Can You Outsource Cryptocurrency Investment? Exploring Options

Cryptocurrency is a digital currency that operates outside the regulation of any individual company or government. It is overseen by an online, decentralised network of users. Cryptocurrencies are often referred to as digital coins or tokens, and they are guarded by encryption through blockchain technology.

Cryptocurrency can be used to buy goods and services, or traded for a profit. People invest in cryptocurrencies for the same reason anyone invests in anything: they hope its value will rise, netting them a profit.

There are several ways to invest in cryptocurrency. You can buy it through a broker or a cryptocurrency exchange, or you can invest through your brokerage. However, investing in cryptocurrency is not without its risks. Cryptocurrencies are highly volatile, and their value can fluctuate dramatically. There is also a high risk of fraud and theft, and the regulatory status of cryptocurrencies is still unclear in many areas.

How to buy cryptocurrency

There are several ways to buy cryptocurrency, and the process can be confusing for newcomers. Here is a step-by-step guide on how to buy cryptocurrency:

Choose a Broker or Crypto Exchange

Firstly, you need to select a broker or a crypto exchange. Both options allow you to buy crypto, but there are some key differences. A cryptocurrency exchange is a platform where buyers and sellers meet to trade cryptocurrencies. Exchanges often have lower fees but can be more complex, with multiple trade types and advanced performance charts. Examples of well-known exchanges include Coinbase, Netcoins, Newton, Coinberry, and Kraken. Cryptocurrency brokers, on the other hand, simplify the process of buying crypto but may charge higher fees or restrict moving holdings off their platform. Examples of brokers include Robinhood and SoFi.

Create and Verify Your Account

Once you have chosen a broker or exchange, you will need to create an account. This usually involves providing personal information, such as your name, date of birth, address, and email address. Depending on the platform and the amount you plan to buy, you may also need to verify your identity by submitting a copy of your driver's license or passport. Some platforms may even ask for a selfie to prove your appearance matches your documents.

Deposit Funds to Invest

To buy crypto, you will need to deposit funds into your account. This can be done by linking your bank account, initiating a wire transfer, or using a debit or credit card. However, it is important to note that credit card purchases are often treated as cash advances by card companies, resulting in higher interest rates and additional fees. Therefore, it is generally recommended to use other funding methods if possible.

Place Your Cryptocurrency Order

Once your account is funded, you are ready to place your first cryptocurrency order. There are hundreds of cryptocurrencies to choose from, including well-known options like Bitcoin and Ethereum, as well as lesser-known options. When placing your order, you will need to enter the ticker symbol of the cryptocurrency you wish to purchase, such as BTC for Bitcoin, and specify the quantity of coins. Many exchanges and brokers allow you to purchase fractional shares of cryptocurrencies, so you don't need to buy a whole coin.

Select a Storage Method

Cryptocurrency exchanges are not always secure, and there is a risk of theft or hacking. Therefore, it is important to choose a secure storage method for your cryptocurrencies. You can leave your crypto on the exchange in a crypto wallet attached to the exchange, or you can transfer it to a separate hot or cold wallet. Hot wallets are connected to the internet and are convenient but carry a higher risk of theft. Cold wallets, such as USB drives or hard drives, are offline and provide top-tier security but come with the risk of losing access to your cryptocurrency if the device fails or the keycode is lost.

The risks of investing in cryptocurrency

Volatile Market

The cryptocurrency market is highly volatile, with dramatic price swings that can resemble a roller-coaster ride. The market is constantly moving, and it is not unusual for a cryptocurrency to skyrocket to fantastic short-term gains or take a nosedive. The 24/7 nature of the market, driven by a global community, means that news and social media hype can quickly impact prices, resulting in an unusually high price volatility compared to other asset types.

Unclear Valuation

Unlike stocks, which are tied to the financial performance of a company, crypto lacks concrete financial metrics, making valuation ambiguous. Cryptocurrencies often have no underlying business operations or financial results to analyse, and their long-term prospects are unclear. This makes it challenging to predict their future performance and assess their intrinsic value.

Cybersecurity Threats

Cryptocurrency exchanges and wallets are frequent targets of cyberattacks and hacks. While losing your crypto wallet keys or passwords can be a problem, the bigger threat is the potential loss of your digital assets due to an exchange breach. It is crucial to choose secure platforms with robust security measures, such as Coinbase, Binance, and Kraken.

Regulatory Uncertainty

The regulatory landscape for cryptocurrencies is still evolving, and governments worldwide are figuring out how to treat and regulate them. The lack of clear regulations and tax guidelines can create uncertainty for investors, especially institutional investors and those concerned about tax implications.

Decentralization Challenges

Decentralization is a key feature of cryptocurrencies, removing the need for middlemen like banks. However, this can also be a challenge. Decision-making and proposed changes in a decentralised blockchain network are managed by consensus and voting among a global community, which can delay necessary updates and leave the system vulnerable to malicious actors or voting system flaws.

Technical Complexity and Scams

The technical complexity of cryptocurrencies and blockchain technology creates opportunities for mistakes and scams. For example, sending cryptocurrencies to the wrong address due to a simple typing error can result in irreversible losses. Additionally, cryptocurrency holders are often targeted by scammers and hackers through fake websites, phishing emails, and other deceptive means.

Investing in cryptocurrencies carries substantial risks, and it is not suitable for everyone. It is crucial to understand these risks, conduct thorough research, and only invest what you can afford to lose. While the potential for high returns exists, it is equally important to be aware of the potential drawbacks and challenges of this volatile and evolving market.

How to store cryptocurrency

There are several ways to store cryptocurrency, each with its own pros and cons. Here are some of the most common methods:

Custodial Wallets

A custodial wallet is a wallet managed by a third party, such as a cryptocurrency exchange. The custodian stores your private keys for you, and may provide insurance on your holdings. Custodial wallets are convenient and require less work on the user's part, but they are not as secure as other options since you are relying on the security measures of the third party. Some examples of custodial wallets include Coinbase, Gemini, and Robinhood.

Non-Custodial Wallets

Non-custodial wallets, on the other hand, are those that you use to store your keys yourself, without any third-party involvement. These wallets can be either hot or cold. Hot wallets are software-based and connected to the internet, making them more vulnerable to hacking. Cold wallets, on the other hand, are offline and considered to be more secure. Examples of commercial cold wallets include Ledger Nano X and Trezor Model T.

Hardware Wallets

Hardware wallets are physical devices, similar to USB drives, that store your cryptocurrency offline. They are considered to be one of the safest options for storing cryptocurrency, as they are not connected to the internet and are therefore not susceptible to hacking. However, they can be inconvenient as you need to connect them to a device to move your crypto.

Paper Wallets

A paper wallet is a simple and inexpensive way to store your cryptocurrency offline. It involves printing out your public and private keys, usually in the form of QR codes, and storing them in a safe place. While this method is secure and cost-effective, it is not very user-friendly and there is a risk of losing the paper or it deteriorating over time.

When choosing a storage method for your cryptocurrency, it is important to consider the level of security, convenience, and cost. For large amounts of cryptocurrency, a cold wallet or hardware wallet is generally recommended, while hot wallets or custodial wallets may be more suitable for smaller amounts that you want to access easily for trading.

The future of cryptocurrency

Cryptocurrency has evolved from a relatively fringe community of anti-establishment investors to a household name. Everyday consumers have seen this new asset class as a way to pad their portfolios with potentially more rewarding, albeit riskier, assets. Older consumers have also begun to back crypto at much faster rates. In the U.S., consumers over 35 years old make up nearly half (47%) of those who expect to invest in cryptocurrency in the next 6 months.

The institutional money that has been pouring into cryptocurrency over the past few years has begun to change the power structure of the market. Crypto enthusiasts aren't the ones mining bitcoin anymore, nor are they the only ones profiting from its success. Over time, the mining network has been ring-fenced by a few companies who can provide the huge amounts of computing power and electricity required to mine at scale, making it very difficult for independent users to get involved.

Cryptocurrency has always been volatile, both in price and in consumers’ perception. Despite the explosion in recent years, what the future of cryptocurrency holds is still unclear.

How to invest in cryptocurrency safely

Cryptocurrency is a risky investment, so it's important to do your research and understand the potential pitfalls before getting involved. Here are some tips on how to invest in cryptocurrency safely:

• Understand the risks: Cryptocurrency is a highly volatile and speculative investment. The prices of cryptocurrencies can fluctuate wildly, and there is a risk of losing all your money. It's important to only invest what you can afford to lose.
• Do your research: There are thousands of cryptocurrencies available, and not all of them are legitimate. It's important to thoroughly research any crypto coin or token before investing. Look into the team behind the project, the problem it aims to solve, and the long-term viability of the project.
• Diversify your portfolio: Don't put all your eggs in one basket. Invest in a variety of cryptocurrencies to spread out your risk. This way, if one coin performs poorly, you still have exposure to others that may perform well.
• Use a reputable exchange: When buying or selling cryptocurrency, use a reputable and well-known exchange such as Coinbase, Binance, or Kraken. These exchanges tend to have stronger security measures in place to protect your investment.
• Secure your crypto: Consider using a crypto wallet to store your digital assets. There are two types of wallets: hot wallets, which are accessible via the internet and are more convenient, and cold wallets, which are physical storage devices that keep your crypto offline and are generally more secure.
• Manage your risk: Volatility can be dangerous for new investors. Consider setting aside a small amount of money for trading and only using a portion of it at first. This way, if a position moves against you, you'll still have money in reserve to trade with later.
• Don't invest more than you can afford to lose: This is a general rule for any investment, but it's especially important for cryptocurrency. Only invest what you are comfortable losing, as the market can be extremely volatile.
• Be aware of fees: Transaction fees can vary widely among currencies and exchanges, so be sure to consider these costs when investing.
• Take a long-term perspective: Cryptocurrency is a relatively new asset class, and its value can fluctuate dramatically in the short term. It's important to take a long-term view and not make emotional decisions based on short-term price movements.
• Consider the regulatory environment: Cryptocurrency regulation is still evolving, and changes in government policies can significantly impact the value of your investment. Be sure to stay up-to-date on any regulatory developments that may affect your holdings.
• Don't fall for scams: Cryptocurrency has become a popular vehicle for fraud, such as pump-and-dump schemes. Be cautious of heavily promoted coins on social media, and always thoroughly vet any investment opportunities to avoid scams.

Frequently asked questions