So, you want to invest in crypto? I’ll walk you through all the basics you’ll need to get started buying and trading cryptocurrencies, whether you’re hoping to buy crypto as an investment or just to have and spend. We’ll cover:
- Should you invest in crypto?
- Where to buy cryptocurrency
- Choosing which cryptocurrencies to buy
- How to store cryptocurrency
- Crypto and taxes
- Things to keep in mind
Should you invest in crypto?
Before you buying single bit of Bitcoin, it’s imperative to understand the significant risks that come with cryptocurrencies and know what you’re getting into.
Risks of crypto investing
Volatility: Cryptocurrencies are known for their extreme price fluctuations. Crypto markets are more volatile than stock markets. It’s not unusual to see the value of cryptocurrencies swing 10% or more in a single day.
Lack of regulation. Even though Bitcoin has been around for more than a decade now, the world of crypto continues to evolve rapidly, with new surprises around every corner. There are thousands of cryptocurrencies and hundreds of places to trade them. And yet, there is little to no regulation. Although any investment involves risk, you at least know that when you buy an exchange-traded fund (ETF), both the fund company and the broker you’re using to buy it must follow certain rules or risk massive government fines. That’s not the case with crypto. Over the past several years FTX grew to be one of the world’s largest crypto exchanges and then, suddenly, was bankrupt and its founder facing decades in prison. Customers lost nearly $9 billion dollars.
Regulatory uncertainty. The legal status of cryptocurrencies varies from country to country. The addition of new regulations could significantly impact crypto markets.
Security. While the blockchain itself is secure, exchanges and wallets can be vulnerable to hacking. If your crypto is stolen, there’s no getting back.
Short track record. Unlike traditional investments, cryptocurrencies don’t have a long track record. This makes predicting their future a challenge.
Reasons to invest in crypto
Now, it’s worth asking what you hope to get out of your crypto investments. Are you you speculating that certain cryptocurrencies are going to appreciate wildly in the long-run? Do you want to try your hand at timing crypto markets and making profitable trades? Or do you want to own some crypto to make anonymous purchases or simply take part in this wild new financial system?
Long-term speculation or diversification. Many people believe that certain cryptocurrencies will make an amazing long-term investment. This is true of Bitcoin which, by design, has a limited supply. Many believe that as Bitcoin becomes more and more scarce, it’s value will skyrocket. On the flip side, all cryptocurrencies have no inherit value. Some of the same things people like about crypto (for example, that it’s not controlled or backed by any government) also increase the risk. If the value of the US dollar started to fall, the US government would do everything it could to protect it. If a crypto goes into free-fall, only the markets will determine its fate. That said, long-term speculation is, I think, a valid reason to invest in cryptocurrency as long as it’s done as part of a diversified investment strategy. Personally, I wouldn’t put more than 5 or 10 percent of my assets into crypto. In other words, if you’re a new investing with $10,000 and want to buy Bitcoin, the more prudent thing to do might be to buy an index fund with $9,000 and put $100 in crypto.
Crypto trading. We’ve all heard the stories of the guys who made millions trading crypto. The thing is, they rode the wave. In the years leading up to COVID-19, crypto had an amazing run. Such markets make frequent trading look easy. And plenty of people will say “look at how much I made, I can teach you to do it, too!” The truth is, when a market is going up and there are many more good days than bad days, even a monkey can make money trading. When the market sours, however, making profitable trades is exceedingly difficult. If anyone can do it, it’s a trader with millions of capital and the fastest technology at their disposal. All of this is to say, I strongly recommend not trying to trade crypto thinking you’re going to make money. If you want to do it for fun, that’s fine. But treat it as entertainment much as you would placing a bet.
“Just to have it”. Beyond trading and speculation, major cryptos like Bitcoin, Etherium and Litecoin are proving to have utility as an alternative, secure and (mostly) anonymous means of payment. Increasingly, you can buy stuff with Bitcoin and a few other cryptos. It can be fun to pay for something this way. There may be things you want to spend money on that you don’t want to appear on your credit card statement (I won’t judge!) Or, maybe you hate banks and want to use alternative payments as much as possible. All that’s fine, but remember: Crypto is volatile. Imagine every day you wake up and check your bank account not knowing if it gained or lost 10 percent overnight!
Where to buy cryptocurrency
Buying crypto is becoming easier everyday. The best crypto exchanges make it easy for beginners to create an account and buy crypto using a debit card within minutes. Alternately, some of the same online brokers you turn to to buy stocks and ETFs are offering the ability to trade crypto. Or, if you don’t want the hassle of owning crypto directly, there are ETFs that track the crypto markets.
Crypto exchanges. Crypto exchanges like Coinbase and Binance work like stock markets for buying and selling crypto. They’re fairly intuitive to use, and you can store your crypto with them without the need for a crypto wallet. The upside to an exchange is ease-of-use. But downsides include fees for buying and selling crypto and platform risk (if the exchange goes bankrupt, you could lose any crypto you have stored with them). This is why you may want to use a crypto wallet in conjunction with an exchange. More on that in a minute.
Brokerage accounts. Not all stock brokerage accounts allow you to trade crypto, but many, like Robinhood, do. Brokers don’t offer access to as many cryptocurrencies as exchanges do (Coinbase claims to offer thousands of different cryptos). You also can’t do things like stake crypto through a brokerage account. (Staking is locking up your crypto for a period of time in order to earn a return, much like putting money into a savings account.) If you prefer, there are exchange-traded funds that track cryptocurrencies. This can be attractive if you want to make a bet on the entire crypto market and not just one or two coins.
Cash app. If you’re just after Bitcoin, did you know you can easily buy, sell and send Bitcoin through Cash App!? It’s become my preferred way to hold small amounts of Bitcoin I intend to spend, and it works really well!
Choosing which cryptocurrencies to buy
With thousands of cryptocurrencies on the market, choosing which ones to invest in is a delicate task. Blindly buying a trending coin is a recipe for disaster, as many “hot” cryptos end up being little more than ponzi schemes whose value quickly plummets to zero.
Personally, I only invest in Bitcoin because it’s the most widely-known, widely-accepted and longest-existing crypto. The downside to this strategy may be that Bitcoin has already experienced most of its growth and future gains, if any, may be modest compared to newer, higher-flying coins. But the flip side is that it’s probably less risky, too.
Things to look at when choosing cryptos to buy include:
Market capitalization. Market capitalization gives you an idea of how much value the market places on the cryptocurrency. Generally, a higher market cap indicates a more stable investment, as these currencies are less likely to be manipulated and tend to have a more established presence in the market. Additionally, look at the trading volume, which indicates how easily you can buy or sell the cryptocurrency. Higher volumes suggest greater liquidity, making it easier to trade without affecting the price too much.
Who developed it? The team behind a cryptocurrency can significantly influence its success. Look for a team with a track record of experience in cryptocurrency and blockchain technology. Additionally, a strong, active developer community indicates ongoing development and support, which is crucial for the long-term viability of any digital currency.
Technology and scalability. Evaluate the technology of the cryptocurrency, including transaction speed, scalability, and security features. Cryptocurrencies that can handle a large number of transactions quickly and securely are more likely to be adopted for widespread use. Scalability is crucial for a cryptocurrency to grow and handle increased demand.
How to store cryptocurrency
Once you own some cryptocurrency, you must store it securely in a crypto wallet. You can think of this wallet as a cyber vault that safeguards your assets and is only accessible with unique encrypted keys. The public key is used by those to whom you wish to send assets. Your private key is only accessible by you, allowing you to authorize your holdings’ movement across exchanges.
Keep in mind that the “wallet” is like a set of keys used to access your cryptocurrency. However, the assets themselves are stored on the blockchain, a cloud-based, global network of computers that form the backbone of the cryptocurrency infrastructure.
- Online Wallets. Stored in the cloud but slightly less secure.
- Mobile Wallets. Accessible from smart devices (phones, tablets, etc.).
- Desktop Wallets. It is stored on your computer.
- Hardware Wallets. Typically a USB drive or other portable media.
Note that while you have the option of getting a crypto wallet, you can also a crypto exchange or a
What is cryptocurrency, and how does it work?
The simple answer to this question is that cryptocurrency is a digital asset used to store value and conduct transactions using the blockchain network as its financial backbone. This may sound pretty complex. Although it is a bit complicated at first, it will probably be much easier to understand than old-fashioned fiat currency once you know the basics.
After all, with central banks around the world seemingly printing new money and taking on more new debts at a record pace, it comes as no surprise that investors seek a safe haven investment that can shield them from the consequences of rampant inflation while also being easy to exchange for goods and services.
Gone are the days where people bought physical gold and rare art to achieve this financial shelter. The costs of storing, securing, and purchase insurance for such valuable items are prohibitive for most people anyway. Not to mention the amount of time and coordination it takes to sell these assets in exchange for cash.
What makes crypto investing appealing?
Despite the risks, there are a couple of reasons many find crypto investing so attractive:
It is Decentralized
With cryptocurrency, you can invest in a digital asset that trades on an exchange, similar to the way stocks are traded on the market. Even the fiat currencies that countries use can also be traded and exchanged effortlessly in the markets.
What sets crypto apart from the bulk of these other liquid assets is that governments do not control cryptocurrencies. The term “decentralized finance,” or DeFi, is perhaps one of the most exciting things about crypto. It makes the dream of a free and fair market, which is not regulated by a central bank or government authority, a reality for many people.
It is a Liquid Asset
Cryptocurrencies can be seen as unique digital tokens that can be exchanged between people and between computers, with a universal value, no matter where you are on earth. What sets cryptocurrency apart from more conventional investments, like real estate, is that you can invest even little amounts of money in Bitcoin, or one of the many other digital currencies in existence, and capture the price fluctuations daily.
How the blockchain works
The blockchain is a digital network that uses a series of ledgers, which you can think of as permanent digital records, to facilitate the exchange of digital assets like cryptocurrencies. Blockchain technology is finding its way into other applications, such as the shipping industry, the digital art world, and even within the trade of precious stones.
Blockchain technology allows a record of every transaction to be marked and attached to the asset itself, allowing a potential buyer to gain insight into the history of the asset they are trading or investing in.
Because these digital markings are also recorded into the blockchain ledger and cannot be altered by anyone, they create a level of assurance, transparency, and security that was just not possible to attain in the past.
The blockchain works in the same manner for cryptocurrencies as it does for everything else, keeping a digital record mirrored by all of the other computers on the blockchain network that can be used for everything from conducting due diligence to verifying ownership of the assets themselves.
This helps crypto investors feel more secure because it is easy to trace their assets and recover them in the event of theft or a natural disaster. Because the assets’ digital footprint is stored in the cloud, they become resilient against many issues that would otherwise cause a total loss if that value had been held in more traditional or physical assets.
To add to the blockchain’s appeal, it is all run by computers and free from outside influence of any kind, meaning that even governments cannot access your digital wallet without getting your permission first.
Going back to the previous ideas about political and economic instability, it is no wonder that people from different places worldwide have decided to shield their wealth by investing in digital assets that are contained within the blockchain network.
Unlike a traditional bank account, which the government regulates, their assets cannot simply be seized, frozen, or lost due to a collapse in the value of their local currency. Unlike real estate and other physical assets, they can easily and quickly exchange their digital assets for goods and services in a large number of other countries around the globe.
Even if they had to leave everything behind and flee to another part of the world, they would be able to access their cryptocurrency wallet from any internet-connected device on earth.
Crypto and taxes
One of the most common questions that new entrants into the crypto space tend to have is whether or not they have to pay taxes on the money they may gain due to their involvement with trading digital assets.
After all, if these cryptocurrencies and digital assets are decentralized and beyond government authorities’ control, why should you have to worry about paying taxes on them? Well, unfortunately, taxes are something that is written into the laws of the majority of countries on the planet. While you may avoid being noticed for a short time, if you make big profits in crypto, you will likely need to transfer some of that money into a traditional bank account to use it.
The other thing to keep in mind is that the modern world of cryptocurrency exchanges involves companies that have to abide by the rule of law in the countries they are located in, making the reporting of account information upon government inquiry almost entirely unavoidable.
As with any other investment, or source of income, it would be in your best interest to consult with an accountant to find ways to benefit from trading crypto while also keeping your tax burden as small as possible.
Keep in mind that cryptocurrencies are typically not treated as currency when it comes to tax codes across much of the globe. They are viewed as investable assets by the majority of tax authorities around the world. As such, they tend to have certain conditions that can completely change your predicted tax liability based on how much profit (or loss) you make, the length of time during which you held the asset before selling for a profit, and also what type of account you hold the assets in.
In most cases, the profits you make from an asset held for less than a year are generally counted towards your “regular income” and are usually taxed at the highest rates. With that in mind, most countries offer much lower tax rates for investments held for more than 12 months, which is known as the capital gains tax.
For example, in the United States, a person who holds an investment for less than one year and sells that investment for a profit must add that profit to their ordinary income and be taxed appropriately based on their marginal income tax rate. However, if the same individual waited 12 months before selling their investment for a profit, they would only pay a fixed capital gains tax on that profit. Their ordinary income tax burden would not be affected at all.
You know what they say: Taxes and death are the only things that are guaranteed in life, and the same is true when it comes to cryptocurrencies. However, if your goal is more long-term, holding your digital assets in a tax-deferred account, such as a retirement or education savings account, might be the best way for you to avoid big surprises when taxes come due.
Cryptocurrency is everywhere. It’s in the news, on social media, even Elon Musk is advertising it. Knowing, not only how to invest in it, but if you should is becoming more and more difficult. One thing’s for sure: it’s an extremely risky investment. So if you do decide to pursue crypto trading, making sure you know the basics.
I’ve done my best to lay out the most basic steps for investing in cryptocurrency, the rest of the research is up to you and the individual currency you decide may work best for your portfolio.
Just remember: diversify!