It might feel like you’ve missed the boat if you’re still not investing in cryptocurrency in 2022. Every time you hear about someone who’s earned thousands (or in some cases millions) from their investments, you probably feel a pain in your chest from all that missed opportunity. But while it can seem like the probability of being able to profit as a newcomer drops with every second you hesitate, most people involved in the crypto world would agree that things are barely getting started.
At the start of 2021, many people were questioning whether the crypto market would crash; instead, we’ve had all kinds of surprises, from the first bitcoin ETF to the dogecoin spike (and then the shiba inu spike) to bitcoin being made legal tender. Arguably, we’re approaching an era where cryptocurrencies are beginning to prove that they’re more than just speculative assets forever destined to be at loggerheads with the conventional financial status quo.
To get you up to speed with what you need to know before you consider getting involved with cryptocurrencies, I’ll cover (also check out this post on 11 things you should know before investing in cryptocurrency):
- What cryptocurrencies are and how they work
- The risk of cryptocurrency investment
- How to get started investing in cryptocurrency
- Top cryptocurrencies for 2022
What Are Cryptocurrencies?
Unless you're a complete beginner, you might be thinking, “it’s 2021 — of course, I know what cryptocurrencies are.” But unless you can give a confident explanation of how they work, it’s best to be humble and ensure you’re properly clued up before you start investing too much money. Most people trade cryptocurrencies based on hype and price predictions rather than a fundamental understanding of the technology and applications, and that’s why many of them go wrong.
Two of the most fundamental concepts to understand are the blockchain and different consensus mechanisms.
The words “cryptocurrencies” and “blockchain” tend to come together, and that’s because cryptocurrency protocols are built on the blockchain. A blockchain is effectively a database that stores all data related to transactions in a chain of blocks. Usually, new blocks are formed when new transactions take place, and all this happens without a third party. Instead, users or computers from around the world verify transactions.
However, this process works slightly differently on different cryptocurrency protocols. For example, some projects have a public ledger where everyone can see all transactions, and others are more private.
To complicate things further, we’ve now started to approach a post-blockchain era in which cryptocurrencies and associated technologies actually don’t use the blockchain. But this is way too advanced for the purpose of this article, so I’ll leave it for a couple of years before I cover it.
Proof-of-Work vs. Proof-of-Stake
Even if you don’t know much about cryptocurrencies, you’ve probably heard that bitcoin involves “miners.” This has attracted a fair bit of attention due to claims that the mining process requires too much power and is bad for the environment — to break the increasingly difficult cryptographic riddles, increasingly powerful GPUs are needed.
This is known as a “proof-of-work” framework: miners are competing to validate transactions by mining. But not every cryptocurrency relies on mining to function.
A popular alternative is proof-of-stake: instead of users competing, they verify transactions at random and are incentivized to be honest by staking, meaning they lose collateral if they attempt to cheat the system.
Most cryptocurrencies use one of the two to validate transactions, but there are a few alternatives we won’t get into here.
Is It Risky To Invest in Cryptocurrency?
Most people get put off the idea of investing in cryptocurrency because they’re worried it’s too risky. What if the world suddenly decides that crypto is worthless and just a massive speculative bubble, meaning we have a situation akin to the dot com crash and you lose your entire investment?
I’m not going to tell you that there’s no risk to investing in cryptocurrencies, because that’s blatantly not true — but there’s good reason to think that they’re going to stick around for a while.
For a while, cryptocurrencies have played the role of “challengers” to the traditional finance system, but 2021 has seen a lot of signals that they’re finally being recognized and adopted by the old guard.
87 countries are now at some stage of research or development of a central bank digital currency. The first bitcoin ETF was launched in 2021 (meaning that we can now expect to see crypto in traditional investment products). Various financial institutions or payment processors are now researching or adopting cryptocurrencies, including Goldman Sachs, JP Morgan, PayPal, and CashApp.
So, in summary: yes, cryptocurrencies still carry more risk than more established assets with longer histories, like real estate and index funds. But we’re not talking about a crazy level of risk in the crypto world — there are plenty of signs that cryptocurrencies are going to be around for quite some time.
How To Start Investing in Cryptocurrency
If I’ve convinced you that investing in cryptocurrency is maybe worth the risk, after all, you still have a major hurdle ahead of you: getting started. First of all, you’ll need to pull together some money, so if you’ve come into a windfall or have some spare cash, that’s a great place to start.
But what about the rest?
It might sound easy enough to buy a cryptocurrency, but it involves four steps that are all rather complex in their own right — you’ll need to choose an exchange, a wallet, a trading strategy (which can be as complex or as simple as you want), and the cryptocurrency you want to invest in.
Let’s look at each one in turn.
To buy a fund, you go to a broker or trading app. Similarly, you need to head to an exchange to buy bitcoin or other cryptocurrencies. But make sure you choose wisely — consider factors like transaction fees, security processes, and insurance funds (money put aside to refund users if they get hacked).
If you’re a complete beginner, Coinbase is one of the more accessible options thanks to its user-friendly interface and educational resources. However, it comes with a price — Coinbase also has some of the higher fees on the market.
If you’d prefer to venture elsewhere, other popular exchanges include:
This is where the processes of buying cryptocurrencies versus other investment assets start to really diverge. Although you can keep your crypto investments sitting in an exchange, it’s far better to transfer them to a wallet for better security.
If you end up buying your crypto on Coinbase, you’ll be pleased to learn that the exchange has its own wallet, which is an excellent option for maximum convenience.
However, if you want to maximize your security, you might want to consider what’s known as a “hard wallet” instead. While soft wallets like the Coinbase wallet store your crypto online, where you can access them from anywhere, hard wallets store your private key (used to log into your wallet) on a physical device.
A hacker can access your digital files far more easily than a physical hard drive placed in a safe in your house, making hard wallets much safer.
The Right Trading Strategy
There’s more than one way to invest in cryptocurrencies. Some investors like to HODL (like holding, but the crypto version) over the long run, while others try to ride the highs and lows by actively trading over the short run. Make sure you get clear on what you’re trying to do before you start buying crypto.
If you want to trade over the long term, the best thing you can do is ensure you understand the technology behind the cryptocurrencies you’re investing in and keep up with industry news. Cryptocurrency whitepapers and news sites like Coindesk are great resources.
On the other hand, if you want to trade over the short run, you’ll have to get more familiar with chart patterns. This can get quite advanced and complex, but two patterns bitcoin beginners should get familiar with are the “flag” and the “pennant,” both of which suggest that price increases or decreases could continue.
Once you have all of the above sorted out, you can start to think about perhaps the most important question of all: which cryptocurrency you should choose. We’ll get to that now.
Top Cryptocurrencies for 2022
I recommend doing your research and coming to your own conclusions when deciding which cryptocurrencies to invest in. Still, there’s no harm in seeing the recommendations made by others before making the final call yourself.
While it can be a good strategy to invest in cryptocurrencies that are early on in their journey to maximize your earning potential, I’ll be sticking to cryptocurrencies that are high up in terms of market capitalization. If you’re brand-new to cryptocurrencies, I’d recommend sticking to more recognized names first.
Bitcoin might seem like too much of an obvious choice to be a good investment, but don’t be so sure. The coin has consistently led the crypto market since its launch in 2009, and there’s no reason to think that 2022 will be the year that everything changes.
Up until now, the prices of other cryptocurrencies have roughly followed the same trends as bitcoin. Yes, you can see from the graphs I’ve included that not every cryptocurrency follows the exact same pattern — but everything increased around March, dropped around June, and increased again around September. Even if some cryptocurrencies experienced starker increases or decreases than others.
Most people see bitcoin as being “The Cryptocurrency,” and for the governments and financial institutions exploring cryptocurrencies, bitcoin will be at the top of the list. The developments we saw in 2021 showed that trend. For instance, you can only buy bitcoin on CashApp for now.
This is as close as you’ll get to a safe bet in the crypto world.
As with bitcoin, ethereum is currently in the enviable position of being known by just about everyone. This means that — even if a different crypto protocol is technically superior — Ethereum will always have a significant advantage.
Arguably, unlike cryptocurrencies like bitcoin which theoretically could make good currencies but in reality, are mostly used for speculation, ethereum has plenty of real-world uses. It hosts smart contracts — digital contracts on the blockchain that don’t need a third party to function — and these pave the way to all kinds of decentralized applications (dApps).
For instance, most NFTs and gaming applications are launched on Ethereum, which are set to become more popular over the coming years. Don’t worry — I’ll return to NFTs later.
Solana ended the year as the fifth-largest coin market capitalization. After launching in 2020, it was worth just $1.7 at the start of 2021 — but its price ballooned to an all-time high of $258 in November, representing an increase of almost 10,000%.
If you’re used to seeing double-digit growth or occasionally triple-digit growth from your stocks, it’s hard to comprehend how those kinds of numbers are even possible.
The buzz around Solana comes down to its potential to challenge Ethereum as the top framework for running smart contracts and building applications — it’s aiming to be better and faster. A few NFTs have also used Solana already.
Polkadot has had some promising spikes in 2021, and although it didn’t quite end the year on the high point that many people thought it would have expected in November, it still has lots of potential to grow. Could 2022 be its big year?
It has smart contract capabilities and aims to be more scalable than Ethereum — but it’s far more than just another Ethereum competitor.
Polkadot is known as a “multi-chain” framework: it helps other blockchain protocols to communicate with each other and exchange data. The details of how exactly it does this get rather technical but let’s just say that it connects different blockchains together so users can get the functionalities of two different protocols at once and transfer cryptocurrencies between them.
If you thought we were done with crypto protocols that have smart contracts capabilities, we have one more left: Avalanche. The protocol claims to be the fastest around, and it also has some of the lowest fees. That might sound like a big claim, but AVAX achieved some impressive growth in 2021, rising from $3.5 at the start of the year to more than $100 by the end — a 2757.14% price increase.
Avalanche is currently in the process of trying to attract more applications and projects to use it, and its Avalanche Rush program involves giving out monetary incentives to attract big names like Curve and Aave. This might be partly responsible for the significant jump in value since August (the program’s launch).
Is this just the start of the story?
A Note on NFTs
Although NFTs aren’t technically cryptocurrencies, given the amount of hype they’ve generated in 2021, it would be incomplete to end the article without at least giving them a passing mention.
NFTs are non-fungible tokens. Because they’re non-fungible, each token represents a single asset — unlike currencies, which are a universal medium of exchange that can be used to buy any goods or services. Instead, NFTs represent ownership of a specific asset, meaning that whoever has an NFT owns the asset it corresponds to. Blockchain technology and smart contracts ensure that ownership rights are enforced and stated on a public ledger.
The tokens first started to generate a buzz at the start of 2021, but they really gained traction after an NFT of a digital artwork sold for $69 million at auction house Christie’s. Quite the feat — but maybe we’ll see an even bigger sale in 2022.
Ready To Join the Party?
Hopefully, this article has given you the confidence to venture into cryptocurrency, no matter how little knowledge (or money) you’re starting with. You don’t have to invest your life savings into cryptocurrency or try to pick a niche coin nobody else has heard of — feel free to start with a small amount or a big name like bitcoin before you get more comfortable with the market.
Don’t listen to the people saying that 2021 was the peak of the crypto market and we’ve already lost our chance at getting in on some of the best growth opportunities — people will probably be saying that at the end of 2022 too.
At the time of writing, Tim Thomas holds no positions in the cryptocurrencies mentioned. YMG, Wealth of Geeks have no positions in the cryptocurrencies mentioned. YMG has a disclosure policy.
Featured Image Credit: Shutterstock.
Tim Thomas was born in Guildford and now lives near Southampton, the UK with his family. Tim started his career in the financial markets and has traded and invested in stocks, options, forex, futures, crypto, and real estate for over 20 years. His website, https://timthomas.co/, is dedicated to teaching swing trading strategies for profits, helping traders reach their wealth and financial freedom goals.