how to invest with cryptocurrency
Table of Contents
Cryptocurrency has long been a hot topic in investment circles, but its popularity has grown significantly in recent years. While some investors see it as a risky alternative investment, mainly because of its speculative nature, others see it as a legitimate option to add to any investor’s portfolio.
If you’re new to crypto, remember that buying cryptocurrency, like any investment, involves inherent risks. It is important to thoroughly research and understand how each type of cryptocurrency works before making any investment decisions.
What Is Cryptocurrency?
Cryptocurrencies are digital currencies that generally operate outside the regulation of any individual company or government. Unlike traditional currencies such as the US dollar, cryptocurrencies are not backed by a central authority, such as the US government.
Instead, they are monitored by an online, decentralized network of users. Cryptocurrencies are often conceptualized and referred to as digital coins or tokens. They are protected by encryption using blockchain technology.
You can use these “coins” to buy things online, just like you would with regular money. However, your options for merchants that accept crypto are more limited than those that accept traditional currencies.
When you make a crypto transaction, a group of computers using blockchain software checks whether the payment is valid. If everything is in order, the transaction is processed.
The blockchain system acts as a digital public ledger, recording all transactions. Miners or validators check these transactions and get paid for their work. After the transaction is verified and verified, the recipient can access it using their secret code, often called a private key.
Even more common than using cryptocurrencies as digital currency, some people invest in the hope that it will increase in value over time, similar to investing in stocks or gold.
Types of Cryptocurrencies
In 2009, Satoshi Nakamoto introduced the first cryptocurrency, Bitcoin. With a market cap of over $1 trillion, Bitcoin now holds the title of the world’s largest cryptocurrency.
Today, there are approximately 10,000 cryptocurrencies, with a combined market capitalization of over $2 trillion.
The biggest cryptocurrencies include:
Bitcoin (BTC)
Like many other cryptocurrencies, Bitcoin operates on a blockchain, or shared public ledger. To ensure security and prevent fraud, transactions must be verified through a process called proof-of-work, in which miners solve secret puzzles.
Bitcoin’s value has grown significantly over the past decade, gaining widespread recognition. In May 2016, one BTC was worth around $500. However, by May 2024, the value of one bitcoin had risen to over $60,000. This is an increase of 11,900 percent.
Ethereum (ETH)
It wasn’t until 2011 that alternative cryptocurrencies, later dubbed “altcoins”, came onto the scene. However, the launch of Ethereum in 2015 truly brought altcoins into the limelight, starting their rise in popularity. Ethereum stands as the foremost altcoin, however, with a market capitalization second only to that of Bitcoin.
While Bitcoin aims to act as a decentralized currency, Ethereum is more like a computer network. It lets people run specialized decentralized applications, or DApps, and set up smart contracts on its system.
Tether (USDT)
Tether, and other tokens like it, stand out from most other cryptocurrencies due to its classification as a stablecoin. A stablecoin’s value is usually pegged to another store of value. Often this is a government-issued currency, such as the US dollar in the case of USDT, but it can be gold or any other commodity.
Theoretically, a stablecoin would have a way to keep its value equal to its peg, whether that peg is the US dollar, the euro or something else entirely. In the case of Tether, the value of the token is maintained by a reserve of US dollars equal to the total value of USDT.
As such, Tether and other stablecoins are expected to exhibit greater stability than other cryptocurrencies, making them a preferred choice among investors concerned about the volatility of digital assets.
Solana (SOL)
Solana was designed to support decentralized finance, or DeFi applications, DApps and smart contracts. It uses a unique method combining proof of stake and proof of history to process transactions quickly and securely. The platform’s native token, SOL, powers its operations.
Binance Coin (BNB)
Binance Coin is a cryptocurrency used for trading and fees on Binance, a top global crypto exchange. Introduced in 2017, BNB now serves a variety of functions including trade, payments and travel bookings.
Pros and Cons of Investing in Cryptocurrency
While proponents of cryptocurrency investing can cite a number of advantages, such as decentralization, accessibility and diversification, many investors see potential profits as the biggest proponents of investing in crypto.
“The most important benefit is the potential for high returns. In their short existence, crypto-assets like BTC and ETH have historically achieved some of the most significant gains in history,” R.J. Weiss, CFP, CEO of personal finance site The Ways to Wealth.
However, it is important to recognize the risks of crypto investing as well. Cryptocurrencies often experience dramatic price swings, and as government regulations evolve, volatility is likely to continue. Security can also be a concern. Not all crypto projects are created equal, and many investors have fallen victim to scams or fraud in the crypto space.
“Cryptocurrencies are volatile; you have to be able to stomach prices going up and down. Only invest up to the amount you’re willing to lose,” says Stephen Reichel, CFP, partner at wealth management firm Navalign. .
Furthermore, while cryptocurrency has generated substantial profits for some investors, others have suffered significant losses.
“There is no guaranteed free lunch. The potential for high profits in crypto is balanced by the risk of substantial losses. The value of your investment may decline, and with the current size and visibility of the crypto market, it is uncertain whether Futures returns are more stable, less dramatic, resembling gold returns,” Weiss says.
What To Consider Before Investing in Cryptocurrency
Before diving into any investment, including crypto, you should do your due diligence. When evaluating whether a crypto investment is right for you, be sure to consider the following:
- Project details. Each cryptocurrency has its own investment thesis, consensus mechanism and use cases. It is important to understand the specifics and unique investment proposition of each cryptocurrency before getting involved.
- Your risk profile. Be honest with yourself when evaluating your risk profile and the volatility of any cryptocurrency. Any crypto investor should be prepared for the possibility of a major price drop.
- Your investment goals. Ask yourself how a crypto investment will fit into your larger financial goals. It is important to make sure that you are not relying entirely on your crypto investments for essential life goals like retirement. Diversity and planning are key.
If you find that you’re not quite ready for crypto investing, there are other ways you can add crypto to your portfolio.
“There are additional options for indirectly investing in crypto. Recently, the SEC approved several spot bitcoin ETFs that you can buy in a brokerage account,” says Rischall. “You can also invest in publicly traded stocks of crypto-related companies, such as major crypto exchanges, hardware manufacturers and service providers.”
How To Invest in Cryptocurrency
For beginners entering the cryptocurrency realm, the process of purchasing digital currencies can seem difficult to navigate. However, you can start your cryptocurrency investment journey by following these simple steps.
1. Pick a Broker or Cryptocurrency Exchange
There are two ways you can go about buying Bitcoin and other cryptocurrencies—either through a broker or through a cryptocurrency exchange.
- Cryptocurrency brokers make it easy to buy crypto but may charge high fees or withhold holdings outside of the platform. Examples include Robinhood and SoFi. Some investors prefer to keep coins in crypto wallets offered by these platforms for added security.
- Cryptocurrency exchanges such as Coinbase, Gemini and Binance.US offer platforms for buying and selling digital currencies. However, these platforms can be overwhelming for new investors. Although user-friendly options make buying easier, they usually have higher fees than standard trading platforms. To minimize costs, consider mastering standard trading platforms before or shortly after making your first cryptocurrency purchase.
2. Set Up an Account
After choosing a cryptocurrency broker or exchange, you need to create an account. Typically, this requires signing up and providing personal information to prove who you are, often known as know-your-customer, or KYC, protocols. This may include entering information from your driver’s license or passport. Sometimes, you may need to provide a photo of yourself or a form of identification.
3. Add Funds to Invest
Before you can start investing in crypto, you must ensure that you have funds available in your account. You can add money to your account in a variety of ways, including linking it to your bank, initiating a wire transfer or using a debit or credit card to pay. The time it takes for funds to be available in your account varies depending on the deposit method and the chosen cryptocurrency broker or exchange.
While some exchanges allow credit card deposits, these come with risks and additional costs. Credit card companies often classify crypto purchases as cash advances, leading to higher interest rates and additional fees. Combined with fees from both credit cards and exchanges, you could lose up to 10% of your crypto purchase.
4. Initiate Your Cryptocurrency Transaction
With your account funded, you’re ready to start buying crypto. Once you’ve decided on the cryptocurrency you want to buy, you can enter its symbol—for example, BTC for Bitcoin—and specify the amount of coins you want to buy. want
Many exchanges and brokers allow the purchase of fractional shares of cryptocurrencies with higher values, such as Bitcoin or Ethereum. This accessibility ensures that those who are not capital-rich can still invest.
How To Keep Your Cryptocurrency Secure
Cryptocurrency exchanges are often prone to theft or hacking. Losing or forgetting the access codes to your account may result in the loss of your investment. That’s why it’s so important to keep your cryptocurrencies in a secure storage location.
“In the crypto space, taking extra steps to secure your investments is key. Adding two-factor authentication gives you an extra layer of security,” says Jeff Rose, CFP, founder of GoodFinancialSentences.com. , making it difficult for unauthorized users to access your funds.
If you are buying cryptocurrency through a broker, the crypto is usually held in a crypto wallet linked to the exchange. If you are not satisfied with the exchange’s service provider or prefer a more secure storage option, you can move your assets to a separate hot or cold wallet.
- Hot wallets. Hot wallets are cryptocurrency wallets that are operated on an Internet-connected device such as a tablet, computer, or phone. While convenient, they are more vulnerable to theft due to their constant internet connection.
- Cool wallets. Cold wallets, such as USBs or hard drives, provide a high level of security for storing cryptocurrency because they are offline and disconnected from the Internet. However, there are risks involved. If you lose the relevant keycode or experience a device failure, you may permanently lose access to your cryptocurrency.
Depending on the exchange and the amount transferred, a small fee may be required to transfer your crypto away from the exchange.
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