Common Cryptocurrency Questions and Basic Tips For Beginners

Cryptocurrencies are no doubt one of the hottest topics right now. Since March 2020, more and more people are getting familiar with words like “Bitcoin,” “Ethereum,” and “blockchain.” However, there are still some common cryptocurrency questions and misconceptions that I’m sure plague many beginner investors. 

Today, let’s try to answer most of those crypto questions. Along the way, I’ll also leave some tips which might help you be a more informed investor. Before we begin though, make sure you read and understand our previous article so you won’t get lost among the terms! 

Note: All views expressed in this article are merely opinions. They SHOULD NOT be taken as financial advice. 

Understanding the concept

Why are cryptocurrencies valuable?

This is easily one of the most common cryptocurrency questions of all.

The value of a cryptocurrency can be influenced by several factors depending on the crypto in question. 

For example, Bitcoin’s value is mostly derived from the fact that it has a finite supply (21 million). It is like digital gold but with potential real-world applications. Ethereum on the other hand represents an innovative new kind of Blockchain networking technology that facilitates financial transactions, and more. 

Most importantly, cryptocurrencies are a new hedge against inflation. With traditional commodities like gold and stocks being dominated mostly by huge institutions, many retail investors (people like us) view cryptocurrencies as an alternative way to safeguard our finances. 

Are Bitcoin and other forms of crypto “real money”?

Different people will give you different answers depending on whether or not they LIKE cryptos. However, there are real-world applications for cryptocurrencies. For one, Bitcoin is now legal tender in El Salvador and can be used to purchase items.

Buying McDonald’s with #bitcoin in El Salvador 🇸🇻 pic.twitter.com/Jqptj4r4f0

— Bitcoin Magazine (@BitcoinMagazine) September 9, 2021

In that sense, you could say that cryptocurrencies are (or have the potential to be) real forms of money, just not in the conventional sense we are used to. 

Basically, since most cryptocurrencies run on a P2P concept (ie direct transaction between two parties without a bank, for example), cryptocurrency can be considered “real money” for people who see value in it. 

Also read: Asian and European Hotels Are First to Accept Cryptocurrency for Bookings

Is cryptocurrency legal?

This is one of the tougher cryptocurrency questions to answer. That’s because there are many frameworks in which you can use to determine if something is legal or not. 

However, the best answer I can think of is that most cryptocurrencies are not viewed as legal tender in most countries. The main reason for that is because cryptocurrencies do not leave any paper trails so it may be hard to track what cryptos are being used for. 

That being said, investing and trading in cryptocurrencies is legal. For example, Malaysia recognises Luno as a legal and licensed cryptocurrency exchange in the country. 

What makes cryptocurrency a viable investment as opposed to other traditional kinds of investments (stocks, real estate, etc.)?

The one major difference between cryptocurrencies and stocks, for example, is functionality. We’ve already discussed the possible (albeit currently limited) ways in which you can use cryptocurrencies in exchange for goods and services. 

You can’t, for example, walk into McDonald’s in El Salvador and try to trade a unit of Tesla stock for a Big Mac. But with Bitcoin, you can. 

Another factor is longevity. Blockchain technology is quickly becoming the go-to technology for many fields, be it cybersecurity, art production, and even gaming. What’s more, cryptocurrencies are viewed as a (SLIGHTLY) more even playing field than stocks, which are often dominated by big brokers on Wall Street. 

Who controls cryptocurrencies?

Define “control.” If you’re talking about control as in regulation like a central bank, then the answer is “no one.” That being said, governments CAN enact laws regarding cryptocurrency exchanges. 

However, if you mean “control” as in manipulating the price of cryptocurrencies, then, unfortunately, yes, there is a small group of investors that has the ability to indirectly influence the market. We call these investors “whales” because they often hold a large number of a particular cryptocurrency. 

While having a lot of Bitcoin does not give you the power to dictate its value, a whale can take certain actions that can cause the price of Bitcoin to rise or fall. For example, if a whale that holds 100,000 Bitcoins suddenly decides to sell ALL of their holdings, it will spark panic in the market and will likely cause massive price fluctuations. 

Why do cryptocurrencies increase and decrease in value so quickly?

Cryptocurrencies are extremely volatile. I’ve personally seen an $8,000 fluctuation happen within just seconds! It’s difficult to explain precisely why this is the case, but there are several factors. 

For one, cryptocurrencies are a relatively new form of commodity. What makes them different is that there is currently no official way to regulate cryptocurrencies. That is, after all, what makes them a valuable investment. 

However, this also makes the crypto market one that is easily spooked. For example, should a major financial institution suddenly announce sanctions against a cryptocurrency, it is likely to cause a massive sell-off. 

Another important issue to note is that the value of cryptocurrencies is often speculative. It is valuable because investors THINK it is valuable. It is not pegged against any real-world commodity or currency. That’s why price movements can be so extreme and sometimes seem out of control. 

Cryptocurrency questions before investing

Is investing in cryptocurrencies the same as gambling?

It isn’t. Or at least, it shouldn’t be. Unfortunately, the association with gambling is often a result of unsound investment strategies. 

The key is to build long-term wealth through investment. Sadly, most newbies try to chase wealth. So instead of investing at a good price, they FOMO into buying cryptos when the price is in the midst of a rapid increase, and quickly sell whenever the price starts falling down.

There’s always an element of risk in investing, regardless of what you’re investing into. A good way to mitigate your risk is to diversify your portfolio and to employ good strategies. 

Will cryptocurrencies definitely make me rich?

It can, but most likely it won’t. 

Apart from price fluctuations which can be extreme in the crypto space, there’s also the misconception about “unearthing the next big thing.” Not every coin/token you see is going to be “the next Bitcoin” and overnight success stories are pretty rare these days.  

Instead, investing in cryptocurrency is a patient process that yields results in the long run. As long as you invest cautiously and consistently, you will more than likely be able to increase your wealth over time.

Do I need to be super-rich to invest in cryptocurrencies?

Not at all. Take Bitcoin for example. Some people think you’ll have to buy an entire Bitcoin, which is worth around $45,000 at the time of writing. 

However, the reality is you can simply buy smaller fractions of a bitcoin, such as 0.1 or even 0.01 Bitcoin (also known as Satoshis). 

I’ll let you in on a secret, the super-rich Bitcoin investors of today actually started out by buying small amounts of Bitcoin and accumulating during the bear market! 

When is the best time/price to invest in crypto?

Now. One of the biggest mistakes beginner investors make is trying to catch the price at its lowest point. Because of how volatile cryptocurrencies are, you probably will never be able to find the “perfect” moment to invest. 

Instead, the best strategy is dollar-cost-average investing. Buy a little bit now, and if the price drops, buy more to push down the average cost of your investment. That way, you’ll be able to turn a profit much quicker. 

How much should I invest in cryptocurrencies?

Not your life savings! I cannot stress this enough. Despite the fact that cryptocurrency investment has the potential to offer generational wealth for some people, you should never put all your savings into it. 

While it differs from person to person, a good number to start is to allocate 10% of your savings (not income) to crypto investments. From there, you can adjust based on your risk appetite. 

Investing (be it crypto or otherwise) should never get in the way of daily life. If you have to eat bread throughout the day just so you have money to invest in crypto, you’re doing it wrong. 

How do I buy cryptocurrencies?

There are different ways to buy cryptocurrencies. However, the best and safest way is to do so using a cryptocurrency exchange that is verified and licensed in your country. 

For example, in Malaysia, it would be Luno; in Singapore, it would be Binance; and PDAX (among others) in the Philippines. 

Make sure the exchange you are using to buy cryptos is licensed by your country’s relevant authorities! 

Common cryptocurrency questions for crypto owners

Can I use any of the cryptos I own?

Yes! Apart from what we’ve mentioned above, you can also use cryptocurrencies to buy and own digital art. 

Known as NFTs (Non-Fungible Tokens), these limited-supply digital art pieces are one of the hottest things right now in the digital sphere. Anything can be an NFT, custom JPEG profile pictures, an original song, and even tweets! 

Is there a tax for cryptocurrencies?

At the time of writing, there is no particular law that deals with taxation when it comes to cryptocurrency in most countries. 

In Malaysia, I actually checked with LHDN (our version of the IRS). Basically, if you’re investing long-term and treating cryptocurrency as passive income, you will not be taxed. However, if you’re actively trading cryptocurrencies on a daily basis, then yes, a tax will be levied on you based on your profit/loss. 

Is investing in cryptocurrencies the only way to make money?

No, but in my opinion, it is the safest. Rather than investing, you also have the choice of trading and staking cryptocurrencies. 

Trading is quite self-explanatory. Just like stocks and foreign currency, cryptocurrencies can be traded on the market. The difference is that cryptocurrency markets are open 24 hours a day, seven days a week. This means that there is no “downtime” when you’re actively day-trading. 

Staking, on the other hand, is kind of like generating passive income using cryptocurrencies that you own. Essentially, you are “locking” your cryptocurrency for a certain period of time and accumulating interest along the way. One of the reasons staking is a thing is to protect the various networks. 

How can beginners tell if a crypto token has merit or is a scam?

Now that cryptocurrency has become a semi-mainstream thing, an important subject to discuss is legitimacy. It is incredibly easy to create your own cryptocurrency, promote it, and strike a deal with an exchange like Coinbase to list it for trade. 

With so many random “shitcoins” around, it’s easy to invest in something that has no inherent value. This is bad because some creators will do their best to promote their coins and then immediately sell everything (rug pull) when the moment is right. 

That’s why, before you invest or buy anything, do your due diligence and read up on the project. 

Look out for White Paper publications and endorsements by major financial institutions or commercial entities. By the way, Elon Musk does not count as either of those. 

Finally, check the market cap and supply limit. If it’s a cryptocurrency that appears limitless but claims to be able to reach insane levels of value, then be very careful and skeptical. More than likely, it is a rug pull waiting to happen.

Invest safely!

And, there you have it, some of the most commonly-asked cryptocurrency questions. Got a question you’re dying to ask about the topic? Let us know! 

More importantly, if you’re planning to invest, please do so cautiously and do your own research! Again, nothing in this article should be taken as financial advice!