How to Invest in Cryptocurrency: A Beginners’ Guide

Investing in cryptocurrency is going mainstream, at least for rich people. As of July 2021, 89% of Americans had heard of Bitcoin, and 22% owned a stake in the digital currency.

This article will discuss how to invest in cryptocurrency and cover all the steps you need to take. We will then discuss some alternative investment options if you want crypto exposure but decide that buying coins outright is not for you.

A Beginner’s Guide To Investing In Crypto

At the start of 2022, the price of most major cryptocurrencies plunged. Bitcoin fell from an all-time high of nearly $70,000 all the way down to just under $19,000 at the time of writing. Another popular crypto, Ether (ETH), saw its value tank by more than 50% in the first six months of the year, and Polkadot fell almost 62% as of the start of June.

Unfortunately, this volatility is very much par for the course for cryptocurrencies, but investors have found a way to capitalize on it and claim the best way to invest in crypto is to wait for these price drops.

The following is a step-by-step guide on how to invest in cryptocurrency.

Step 1: Learn The Basics Of Cryptocurrency Investing

Before you part with any fiat currency (dollars, pounds, euros, etc.), you’ll want to understand what you’re actually doing when buying and selling crypto. Strictly speaking, when you purchase crypto, you are not investing. Instead, you are speculating.

Here’s the difference. When you invest, you are buying an asset that generates income. Buy-to-let properties, for instance, are an investment, because tenants pay you income in the form of rent every month. Stocks are also an investment because they give you the rights to a slice of company profits, delivered every quarter. 

Crypto is different. It doesn’t pay an income. Instead, it is like buying a house and then hoping to flip it once the price rises. The goal is to make money from value appreciation when you sell.

The exception is when you buy cryptocurrency stock. Here, you are buying shares of companies heavily involved in crypto. They do generate income, so buying their shares is a form of investment, identical to purchasing stocks from any other publicly-traded company.

Granted, crypto may have intrinsic value as a currency, just like a condo bought speculatively can also provide housing services. But no honest crypto investing guide can ignore the fact that cryptocurrencies are different from conventional income-generating assets.

Before buying a cryptocurrency, research it thoroughly, ensuring you understand how it works. Check its type of authentication (usually proof-of-work or proof-of-stake) and price history to see how it moved in the past.

If you’re buying a stablecoin - i.e., crypto whose price is tied to another asset; for example, Tether’s value is tied to that of the US dollar - make sure you understand how the network maintains its connection to the fiat currency. You don’t want to buy a coin with a failed peg and watch the value of your tokens go to zero. Coins that are successful today may be worth nothing in six months (Luna is a good example of this happening). 

Unfortunately, with crypto, past price performance is not a reliable indication of future returns. Bitcoin and other major currencies may appear to follow cyclical, logarithmic, or “network size-related” price patterns, but these may ultimately turn out to be illusions. Finally, the only thing determining a token's value is the price buyers and sellers agree upon on cryptocurrency exchanges.

Step 2: Choose Your Broker

Once the preliminary steps are over, the next step is to choose a trading mechanism. Retail investors and traders have two options: Brokerages or exchanges.

A brokerage is just an agent who goes to the market to buy and sell cryptocurrency on your behalf. These services claim to take the complexity out of cryptocurrency purchases by interacting with exchanges instead of you. However, most of them charge multiple brokerage fees. If a brokerage claims to be free, that most likely means it’s selling your information to exchanges for profit.

There are also problems with storing coins on brokerages. Most brokers don’t let you move your crypto holdings out of their native accounts (unless you convert them to fiat first). This means you can’t store them in safe wallets, increasing your risk of loss through hacking.

The alternative is to use one of the many crypto exchange platforms directly. This is regarded by many as the easiest way to buy cryptocurrency. These are digital platforms, similar to stock trading platforms, where you connect with other buyers and sellers to trade.

Because of how cryptocurrency works, the transaction fees on these platforms tend to be quite low. However, relatively advanced (and somewhat confusing) features make them intimidating for new investors.

Popular crypto exchanges include:

• Crypto.com
• Gemini
• BitMart
• Charles Schwab
• Coinbase
• Kraken

Each platform offers tools suitable for a particular audience. Coinbase, for example, is a good option for those only just getting into cryptocurrency. Kraken, on the other hand, gears itself towards experienced traders with longer experience in the crypto markets.

Step 3: Set Up Your Account

Once you decide on the best way to invest in cryptocurrencies, the next step is to set up an account on your platform of choice.

How you do this will depend on the platform you choose. Many exchanges now require you to provide them with personal details as part of their “know your customer” obligations. The purpose of this is to reduce the risk of fraud, money laundering, and other malicious activities, and it is a federal requirement if you are in the US.

You’ll need to provide some sort of government identification – usually a passport or driver’s license. You may also need to upload a selfie to confirm you are the applicant, not somebody else using your identity to trade anonymously.

Step 4: Credit Your Account

The next step is to credit your account with the funds you need to start buying cryptocurrencies.

There are multiple ways to credit your account. These include:

• Wire transfer
• Bank transfer
• Debit card
• Credit card
• E-wallet transfer

Once you have the money in your account, you can then invest in cryptocurrency safely.

If you credit your exchange or brokerage account via credit card, you may wind up with high fees. Credit card companies treat cryptocurrency purchases as cash advances, meaning you’ll pay higher interest rates and fees.

Step 5: Start Investing

Finally, it’s time to start investing by placing your first cryptocurrency order. To do this, you’ll need to identify cryptocurrencies by their ticker (the three- or four-letter abbreviations that denote them). For instance:

1. Dogecoin (DOGE)
2. Ethereum (ETH)
3. Luna (LUNA)
4. Binance Coin (BNB)
5. Uniswap (UNI)

Once you find a coin you like, tell your platform how many you would like. Many platforms let you invest small sums by buying fractions of a coin. Some coins, like Bitcoin, sell for thousands of dollars apiece, so you probably won’t be buying them by the dozen.

When purchasing crypto, you can place various orders, similar to conventional stock trading. For instance:

• Market order: A market order is a tool that attempts to clear a sale at the prevailing market price. If enough people are willing to sell at the market price, the order will be filled at that price. If there aren’t, the price will fall, and you will get less for your money.
• Limit order: A limit order is an order where you buy or sell crypto at a specified price or better. If the price isn’t reached, the order won’t fulfill.
• Stop order: A stop order is a market order you execute once certain conditions are met (such as the price falling below a specific value). Stop orders may only be partially filled if the number of market orders available at that level is too low. Hence, you may have to wait for the order to complete.

Step 6: Deposit Your Cryptocurrency In A Wallet

The last step is to deposit your new tokens somewhere safe. As noted above, exchanges and brokerages provide storage for your money on their platforms. However, while they might call these “wallets,” they don’t always offer much security. If the power goes down or someone hacks the exchange, you could lose all your money.

The safest way to buy Bitcoin and other cryptocurrencies is to use a combination of a “hot” and “cold” wallet.

Hot wallets store your balance online and require internet-connected devices to access and operate. They are convenient, but because they are online, there is a higher risk of theft. That’s why you should only keep crypto you immediately want to trade in a hot wallet.

On the other hand, cold wallets are cut off from the internet, making them the most secure storage option for the biggest part of your crypto. Most take the form of external hard drives or USB sticks. However, you need to be careful. If you lose the drive, it gets broken, or you forget your password, you could lose access to your money forever.

You can use them individually, too. Hot wallets come with a higher risk of theft, but many are run by custodians, so you have a better chance of regaining access, should you get locked out.

Other Ways To Invest In Cryptocurrency

In the past, the only way to invest in cryptocurrency was to buy the currencies themselves. However, things are changing, and there are now more options than ever before.

Invest In Crypto ETFs

As of June 2021, there were no cryptocurrency ETFs regular investors could sink their money into. However, by June 2022, the situation was quite different. Options included ProShares Bitcoin Strategy ETF (BITO), Valkyrie Bitcoin Strategy ETF (BTF), Grayscale Bitcoin Trust (GBTC), VanEck Bitcoin Strategy ETF (XBTF), and many others.

These ETFs let you invest in multiple currencies and crypto-related products simultaneously, diversifying your risk and removing the need to make separate purchases.

Invest In Companies That Will Profit From Cryptocurrency

The other option is to learn how to invest in cryptocurrency stock – companies with deep ties to cryptocurrency operations. For instance, you might consider buying NVIDIA. This company makes graphics cards miners use to mine Bitcoin and other proof-of-work cryptocurrencies. 

It’s important to mention that crypto exchanges don’t let you purchase equity, only currency; hence, if you want to adopt this strategy, you’ll need to open an account with an online brokerage.

Takeaway

Learning how to invest in cryptocurrency is becoming more popular. If you decide to get into it, you need to understand it for what it is. Investing in crypto isn’t really investing: Instead, you buy tokens in the hope that they will appreciate so you can sell them again. Therefore, you are speculating, hoping that other people will value them more in the future. Always approach any such activities with caution, and invest with small sums first.