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Make no mistake about it, cryptocurrencies are the best performing asset class of the past 12 months. Some digital tokens have generated gains in the thousands of percentage points since the turn of 2021 alone.
But, cryptocurrencies are also highly speculative and volatile, so you should tread with caution when investing in this somewhat proven financial arena.
If you’re looking to gain exposure to digital assets, this guide will discuss how to invest in cryptocurrency in a safe and cost-effective manner. We’ll also give you a bit of background on what to consider before making an investment.
How Do Cryptocurrencies Work?
Let’s start with the basics of how cryptocurrencies work. In a nutshell, cryptocurrencies are digital tokens that represent value. In most cases, cryptocurrencies are built on top of blockchain technology, which allows people to transfer value without a third party.
This is why cryptocurrencies and the underlying blockchain are referred to as decentralized technologies. Many cryptocurrencies claim to serve a purpose. For example, Bitcoin was created to challenge the mainstream global transaction industry while Ethereum permits trustless smart contracts.
With that said, most cryptocurrencies are purchased on a speculative basis, with the investor looking to make fast and easy gains. This has resulted in more than 10,000 digital currencies, many of which will be unlikely to stand the test of time.
In terms of value, all cryptocurrencies can be bought and sold online from a broker or exchange. This in itself has created a multi-trillion dollar investment marketplace whereby cryptocurrencies rise and fall in value on a second-by-second basis, much like stocks, currencies, and commodities.
Before investing in a cryptocurrency, make sure you understand its purpose and the reason behind the project. A good place to start is by reading the project’s white paper.
How to Invest in Cryptocurrency?
If you are thinking about investing in the cryptocurrency market, there are many considerations that need to be made. In the sections below, we’ll walk you through the process step-by-step, starting with the process of assessing your digital currency budget.
Step 1: Decide on a Budget for Investing in Cryptocurrency
Irrespective of what asset class you are thinking about investing in, it’s crucial to create a budget. This will ensure that you only invest amounts that you can afford and — perhaps most importantly — you are not overexposed to a single asset or market. This sentiment could not be stronger when it comes to the volatile nature of cryptocurrencies.
With this in mind, risk-averse investors will rarely allocate more than 2% to 5% of their wider portfolio to digital assets. Naturally, the rest will be diversified across other financial instruments, including the likes of blue-chip stocks, growth stocks, bonds, and even precious metals.
The key reason why you should consider restricting the amount you invest in cryptocurrencies is that the marketplace is overly speculative. For example, Dogecoin, a cryptocurrency that was launched in 2013 as a joke, saw gains of over 10,000% in the first five months of 2021.
There was nothing fundamental behind this parabolic rise other than a few positive Tweets by Elon Musk. Sure, examples like this can be great if you get in at the right time. But, those that buy towards the top of the peak will likely end up losing a lot of their investment capital.
Step 2: Choose a Cryptocurrency to Invest In
Perhaps the most challenging part of the process when thinking about how to invest in cryptocurrency is knowing which digital asset to buy. As we noted earlier, there are thousands of cryptocurrencies active in the market, so the research process can be challenging.
A good starting point is to focus on established digital tokens that have a solid market capitalization. Although still volatile, these digital assets will be a lot less speculative than small-cap projects with a minute valuation.
For example, it goes without saying that Bitcoin is by far the most established and recognized cryptocurrency. The digital asset has since surpassed a total market capitalization of over $1 trillion, making it more valuable than blue-chip stocks that have dominated their respective sectors for many decades.
You then have solid cryptocurrency projects like Ethereum, Chainlink, Litecoin, EOS, and Cardano, all of which carry multi-billion dollar market capitalizations. At the other end of the scale, you have crypto assets with a market capitalization of just a few million dollars with very few people aware of what the project does or who is behind it.
Ultimately, when thinking about how to invest in cryptocurrency, you need to be prepared to do lots of research before you enter the market. There are a number of retail investor-friendly platforms that provide invaluable research and educational materials, including but not limited to Coinbase, Kraken, and Binance.
You might even consider reading the project’s whitepaper, which outlines the goals and objectives of the cryptocurrency in question. Another option that you have when it comes to selecting a cryptocurrency to invest in is to create a diversified portfolio that is weighted by market capitalization.
For example, while more weightage would be given to the likes of Bitcoin and Ethereum, a much smaller percentage might be allocated to Stellar, Litecoin, and Bitcoin Cash. Make sure you check out our guide on the best cryptocurrency to invest in to learn more about your options.
Here are a few popular cryptocurrencies ranked by market capitalization:
|Cryptocurrency||Market Cap||Max Supply|
|Bitcoin (BTC)||$800.81 billion||21 million coins|
|Ethereum (ETH)||$330.35 billion||N/A|
|Tether (USDT)||$80.05 billion||N/A|
|Binance Coin (BNB)||$65.37 billion||168,137,036 coins|
|Cardano (ADA)||$28.74 billion||45 billion coins|
|Ripple (XRP)||$36.15 billion||100 billion coins|
|USD Coin (USDC)||$52.43 billion||N/A|
|Dogecoin (DOGE)||$16.37 billion||N/A|
|Polkadot (DOT)||$18.95 billion||N/A|
|Binance USD (BUSD)||$17.86 billion||N/A|
Step 3: Choose a Platform to Buy Cryptocurrencies
Once you have devised an investment budget and made a shortlist of digital assets that you wish to gain exposure to, it’s then time to think about which cryptocurrency platform you want to complete the process with.
Let’s explore both options so that you can assess which one is right for you.
Option 1: Traditional Broker
With cryptocurrencies now operating in a multi-trillion trading arena, it was only a matter of time before traditional online brokers entered the market. As such, you can now invest in cryptocurrencies through platforms like Robinhood, TradeStation, SoFi Invest, and Webull.
There are both pros and cons of taking this route when thinking about how to invest in cryptocurrency. In terms of the positives, you will likely benefit from zero-commission fees and you’ll also be able to invest fractional amounts.
For example, Robinhood allows you to invest in a number of popular digital currencies from just $1 upwards and on a 0% commission basis. You will also be able to blend your other investments with your chosen cryptocurrencies, as the aforementioned platforms also offer thousands of stocks and ETFs.
On the flip side, by using a traditional online broker such as those mentioned above, you likely won’t have the option of withdrawing your cryptocurrency investments to a private wallet. Instead, your chosen broker will safeguard your digital coins for you, meaning that you do not have 100% control over your funds.
This is why using a more conventional cryptocurrency exchange is perhaps the best option, which we discuss in the section below.
Option 2: Cryptocurrency Exchange
There are dozens of cryptocurrency exchanges that allow you to buy, sell, and trade digital assets with ease. However, only a few stand out for us as the vast majority of exchanges operate without a regulatory license. This means that your capital is at risk, especially if the exchange suffered a remote hack.
With this in mind, some of the most prominent exchanges to consider include Coinbase, Kraken, and Gemini. All three of these exchanges have the legal remit to accept American clients and thus hold the required approval from relevant US authorities.
Take Coinbase, for example, which is regulated by the Securities and Exchange Commission (SEC) while Gemini is licensed by the New York State Department of Financial Services (NYDFS) as a trust company.
These trusted exchanges also make cryptocurrency investment simple and fast as they accept debit cards and bank account deposits. In many cases, the KYC (Know Your Customer) onboarding process can be completed in minutes, and most importantly, you will always have the option of withdrawing your crypto assets to a private wallet. Ultimately, this ensures that you, and only you, have control of your cryptocurrencies.
Step 4: Place an Order to Buy Cryptocurrencies
The next step when looking at how to invest in cryptocurrency is to open an account with your chosen broker or exchange.
Assuming you are using a regulated provider (which you should be), the platform will ask you to upload a copy of your government-issued ID as per the aforementioned KYC process. Once your account is verified, you can then proceed to make a deposit and set up an order on your chosen digital asset.
If you want to keep things simple, exchanges like Coinbase and Kraken allow you to create an instant buy order, which means that you are purchasing the digital currency at the next best available price. This is comparable to a market order. In this instance, it’s just a case of entering your stake in US dollars and the exchange will take care of the rest.
Alternatively, you might also consider setting up a manual limit order. This allows you to specify the price at which your cryptocurrency investment is executed at. For example, Ethereum might be priced at $2,900 per token at the time of the order, you might not want to make the purchase until the crypto asset hits $3,100.
In this instance, you simply need to set up a buy limit order at $3,100. In doing so, your position will only be executed when your predefined price of $3,100 is matched by the markets.
Regardless of whether you opt for an instant buy or a price-specific limit order, once your cryptocurrency purchase is executed, the digital tokens will be added to your online web wallet.
If you opted for a broker like Robinhood or Webull, the digital coins will remain in your portfolio until you decide to cash out. If you opted for an exchange like Coinbase or Gemini, you can elect to withdraw your coins to a private wallet of your choosing.
Keep in mind that cryptocurrency accounts are not insured by a government like U.S. dollars into a bank account.
Step 5: Store Your Cryptocurrency Safely
If you have purchased cryptocurrency from a provider that allows you to withdraw the tokens to a private wallet, you need to think about which storage methods are best for you. Before we get to the various storage types available, let’s briefly examine how cryptocurrency wallets work.
In their most basic form, wallets allow you to store your digital tokens safely. The wallet will come with a unique private key, which is comparable to an online banking password or ATM PIN. The key difference is that the wallet owner (i.e, you) is the only person that has access to the private key.
This means that you are 100% responsible for the safekeeping of your cryptocurrency. In other words, while nobody else has access to your wallet, if you misplace the private key your funds will likely be gone forever. With this in mind, it’s important to spend some time researching how cryptocurrency wallet security works before you get started.
Nevertheless, there are three main wallet types that you might consider — each of which comes with varying levels of security and convenience.
Option 1: Desktop Wallet
The first storage option to consider is a desktop wallet. This comes in the form of software that you download and install on your Windows or Mac device.
In order to send funds, you will need to open the desktop wallet software. This means that you won’t be able to transact unless you have the device on you. This storage option is generally considered to be safer than a mobile wallet, but less convenient.
Option 2: Mobile Wallet
Mobile wallets offer the perfect combination of security and convenience. The wallet comes in the form of a mobile app, which allows you to send and receive funds while on the move. Mobile wallets also make it easy to check the value of your cryptocurrency investments in real-time.
The best mobile wallets come with a QR code feature, meaning you can use your phone’s camera to scan a cryptocurrency wallet address. This saves the need to copy and paste the address manually. In terms of security, you will be given a backup passphrase when you set the mobile wallet up.
You are advised to write this down on a piece of paper, not least because this will allow you to regain access to the wallet in the event your phone is lost or stolen.
Option 3: Hardware Wallet
If you’re investing larger amounts into cryptocurrency, then you might want to consider a hardware wallet. This is without a doubt the most secure way of keeping your crypto assets safe.
Your chosen hardware wallet comes as a physical device that remains offline at all times unless you are transferring funds. In order to send cryptocurrency to another wallet, you will need to physically enter your chosen PIN.
If the hardware wallet is stolen, you can regain access remotely with the passphrase you were given when you originally set it up.
The safest and most secure way to store cryptocurrency is offline with a cold wallet. A cold wallet is a type of wallet that is not connected to the internet and they are generally less vulnerable to hackers.
Benefits of Investing in Cryptocurrency
Before you proceed to invest in your chosen cryptocurrency, it’s a wise idea to consider the benefits and potential drawbacks.
Let’s start with the benefits:
Above-Average Returns: The main draw for those looking to invest in cryptocurrency is that the asset class has returned significant gains in recent years. Bitcoin, for example, was first launched in 2009 and was worth just a small fraction of one cent. Earlier in 2021, the digital currency reached highs of over $63,000.
We mentioned earlier the case of Dogecoin, which returned over 10,000% in the first five months of 2021 alone. There are plenty of other examples of digital currencies returning five-digit percentage gains in less than a year. Naturally, these sizable returns are what attract the average investor to the digital asset arena.
Low-Cost Entry: When you invest in a cryptocurrency, there is no requirement to purchase a full coin or token. For example, the likes of Bitcoin, Yearn.finance, and Wrapped Bitcoin are all trading at over $30,000 per coin. You can, however, invest as little as you like as digital tokens can be fractionated into much smaller units.
At the other end of the scale, some cryptocurrencies are worth less than a dollar. For example, the likes of TRON and Dogecoin will set you back at just $0.07 and $0.30 per token. Regarding the former, this means an investment of just $70 would get you 1,000 TRON tokens.
Store of Value and Hedging: Cryptocurrencies like Bitcoin are often referred to as a store of value, not least because they resemble the same characteristics of gold. For example, both Bitcoin and gold are finite asset classes as only so much can be minted at any given time.
Both Bitcoin and gold can also be used as tools to hedge against the wider stock markets. That is to say, having a small allocation of Bitcoin in your portfolio could potentially allow you to hedge against falling stock prices.
Many Cryptocurrencies Are Still in Their Infancy: Many cryptocurrencies that are available to trade online have been operational for less than a year. This gives you the opportunity to invest in a project that is still well in its infancy.
In a similar nature to growth stocks that have recently gone through their respective IPO, investing in a newly launched digital asset will allow you to purchase the tokens at a much more favorable price.
Easy to Diversify: With more than 10,000 digital currencies to choose from — many of which are competing for the same market share — diversification has never been easiest.
After all, you can create a portfolio of digital currencies with various weights to ensure that you are not overexposed to a small number of projects.
Downsides of Investing in Cryptocurrency
Now that we have covered the benefits, below you will find the main drawbacks of investing in cryptocurrency.
Volatility: As we have discussed throughout this guide on how to invest in cryptocurrency, digital assets are highly volatile. Depending on the cryptocurrency you invest in, you might experience double-digit percentage gains and losses each and every day. For example, while on one day your crypto asset might rise by 30%, it can just as easily lose 50% the following day. This is especially the case when investing in cryptocurrencies with a small market capitalization.
Regulation: There is still a major grey area when it comes to cryptocurrency regulation. The key issue is that cryptocurrencies operate in a borderless industry, so there ultimately needs to be a global framework that ensures investors are protected irrespective of where they are based.
Currency of Crime: Although very few cryptocurrency transactions are associated with criminality, it must be noted that the anonymous characteristics of digital assets are appealing to bad actors. With plenty of crypto-related scandals linked to exchange hacks and remote malware attacks, currencies have a murky reputation.
FAQ About How to Invest in Cryptocurrency
Below you will find a list of commonly asked questions by those looking at how to invest in cryptocurrencies for the first time.
What Is Cryptocurrency?
Simply put, cryptocurrencies allow users to send and receive funds without the need of a centralized third party. Instead, transactions are executed in a decentralized manner through blockchain technology.
As many cryptocurrencies are decentralized — including the likes of Bitcoin, Ethereum, and Litecoin — no single person or entity has control over the network. Cryptocurrencies can be bought and sold online with real money, which itself has created a trading industry that is now over a trillion dollars.
Why Are Cryptocurrencies so Popular?
Although some people are drawn to the decentralized and anonymous nature of cryptocurrencies, the main draw is arguably based on financial gains. That is to say, people invest in cryptocurrency on a speculative nature because they hope for above-average gains.
Are Cryptocurrencies a Good Investment?
There is no denying that over the past few years cryptocurrencies have been a great investment for those that entered the market at the right time.
However, we should once again note that cryptocurrencies are both volatile and speculative, so if you’re a risk-averse investor you should consider keeping your stakes modest.
In fact, allocating more than 5% of your portfolio capital to cryptocurrency is likely more risk than you should be taking.
Is Investing in Cryptocurrency Legal?
Yes, in the vast majority of jurisdictions — including that of the US — investing in cryptocurrency is perfectly legal.
What Is the Minimum to Invest in Cryptocurrency?
Cryptocurrencies can be fractionated into tiny amounts, so in theory, there is no minimum investment amount. With that said, your chosen cryptocurrency broker or exchange might implement a minimum deposit or stake amount, so be sure to check this before signing up.
How Do Taxes on Cryptocurrency Investing Work?
Taxation of cryptocurrencies will vary from region to region and can be complex to understand, so always seek the assistance of a qualified and experienced advisor.
With that said, you should be aware that the IRS views cryptocurrencies as property for the sake of taxation. As such, any capital gains you make will be taxable just like they are when you buy and sell traditional stocks.
What Is the Best Cryptocurrency Investment Strategy?
The best cryptocurrency investment strategies are those that focus on diversification and dollar-cost averaging.
Regarding the former, this will not only see you invest in a full basket of cryptocurrencies to mitigate the risk, but your portfolio should also contain traditional assets like stocks, ETFs, and even gold.
In terms of dollar-cost averaging, this will see you invest regular amounts as opposed to a one-off lump sum. For example, if you have $6,000 to invest in cryptocurrency, you might decide to spread this amount over 12 monthly purchases at $500 each.
Are Cryptocurrencies Safe or Can They Get Hacked?
Safety is a major concern for those looking at how to invest in cryptocurrencies for the first time. The most important thing to consider is that you should always keep your digital assets in a safe and secure wallet. In fact, the safest way to do this is to store your investments in a hardware device. Even if your hardware wallet is stolen, you can still recover the funds remotely through your backup passphrase.
In summary, when you consider that the total market capitalization of the wider cryptocurrency markets has since surpassed a trillion dollars, it should come as no surprise to learn that more and more first–time investors are looking to get a piece of the action.
Although it can be easy to focus on the potential gains, don’t forget that cryptocurrencies are highly volatile and speculative assets. Most importantly, this means that you should always mitigate your risk by keeping your stakes modest, diversifying well, and adopting a dollar-cost averaging strategy.
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- Investing for Beginners: How to Start Investing the Right Way
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Kane is a highly-skilled researcher and writer with expertise in finance, trading, and cryptocurrencies. Academically, Kane holds a Bachelor’s Degree in Finance, a Master’s Degree in Financial Crime, and he is currently engaged in a Doctorate. He is passionate about researching the money laundering threats of the virtual economy — notably, cryptocurrencies and blockchain technology.