Despite periodic ups and downs, cryptocurrencies have attracted significant attention and gained popularity in recent years, offering several advantages over traditional currencies. These include increased security and privacy, lower transaction fees, and decentralized control. Investing in cryptocurrencies can involve a variety of approaches, from buying digital currencies directly to investing in crypto funds and companies. However, it is worth remembering that investing in this sector can be risky, volatile, and complex. This article will teach you how to invest in one of the newest asset classes.
Ways to invest in cryptocurrency
When considering investing in cryptocurrency, one of your first options may be to buy and hold one or more cryptocurrency coins. Buying cryptocurrency directly is probably the most common way to add cryptocurrency assets to your portfolio. However, you also have several other options for investing in cryptocurrency. Let’s take a look at the most popular ones:
Buying crypto outright
Direct cryptocurrency investing involves buying and holding one or more digital coins. You can choose among the best-known currencies, such as Ethereum and Bitcoin, as well as lesser-known, recently released coins. The easiest way to access cryptocurrency is to buy the coins you are interested in through a traditional investment platform or crypto exchange.
How to buy cryptocurrency on an exchange:
- Choosing a cryptocurrency exchange.
Decide on a reliable and reputed exchange that offers a wide range of currencies. - Creating an account.
Register on the chosen exchange by providing personal information and confirming your identity. - Deposit funds into your account.
Before buying cryptocurrency, fund your exchange account with fiat money (usually US dollars). - Choosing a cryptocurrency.
Decide which cryptocurrency you want to invest in by researching the available options. - Placing an order.
Follow the exchange’s instructions for placing and executing a purchase order for the selected cryptocurrency. - Storing in a digital wallet.
Once purchased, store your cryptocurrency access information in a digital wallet, which may be on an exchange or with an independent wallet provider.
Benefits of direct investing:
- quick access to the market – buying cryptocurrency directly allows you to access digital assets in just a few minutes;
- hands-on experience – placing orders on an exchange gives you hands-on experience and a better understanding of how cryptocurrency works;
- full control over your coins – you have full control over your coins, allowing you to transfer them between different wallets;
- investment flexibility – cryptocurrency markets operate 24/7, giving you more flexibility in choosing when to invest compared to traditional assets such as stocks and ETFs.
Disadvantages of direct investing:
- cybersecurity risks – cryptocurrency is vulnerable to online theft, so it’s important to learn the basics of cybersecurity;
- difficulties in transferring coins – transferring cryptocurrency requires several steps, and even small mistakes can result in loss of access to the investment;
- high volatility – cryptocurrencies are subject to significant price fluctuations, and there is a possibility that the value of any one of them could drop to zero.
Investing in cryptocurrency directly requires care and knowledge, but with the right approach, it can become a significant part of your investment portfolio.
Buying crypto on a brokerage platform
Investing in cryptocurrency through a brokerage platform can be done by purchasing cryptocurrency exchange-traded products (ETPs) or cryptocurrency-related exchange-traded funds (ETFs). These tools allow investors to gain exposure to the cryptocurrency industry without having to directly own cryptocurrency.
What it takes:
- Open a brokerage account.
Create an account on a brokerage platform by providing the necessary personal information and confirming your identity. - Funding your account.
Transfer funds to your brokerage account using fiat money. - Instrument selection.
Decide whether you want to invest in ETPs or ETFs. Explore the available options and choose the most suitable one. - Placing an order.
Follow the instructions of the brokerage platform to place a purchase order for the selected instrument. - Investment monitoring.
Monitor your investments through the brokerage platform and decide on further actions based on the market situation.
Advantages of this method:
- ease of use – investing through a brokerage platform can be easier for those unfamiliar with the nuances of cryptocurrency cybersecurity;
- tax and estate aspects – managing taxes may be easier compared to buying cryptocurrency outright;
- diversification – equity and futures-based ETFs give access to a diversified basket of cryptocurrency assets, which can reduce volatility compared to buying individual cryptocurrencies;
- the convenience of traditional investments – buying ETPs and ETFs through brokerage accounts, IRAs, and trusts provides the convenience of traditional investment avenues.
Disadvantages of this method:
- lack of direct ownership – ETPs and ETFs do not give you direct ownership of the cryptocurrency, which means you cannot use these assets to pay for goods and services;
- trading restrictions – ETPs can only be traded during traditional market hours, which may limit your ability to respond to market changes during weekends or off-hours;
- liquidity risks – Spot bitcoin ETPs are new, and if they are not widely adopted, liquidity problems may arise, which could result in orders being executed at less favorable prices;
- diluted upside potential – ETFs are portfolios composed of multiple investments, which may reduce the upside potential associated with individual cryptocurrencies or companies.
In summary, investing through a brokerage platform can be a convenient and less complicated way to access the cryptocurrency industry, but it is important to consider all of the risks and limitations associated with this method.
Buying cryptocurrency stocks
Investing in cryptocurrency through buying shares of companies operating in the crypto industry involves buying shares of companies such as cryptocurrency exchanges, mining companies, or banks that provide solutions for crypto companies.
How to do it:
- Choosing a brokerage platform.
Sign up with a reliable brokerage platform that offers stock trading. - Creating an account.
Open an account by providing the required personal information and confirming your identity. - Funding your account.
Transfer funds to your brokerage account using fiat money. - Research companies.
Research companies in the crypto industry to determine which ones you want to invest in. - Buying stocks.
Place an order to buy shares of your chosen companies through a brokerage platform. Most major brokerages allow you to trade stocks without commissions, although they may charge a spread. - Monitoring and management.
Track your investments and make future management decisions based on financial reports and market trends.
Advantages of this method:
- trading without commissions – many large brokerages allow you to trade stocks without charging commissions, which can lower your overall costs;
- buying shares of crypto companies allows you to bet on leaders in the industry, which can lead to significant returns if the company is successful;
- investing in stocks is easier for those unfamiliar with the technical aspects and cybersecurity of cryptocurrencies.
Disadvantages of this method:
- volatility – cryptocurrency companies are subject to the same volatility as cryptocurrencies. Abrupt changes in the value of cryptocurrencies can affect the stock price of companies;
- inexperienced investors may find it difficult as this method requires a detailed understanding of the market and companies.
Thus, buying shares of crypto companies can be a good way to invest in the cryptocurrency industry, especially for those who want to avoid the technical complexities involved in buying cryptocurrency directly. However, the risks associated with market volatility and the fortunes of individual companies should be considered.
Other methods
Traders can use other methods to participate in the cryptocurrency market. These methods include:
- Cryptocurrency mining.
Mining is the process of confirming transactions and adding them to the blockchain using the processing power of specialized equipment. For this work, miners are rewarded in the form of new coins. One of the main advantages of mining is the ability to obtain new coins without having to buy them on the market. Also, miners are actively involved in maintaining and securing the network, which makes them important participants in the cryptocurrency ecosystem.
However, mining requires a significant upfront cost for equipment such as ASICs or GPUs, as well as additional energy costs, as mining consumes a large amount of power. Setting up and operating mining equipment also requires technical knowledge and skills, which can be challenging for beginners.
- Cryptocurrency Stacking.
Cryptocurrency staking involves holding a certain number of coins in a wallet or on a special platform to keep the blockchain running. For this, coin owners are rewarded in the form of additional coins, allowing them to earn passive income. This method also contributes to the security and decentralization of the network, as steaking participants become a kind of guarantor of the blockchain’s reliability.
Steaking has a few drawbacks as well. First, the funds used for stealing may be subject to risks of hacking and theft if they are stored on untrusted platforms. Second, steaking typically involves locking up funds for a certain amount of time, which limits their liquidity and makes them unavailable for other investments or spending.
- Cryptocurrency Loans and Deposits.
Cryptocurrency loans and deposits provide an opportunity for cryptocurrency owners to earn interest income for lending their assets. Cryptocurrency owners can place their coins on platforms that provide loans and receive interest payments from borrowers. This can be a lucrative way to generate passive income. In addition, borrowers can use their cryptocurrency as collateral to obtain fiat money or other cryptocurrency assets, allowing them to maintain their position in the market.
The main risk of this investment method is the possible default of borrowers, which can lead to losses for lenders. Moreover, the value of the cryptocurrency used as collateral can fluctuate significantly, which increases the risk of liquidating the position if the value of the asset falls below a certain level.
Each of these approaches has a different level of risk and degree of influence from the cryptocurrency market, so it’s important to understand exactly what you’re buying and how it fits your investment goals.
Tips for investing in cryptocurrency
To make your crypto investing process more manageable and informed, follow the advice of our experts:
Do your research and find the best niche to invest in?
Understanding what you are investing in is key to success. Approach this process the same way you would any other investment. Start by researching each cryptocurrency as if you were analyzing company stocks: read available documents, reports, and reviews.
Since there are many cryptocurrencies, each of which functions differently and has its characteristics, you need to research each one thoroughly. This includes understanding what assets or cash flows, if any, support a particular cryptocurrency.
For example,
unlike stocks, which are backed by the financial performance of companies, many cryptocurrencies such as Bitcoin have no physical assets or revenue streams and are dependent on market demand.
Pay attention to the most well-known and established cryptocurrencies such as Ethereum, Dogecoin, Cardano, and Solana. They have different growth potential and features. Before investing, research their pros and cons to understand how each asset can fit into your investment portfolio and what risks you are willing to take. Understanding the investment case for each cryptocurrency will help you make an informed choice and minimize potential losses.
It’s also worth familiarizing yourself with market trends and risks. Research current news and events in the world of cryptocurrencies. Don’t base your decisions solely on historical price growth – it’s important to understand what will drive future asset development.
Consider your storage and digital wallet options as well
Cryptocurrency storage is also important. You can use asset storage platforms or crypto wallets. Platforms should be safe and secure, with protection from hackers and financial guarantees. Cryptocurrency wallets can be “hot” (online) or “cold” (physical), and choosing the right wallet can provide an extra layer of security.
Watch that volatility
Crypto and stock prices can change very quickly, which creates opportunities for experienced traders but can be dangerous for beginners. Inexperienced investors may find it difficult to manage volatility and risk, so it is important to have a strategy to minimize losses.
Manage your risk
Managing risk when investing in cryptocurrency is crucial due to the high volatility and lack of centralized regulation.
How to protect your cryptocurrency investments:
- Only invest funds that you can afford to lose to avoid negatively impacting your financial situation. Avoid investing funds that you may need shortly;
- develop a risk management strategy. For long-term investors, this may be holding positions despite market fluctuations, while short-term traders should establish clear exit rules to avoid significant losses;
- diversify your portfolio. Diversification and setting aside funds will also help reduce your overall risk and maintain a financial cushion for future trades.
It is also important to manage your emotions to avoid making impulsive decisions that can compound losses.
Finally, it is important to pay attention to the security of the exchanges and brokers you use. While you may legally own assets, it is the responsibility of the platform to protect them, and that protection must be robust. If an exchange or broker does not provide sufficient security, some traders choose to store their coins in a cryptocurrency wallet to ensure they are protected from hackers and other threats by keeping them offline.
Frequent questions and answers
Is cryptocurrency a good investment?
Cryptocurrency can be a good choice for investors willing to accept a high level of risk. Because of its volatility, this type of investment is not suitable for conservative investors looking for stability and predictability. However, if you are willing to take more risks and are looking for the potential for high returns, cryptocurrencies can offer attractive growth opportunities.
How much should you invest in cryptocurrency?
The amount you should invest in cryptocurrency can be very small, starting at a few dollars, as many exchanges and trading apps have minimum trades starting at $5 or $10. However, it is important to keep in mind that some trading platforms charge high commissions for small amounts, which can reduce the effectiveness of your investment. Therefore, it pays to choose brokers and exchanges with low commissions or spreads.
Experts recommend limiting your cryptocurrency investments to 1%-5% of your total capital. This will help you manage your risks and not jeopardize your finances. Keep in mind that cryptocurrencies can fluctuate significantly in price, and it is important not to invest more than you can afford to lose.
Diversification also plays a key role. Investing in different cryptocurrencies can reduce risk, as some have better long-term potential and are less susceptible to price manipulation. At the same time, even larger and more well-known cryptocurrencies can show significant fluctuations. Therefore, it is important not only to diversify the cryptocurrencies in your portfolio but also to consider their share in your overall investment portfolio.
What do I need to know before buying cryptocurrency?
Before buying cryptocurrency, it is important to consider a few key factors. First, since the cryptocurrency market is still young and unstable, it is important to put risk management ahead of potential growth to avoid emotional and financial stress. Invest only the amount you can afford to lose to prevent catastrophic consequences in the event of a market crash.
Additionally, cryptocurrency can be subject to market manipulation and does not offer the same regulatory protections as traditional securities. The lack of insurance from the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation means you should approach investing with caution.
The cryptocurrency market is highly volatile and prices can fluctuate wildly, creating additional risk. In addition, possible regulatory changes could affect the value of cryptocurrencies in the future, and some cryptocurrencies could become illegal, rendering them worthless.
What to look for in a cryptocurrency investment?
First, keep an eye out for new developments and changes in the cryptocurrency industry, as they can significantly affect the value of your assets.
If you decide to invest, research each cryptocurrency thoroughly before buying and pay attention to transaction fees, which can vary significantly from currency to currency.
Understanding the tax implications is also critical, especially if you are buying or selling cryptocurrency.
It’s important to approach investments with a long-term perspective. Cryptocurrencies can change their price quickly, and emotions often lead to mistakes such as buying at a peak or selling during a downturn. A long-term approach will help you avoid making decisions based on short-term market fluctuations.