (I won’t be covering the details of the technology in this post- for that, I recommend 3Blue1Brown’s “But how does bitcoin actually work?” on Youtube. While it’s tailored to Bitcoin, it explains the ins and outs of a basic blockchain.)
SPOT PRICE – This is the price that you frequently see associated with each coin. This is the price that you can expect to buy or sell at and have your order processed immediately. A “Market Buy” will immediately find you the lowest price seller, while a “Market Sell” will find you the highest price buyer. Alternatively, you can place a “Limit Buy” and name a price. For example, if coin X has a spot price of 140USD, you can set a Limit Buy for 135USD. This order will only execute once the price of coin X drops to 135USD or lower. The same applies to a Limit Sell, if the price rises to your chosen price or higher.
CIRCULATING SUPPLY – This is the number of any given coin that has been placed into the open market. Bitcoin, for example, currently has a circulating supply of 19 million coins. This is also the overall supply, as there is no governing body that holds the coin in reserve. Stellar is an example of differing circulating and total supplies; while there are 22.3 billion Stellar Lumens circulating, there are a total of 50 billion in existence. This is because Stellar has a non-profit governing body that holds roughly 27.7 billion Stellar Lumens in reserve to use for development and promotion.
MARKET CAP – This is the overall valuation of a cryptocurrency. Simply put, “Price x Supply = Market Cap”. For example, if coin X has a spot price of 20 dollars and a supply of 20 million, the market cap would be 400 million dollars. This is a better indicator of value than just the price. For example, XLM has a current price of 0.34USD, while AAVE is priced at 301.56USD. This would lead one to believe that AAVE is more valuable overall but 1000x, but it actually has just under half the market cap of XLM (3.7B vs 7.5B) due to vast supply differences. This is the issue with the “DOGE TO A DOLLAR” claim. It looks possible because it’s a 96 cent movement in price, but the reality is that DOGE would have to increase by 125 Billion USD in overall valuation.
VOLUME – The number of coins traded over a period of time, almost always 24h. This is hard to provide concrete examples for, but is something you can get a feel for over time. A very rough explanation of this concept, is that higher volume trading is more representative of an accurate valuation. This is why you may see a coin’s price drift around during off hours, then suddenly snap up or down along with comments in the daily thread saying “Europe just woke up!”
HODL – Long term holding, especially through dips. Running joke in the crypto community, but also good advice.
DCA – Dollar Cost Averaging. This is an investing method where you buy small amounts over a period of time rather than a large amount all at once. This reduces your exposure to short-term volatility and is often recommended during dips.
ATH – All Time High. A new highest price that a particular coin has seen.
KYC – Know Your Customer. A set of regulations from governments that require exchanges to collect information on their customers. This is why you may be asked for your driver’s license or SSN.
DeFi – Decentralized Finance. An ecosystem of permissionless banking, loans, and trading largely based on Ethereum.
CeFi – Centralized Finance. Banking, loans, and trading that require a central authority. Coinbase is an example of a CeFi brokerage, while UniSwap is an example of a DeFi brokerage.
ERC-20 Token – Any of a variety of tokens that are based on Ethereum. Examples include BAT, OMG, etc.
Hardware Wallet/Cold Storage: A method of storing cryptocurrency using a specialized external device that protects your private key from being exposed. You can access this wallet using your Hardware Wallet and PIN, or by putting your recovery phrase into any hardware wallet.
YOU SHOULD KNOW:
-NEVER SHARE YOUR RECOVERY PHRASE. No one with hood inteions will EVER ask you for this. If your recovery phrase is entered into any electronic device other than a hardware wallet, assume you’ve been compromised.
-Do your own research. A lot of people are going to spam you with their favorite coin and pretend it has zero weaknesses. They do not care about you, they are trying to pump their coin.
-Cryptocurrency is an extremely volatile asset. +/-20% days are very common. Don’t panic buy, don’t panic sell.
-Do not invest more than you can afford to lose. The risks and rewards of crypto investing are both massive. On a related note, do not touch margin/leverage unless you are 100% sure what you’re doing. You can and likely will lose MORE than you put in.
-Not your keys, not your crypto. Some exchanges, such as Robinhood or PayPal, allow you to “buy” crypto but don’t allow you to send or withdraw it. You do not own this crypto, you own the right to track the price of their crypto. It is strongly recommended that you use an exchange that let’s you withdraw your coins to an external wallet.
-Our daily threads run 24/7. If you want to bounce ideas around or join in the hype, hop on in. We don’t bite.
-NEVER SHARE YOUR RECOVERY PHRASE.
This is generally a friendly and welcoming community. If you have any questions, please feel free to ask here or in the daily thread and myself or someone else will be more than happy to help you. In the near future, I plan to do this kind of post covering individual currencies. Let me know if you have suggestions or things you’d like to see.
Good luck and happy hodling.