Identifying the hidden costs to investing in cryptocurrencies helps to improve prospects of gaining more profits. Opportunities to reduce costs of investing in cryptocurrenices stem from transaction fees, wallet fees, exchange fees, and dollar cost averaging. Understanding the architecture of cryptocurrency network goes a long way in reducing costs.
Transaction fees on platforms serve as one of the most significant factors affecting the cost of investing in cryptocurrencies. The decentralised nature of cryptocurrencies requires cryptocurrency holders to pay for the use of the blockchain on which a cryptocurrency operates. Investors pay transaction fees to miners for securing the blockchain network from attacks. Block sizes affect the fees for transactions. Miners charge fees in exchange for solving mathematical problems related to the blocks. Users have to pay higher fees for miners to process larger blocks at a faster rate. Users with more blocks that need to be solved may be required to pay higher transaction fees.
Cryptocurrency wallets depend on blockchain networks to operate successfully. Receiving and sending cryptocurrencies with wallets accrues costs on account of the need for miners to secure the network transactions. The company operating a cryptocurrency wallets usually charges a fee for use of their wallets. While the fees are usually small, there are alternatives which do not charge fees.
Do It Yourself
A do-it-yourself approach to cryptocurrency wallets can save users a lot of money when making transactions. Open-source solutions exist that do not carry the fees that many cryptocurrency wallets carry. Knowledge of programming and technology architecture reduces mistakes are not made in the storage of cryptocurrencies with wallets deployed using open-source software. Extensive due diligence will be required to ensure that there are not weaknesses in the technology that could result in losses.
Exchanges charge disproportionately high fees, charging for different user activities such as deposits and withdrawals. More popular exchanges typically charge users more than other exchanges on account of the high demand they are experiencing.
Exchanges may add conversion fees, depending on the currency a user depicts into their exchange account. Fees as high as 0.2% cost users twice as much as if they had deposited the currency that an exchange accepts.
Dollar Cost Averaging
Using the dollar cost averaging method can help one to purchase cryptocurrency at the best possible price. Trades use the dollar cost averaging method for different types of asset classes to make investments in markets with better confidence that they can mitigate the risks of volatility and associated costs.
The dollar cost averaging method requires investors to invest equal portions consistently at regular intervals until their investment targets are met. Investors gain from investing the same amount regardless of the price changes that take place during the investment period. Opting for consistency helps to beat the effects of price fluctuations, lowering the average buying price. The method increases the probability that an investor can cut through volatility over a determined period. Cryptocurrency volatility is both a blessing and a curse, tempting investors with prospects of high profits in short time periods.