What You Need to Know Before Investing Your First Dollar
In our guide to investing in cryptocurrencies, we explain where to start if you have decided to take your first step.
Before investing money or even forming a strategy, it is crucial to remember that any investment carries the risk of asset loss. Therefore, do not use borrowed funds or money intended for rent payments. Investing requires discretionary capital, the reduction of which will not leave you without means of existence or plunge you into debt.
The cryptocurrency market offers a wide variety of assets and methods for earning on them. However, working with them can be broadly divided into active and passive investments. This is where our journey begins.
Active and Passive Investments: Understanding the Difference and Making a Choice
Active and passive investments represent two opposite approaches to managing assets and generating income.
Active investments imply strong involvement in the process and continuous monitoring of the situation. Passive investments, on the other hand, require spending less time and earning with minimal effort.
However, both approaches start with immersion in the field and careful selection of assets and strategies.
Active approaches involve independently forming and balancing the portfolio, requiring constant attention. In this case, much time needs to be spent monitoring the market, news background, and so forth. Income is generated through trading. Active investments operate in the short term, as earnings are based on identifying opportunities for profitable buying and selling without long-term asset holding in the portfolio. Such investors need to achieve returns above the market rate.
The potential profit of active investments in the short term is greater than that of passive ones. However, that may change in the long term.
Passive investments focus on minimal effort and time spent on portfolio rebalancing. Investors choose solutions that allow them to be minimally involved in managing their finances. Various approaches are used, including long-term asset purchases and investments in products with passive interest income.
The goal of passive investments is to minimize effort and maximize profit.
Let’s examine the differences in your involvement in the process between active and passive investments using the example of a chicken farm.
What does an active chicken investor do?
They buy land for the farm, build it, select each chicken, care for the birds, collect eggs, and go to sell them at the market. The investor spends a lot of time and effort to earn from the eggs and organizes all processes themselves.
What does a passive chicken investor do?
They buy an already built farm with a ready-made chicken family. A hired worker takes care of the chickens, who then hands over the eggs for sale at the market. The investor simply chooses the right farm and waits to receive their share of the profits.
Types of Active Investments
Active investments can be categorized based on asset types and trading strategies.
Assets can be divided into two categories:
- Underlying asset — a regular asset in its original form. For example, Bitcoin, Ether, and so on.
- Derivative asset — a financial instrument whose value depends on changes in the value of the underlying asset. Derivative assets include instruments such as options, futures, and so on.
Options are instruments that grant their holders the right, but not the obligation, to buy or sell an asset at a specified price at a certain point in time or within a specified period.
When buying an option, you obtain the opportunity to execute a transaction, but not the asset itself. The asset is bought or sold separately. This is not the simplest instrument, as it requires in-depth study and practice. You can learn more about options in our material.
Futures are contracts between two parties, where one party agrees to buy and the other party agrees to sell a specific amount of an asset at a predetermined price at a certain point in time in the future.
The difference between futures and options is that an option does not require the buyer to purchase the asset; only the seller is obligated to execute the transaction upon the buyer’s request.
Trading strategies can be associated with different levels of risk and, consequently, income.
As always, the ironclad rule applies: the higher the income, the higher the risk.
Beginners are normally not advised to start with trading risky assets. Active trading requires knowledge of both the industry itself and specialized tools for calculations and forecasting. You can easily lose your entire budget by betting on the wrong moments or getting into debt due to margin trading.
Do not use borrowed funds in the early stages of becoming an investor. This is extremely dangerous, as not only potential profit multiplies but also the potential loss that you may incur.
If you want to play the lottery with risky assets and buy altcoins that potentially can bring hundreds of percent, allocate a budget for this that you are willing to lose, so that you won’t get too stressed.
Types of Passive Investments
There are many variations of passive investments in the crypto market. They differ in assets and methods of earning yield. There are options to suit every taste, preference, and minimum investment amount.
A detailed analysis of passive income methods in the crypto industry can be found in our material. For now, let’s consider a brief overview of the products.
Long-term Trading
You buy an asset with the goal of selling it when the price rises to a certain value. You don’t need to constantly monitor the market and react to fluctuations because you have long-term goals.
For example, you buy Bitcoin for $45,000 and wait for it to rise to $65,000. You place a limit order for sale and proceed with your day-to-day.
With active investments, you would constantly monitor the market and try to guess the best moments to buy and sell Bitcoin.
Yield Farming
Farming involves providing cryptocurrency to a liquidity pool on a decentralized exchange in exchange for LP tokens. By supplying assets to the exchange for quick operations, it shares commissions with you. This is called providing liquidity.
LP tokens represent your share in the pool. A portion of the fees for operations in the pool is credited proportionally to this share.
A currency pair is sent to the liquidity pool. That is, you are using not one asset, but two at once.
LP tokens are not idle. They can be sent for staking (temporarily frozen to receive even more rewards). On some exchanges, this process is seamless, and there is no need to obtain LP tokens and then stake them additionally.
Liquidity Mining
Liquidity mining is very similar to farming. By using it, you also send assets to a pool to provide liquidity, but this method is usually available on centralized exchanges.
Also, in liquidity mining, you can use a single cryptocurrency instead of a pair. The exchange shares a portion of the commission proportional to your share in the pool.
Staking
Staking is the process of maintaining the operation of a network with a Proof-of-Stake consensus algorithm.
With LP token staking, it has a similar mechanism. LP tokens are not used to support network operations but are simply locked in a wallet in exchange for rewards.
The essence of staking is that you either lock assets yourself or delegate them for staking in exchange for an annual percentage yield on the investment amount.
Staking comes in several types:
Direct. You become a validator, someone who holds coins, verifies transactions, and adds new blocks to the blockchain. You don’t need to do this manually; you need to correctly set up a computer and lock assets in a wallet to turn it into a node. This option is the most technically challenging in terms of technical expertise and equipment preparation.
Delegated. You don’t become a validator yourself but only lock assets, transferring the network maintenance work to validators. Delegated staking is divided into subtypes depending on how many assets you lock.
Let’s take Ethereum, for instance.
For Ethereum staking, you need to lock up 32 ETH:
- With direct staking, you set up a node and lock ETH in your wallet. All complexities fall on your shoulders;
- You can lock up 32 ETH but not set up a node yourself; instead, you can delegate them for staking, and network maintenance will be done on your behalf, but not with your equipment;
- You can lock only a part of your ETH, not necessarily the whole sum of 32 coins, by working through a pool where other people also send their assets, and validators work for all of you and share the rewards.
Cloud Mining
Cloud mining is mining without buying equipment and maintaining a mining farm. It works through renting others’ computing power. You purchase access and receive a percentage of the mined coins.
Unfortunately, this convenient method is associated with a high risk of encountering scammers.
Referral Programs
Referral programs provide an opportunity to receive one-time rewards and passive income from referred users. Usually, exchanges share a portion of the trading fees from referrals.
On Bitbanker, you can receive 30% of the commission from invited users for a year, as well as other bonuses when the referral meets certain conditions.
NFT
NFTs are not only tokenized images that can be resold but also assets that can generate passive income.
NFTs can be:
- Staked;
- Sent to a liquidity pool;
- Rented out through Play-to-Earn projects;
- Issued and received royalties from their resale.
Testnets
A testnet is the launch of a test version of the network. For participating in testing, projects may reward participants with native tokens of the blockchain or NFTs.
You can test the interface and system operation, and by creating a node, participate in blockchain operations. In the latter case, the income will be passive, as the computer will work almost without your intervention.
Not all projects pay for participation in such activities. This should be taken into account because you may help but not receive any profit.
For beginners, this is not the easiest activity, but once you understand the topic, you can try it out.
Hard Forks
A hard fork is a significant change in the operation of a blockchain, where the old version is incompatible with the new one. If the community does not come to a consensus on innovations, a split occurs, resulting in two independent blockchains with their own coins.
Holders of the original cryptocurrency can receive an equivalent amount of coins in the new network.
You can profit from a hard fork by buying currency before the update. If a split occurs, you will receive new coins. However, this method does not guarantee a 100% result.
Retrodrops
A retrodrop is distribution of cryptocurrency to reward users for their participation in it at a certain moment in the past. For example, if you traded on a new exchange and after launching its token, it may give you some of its currency. Blockchains also do this for conducting transactions. There are many retrodrops variations.
Retrodrops work in the long term and do not always yield results because the conditions for receiving rewards are announced when it is too late to participate. In other words, you perform a specific action once and wait to see if you will be rewarded for it.
Retrodrops are a type of airdrop. Other formats often involve performing more actions and usually do not reward participants as generously.
Token distribution is like a lottery. To participate successfully, you need to delve deep into the subject and search for projects with the potential for a drop.
Dividends
Dividends in the crypto industry work similarly to those in the stock market. When buying and holding assets in a wallet, the project credits a portion of the profits or fees.
There are not so many projects like this, and the risk of not receiving dividends as promised can be too high.
Lending and Deposits
Lending and deposits involve providing assets to the platform for issuing crypto loans to other users in exchange for an annual percentage yield.
The mechanism is similar to that of a regular bank. You provide money, and they are lent out to others at a higher interest rate than what you receive.
On Bitbanker, you can open a USDT deposit with up to 8% annual returns.
Investment Products
Investment products are ready-made solutions for asset investment. The platform forms a strategy, selects assets and ways to earn on them, and pays you a portion of the profits.
Investment products can either be a strategy with delegated management of your assets or the purchase of a ready-made product. In the latter case, earnings may not be based on the same asset you invest in but on another.
For example, you purchase a product with earnings based on the Bitcoin rate against USDT. After the term expires, you will receive profits in USDT, not Bitcoin, which was used to generate income.
Investment products are an easy way to earn on various assets without having much experience and without spending your time. All you need to do is choose a product and wait for the profit.
On Bitbanker, you can choose a balanced investment product with varying degrees of risk and return.
Formation of Initial Capital and Goals
Before you start making a plan and choose an asset, you need to determine your goals. You should have a fairly clear understanding of what you expect from your investments and what results you intend to achieve.
For example, you may set a goal to increase your portfolio to $10,000.
Now you need to understand how much you are willing to allocate for initial capital. Let’s assume it’s $1,000. It’s also important to consider the availability of additional investments. Suppose you don’t plan to invest anything more and want to increase your initial capital to $10,000 solely through profits.
Determining Risk and Return Levels
The goal is set, and the initial capital is allocated. Now it’s time to set deadlines. However, it’s not that simple. You can’t randomly give yourself a time frame to achieve your goal because the timeframe will depend on your risk tolerance.
Normally, the higher the risk, the higher the potential return and, under ideal conditions, the less time spent. In theory, you can increase your initial capital tenfold by buying a single coin that skyrockets in a week, but the likelihood of success will be extremely low because it’s a 900% increase. Moreover, you need to buy and sell at the right time without wiping out your portfolio. Such investments are like a lottery. You can play it, but you should be prepared to lose money.
The timeframe for achieving your goal directly depends on the risk. If you don’t want to lose everything, it’s better to slowly and steadily increase your capital with instruments and assets with low or moderate risk. This is especially important in the initial stages, while you haven’t become an expert yet.
By setting boundaries for yourself regarding risk, you can also determine the level of return, as it will allow you to calculate the time it will take for your investments to yield the desired profit.
Building an Investment Plan
An investment plan is needed for the prudent formation of a strategy. When constructing it, it is important to consider:
- Approach to investing (active, passive, or mixed);
- Initial capital;
- Goals;
- Instruments;
- Timeframes;
- Potential returns;
- Diversification frequency;
- Risk level;
- Portfolio status checking frequency.
Naturally, there can be a vast number of approaches to composition, as well as variations of elements considered.
Let’s consider two brief plans as examples. The first one will be for active investments, and the second one for passive investments.
Plan for active investments:
Initial capital — $1,000
Goal — $10,000
Instruments — scalping (high-frequency trading of an asset within a single day. In scalping, the trader closes all orders within the day);
Timeframe — one year;
Potential return — 1% per day;
Risk level — high;
Diversification frequency — once a week;
Portfolio status checking frequency — daily.
With this plan, earning 1% daily, $1,000 can be turned into $10,000 in 233 days. The risk will be extremely high as there might be drawdowns, and the capital may need to be recovered.
Scalping will require a lot of time since you’ll need to constantly monitor the market and frequently execute trades. Additionally, you need to select assets that will allow you to achieve such a percentage. Also, don’t forget about commissions, as they will eat up 0.1-0.15% of the transaction amount.
Plan for passive investments:
Initial capital — $1,000;
Goal — $10,000;
Instruments — staking, lending, investment products, farming;
Timeframe — five years;
Potential return — 61.5% per year;
Diversification frequency — once a week;
Risk level — moderate;
Portfolio status checking frequency — once a week.
When risks decrease, potential returns decrease as well. It will take much more time to achieve the goal, but the probability of losing money will be lower.
In reality, even achieving 61.5% annual returns won’t be easy if you don’t want to invest in risky products. Let’s consider a similar case.
On PancakeSwap, you can stake LP tokens of the USDT/ETH pair with a potential return (APR) of 69.53%. It looks attractive, but where are the pitfalls?
Firstly, remember that the percentage can change. Secondly, don’t forget about currency exchange rate fluctuations. There shouldn’t be a problem with USDT, but ETH may depreciate. It’s important that the decline in the exchange rate is covered by the staking yield; otherwise, it won’t make sense.
Also, remember that there will be a fee for operations involving adding and withdrawing funds from the pool.
How to Invest in Cryptocurrency with Minimal Risk. The Safest Strategies
In the examples with the investment plan, we have considered strategies that are quite complex and risky for beginners. They can bring decent income, but the probability of approaching trading incorrectly, choosing an unreliable pool, or a decrease in asset prices can become an insurmountable challenge.
It is best to start your investor journey with safe instruments.
Let’s discuss which assets and tools are associated with minimal risk.
First and foremost, stablecoins are considered the most secure asset because their price is protected from volatility. The exchange rate may fluctuate by a few cents, which practically does not affect the portfolio.
The top 3 stablecoins at the moment are USDT, USDC, and DAI. USDT is the most popular among them, with its daily trading volume surpassing even Bitcoin and Ethereum.
What can be done with stablecoins:
- Use for staking.
- Send to liquidity pools.
- Use for lending and deposits.
Moreover, pools can consist entirely of a stablecoin pair, for example, USDT/USDC. Naturally, the profitability will be lower than with investments in volatile coins, but this way, you protect yourself from a decrease in the exchange rate.
On Bitbanker, you can find two products for earning on stablecoins:
- Deposits with income up to 8% per annum.
- Investment product “DeFi Investments” with a target yield of at least 10% per annum.
As for active investing, in any case, there will be a risk. If you trade volatile assets, it is difficult to avoid the likelihood of losses when the exchange rate decreases. Therefore, it is best to choose a strategy that lies between active and passive investments — Dollar-cost averaging. This is purchasing an asset for a fixed amount at certain intervals.
This approach helps to avoid the need to search for entry points and to average the cost of the asset.
For example, you buy Bitcoin once a month for $100, regardless of its exchange rate. As a result, you get an average cost.
Averaging helps simplify the investment process, eliminate the influence of emotions when making decisions, develop a clear strategy, and reduce risk.
To protect against market volatility and earn regardless of the trend, there are investment products based on option contracts.
Bitbanker offers a product for investing in Bitcoin and Ethereum called “Capital Protection“. It provides protection against losses when the Bitcoin exchange rate decreases due to compensation under an option contract and generates income when the Bitcoin exchange rate rises.
If the rate decreases, you receive the difference in rates as compensation, and the initial investment amount does not change. If the rate increases, you earn on the difference in rates.
You can learn more about the mechanism used in the product in our article.