Crypto Investment: Is It Right For You?

Investing in cryptocurrency has become an increasingly popular option, with many investors curious about getting into the game. Cryptocurrency is a virtual currency that can be used to pay for purchases online without going through an intermediary, such as a bank, or it can be held as an investment.

There are several ways to invest in cryptocurrency, including buying it directly through an exchange or investment platform, investing in crypto-related exchange-traded funds (ETFs) or stocks, or even investing in companies with a partial or total focus on cryptocurrency.

However, it's important to note that investing in cryptocurrency is risky and highly volatile, with large swings in value over short periods of time. Before investing, it's crucial to carefully research any digital coin and understand the tax implications of using crypto.

Buying crypto directly

One of the most common ways to invest in crypto is to buy it directly. This can be done via a traditional investment platform or a crypto exchange. Buying crypto directly gives you exposure to the industry in as little as minutes. Entering an order on a traditional investment platform or an exchange can also provide hands-on experience with the buying process, which can be useful for better understanding how crypto works.

When buying crypto directly, you should be aware of the risks involved. Crypto is vulnerable to online theft, so it's important to learn the basics of crypto cybersecurity before purchasing. Transferring coins is also a multi-step process where even small errors could result in losing access to your investments. Additionally, crypto is highly volatile, and there is a possibility that the value of any cryptocurrency can drop to zero.

To buy crypto directly, you will need to follow these steps:

• Choose a crypto exchange: Select a reputable and well-known exchange that offers a large selection of currencies. Examples include Coinbase, Kraken, Gemini, and Binance.
• Create an account: Provide your personal information and verify your identity to complete the registration process. Use two-factor authentication and a long, unique password to enhance security.
• Fund your account: Before you can buy any crypto, you need to fund your exchange account with fiat money, such as U.S. dollars. You can connect your bank account directly or use a debit or credit card. However, be aware that credit card issuers treat crypto purchases as cash advances and charge high fees and interest rates.
• Choose the cryptocurrency you want to buy: Research and decide which cryptocurrency you want to invest in. You can choose to invest in one or multiple cryptocurrencies.
• Place a buy order: Follow the steps provided by the exchange to submit and complete a buy order for your chosen cryptocurrency.
• Store your cryptocurrency in a digital wallet: After your purchase, you will need a digital wallet to access and store your crypto. This can be provided by the exchange or an independent wallet provider.

It's important to remember that investing in cryptocurrency is risky, and you should not invest more money than you can afford to lose. Additionally, pay attention to transaction fees when making crypto purchases, as these can vary significantly among currencies.

Crypto exchange-traded funds (ETFs)

Crypto ETFs are a developing asset class, and the market may look different in the future due to regulatory uncertainty. They provide exposure to crypto without the additional expenses or risks of owning and holding cryptocurrencies in a crypto wallet. Crypto ETFs also lower the learning curve for investors who are unfamiliar with networking technology and crypto jargon. Additionally, they offer more security for investors as cryptocurrency exchanges, storage devices, wallets, and some poorly designed blockchains have been hacked.

There are some disadvantages to crypto ETFs. They do not always duplicate the price moves of the underlying digital token, especially for ETFs that depend on futures contracts to track cryptocurrencies. Crypto ETFs also have their own fees, and since they are often actively managed, they can have higher expense ratios than other ETFs. Investors in crypto ETFs do not have direct ownership or control over the underlying cryptocurrency.

The first cryptocurrency ETF, the ProShares Bitcoin Strategy ETF, started trading in October 2021. This ETF tracks bitcoin futures prices. In January 2024, the Securities and Exchange Commission (SEC) approved the first 11 spot cryptocurrency ETFs for the U.S. market.

Crypto exchange platforms

• Coinbase: Founded in 2012, Coinbase is the largest exchange by trading volume in the US and is available in over 100 countries. It offers an easy-to-use platform with strong security features and advanced trading options. Coinbase supports over 50 different cryptocurrencies and crypto tokens.
• Binance: Founded in 2017, Binance quickly rose to become the largest crypto exchange globally by trading volume. It offers the largest assortment of crypto, with over 500 coins and tokens. However, it has faced regulatory scrutiny for lax anti-money laundering checks.
• Kraken: One of the oldest crypto exchanges, founded in 2011. Kraken offers a solid range of coins with competitive trading fees and advanced trading tools. It also provides good customer service and educational resources.
• Gemini: Founded in 2014 by the Winklevoss twins, Gemini is known for its strong security measures and compliance with regulations. It offers a professional-grade trading platform and supports over 80 digital currencies and tokens.
• Crypto.com: Founded in 2016, Crypto.com is available in 90 countries and supports over 350 cryptocurrencies. It provides a vast ecosystem, including its own blockchain, native token, and crypto visa card. The Crypto.com mobile app offers a wide range of features for on-the-go trading.
• Robinhood: A mobile app for stock investing that also supports crypto purchases. Robinhood offers a simple interface but lacks certain crypto-specific features.

When choosing a crypto exchange platform, it is important to consider factors such as security, fees, the range of cryptocurrencies offered, customer support, and regulatory compliance. Additionally, users should be cautious of potential risks, such as hacks and cyber theft, which have affected even some of the largest exchanges.

Crypto wallets

There are two main types of crypto wallets: hot wallets and cold wallets. The main difference is that hot wallets are always connected to the internet, whereas cold wallets are kept offline.

Hot Wallets

Hot wallets are digital tools that are always connected to the internet. They are usually accessible through a phone, desktop computer, or web browser. Hot wallets are more susceptible to cyberattacks because they are always online. Examples of hot wallets include:

• Paper wallets: Keys are written on a physical medium like paper and stored in a safe place.
• Hardware wallets: Keys are stored in a thumb drive device that is kept in a safe place and only connected to a computer when you want to use your crypto.
• Online wallets: Keys are stored in an app or other software.

Cold Wallets

Cold wallets store your digital keys offline, usually on a piece of hardware or a sheet of paper. Hardware wallets usually come in the form of a USB drive, which lets you buy, sell, and trade crypto. Cold wallets are deliberately designed to be hard to hack, and unless the wallet owner falls for a phishing attack, hackers have no way of obtaining the owner's keys remotely.

Examples of cold wallets include:

• Ledger Nano S Plus: Ledger is one of the most well-known brands in the crypto space, and its products stand out for using a Secure Element component to provide an extra layer of security.
• SafePal: SafePal offers both software and hardware wallet options that support over 10,000 crypto assets.
• KeepKey: KeepKey is a reasonably priced hardware wallet that supports over 7,000 crypto assets.

Choosing a Crypto Wallet

When choosing a crypto wallet, it is important to consider how often you trade, what types of crypto you want to trade, how much you are willing to spend, and what functionality you need. It is also essential to prioritize safety and risk management over upside due to the volatility of the crypto market.

Crypto mining

Miners compete with their peers to be the first to solve a complex mathematical equation in the form of a cryptographic hash. The first miner to crack the code gets to add the block to the ledger and receive a reward. Each block uses a hash function to refer to the previous block, forming an unbroken chain of blocks that leads back to the first block.

In the early days of Bitcoin, anyone with a decent home computer could participate in mining. However, as the blockchain has grown, the computational power required to maintain it has increased significantly. As a result, amateur bitcoin mining has not been profitable for hobbyists for years, and virtually all mining is now done by specialized companies or groups of people who band their resources together.

Bitcoin mining requires substantial hardware and software. Miners need a graphics processing unit (GPU) or an application-specific integrated circuit (ASIC). These machines can range in price from about $1,000 to $2,000 for a capable GPU, while ASICs can cost much more, into the tens of thousands of dollars.

The process of crypto mining also consumes a large amount of electricity and has been known to impact the power grid and the environment.

Frequently asked questions