Crypto Investment Strategies: Do They Work?

Investing in crypto is a hot topic, but it's important to understand the risks and potential pitfalls. Cryptocurrency is a digital currency that uses cryptography to secure transactions, and it's been growing in popularity as an investment option. Crypto is decentralised, meaning it's not issued or backed by a central authority like a government. This makes it theoretically immune to government interference but also means it's unregulated and prone to scams and hacking. Crypto is also extremely volatile, with prices fluctuating dramatically, and it's a favourite of criminals for money laundering and illicit purchases. Despite the risks, some people have made substantial fortunes by investing in crypto, so it can be tempting. If you're considering investing, it's important to do your research, understand the unique characteristics of each cryptocurrency, and only invest what you can afford to lose.

How does cryptocurrency work?

Cryptocurrency is a digital payment system that doesn't rely on banks to verify transactions. It is a peer-to-peer system that enables anyone, anywhere, to send and receive payments. Cryptocurrency payments exist purely as digital entries in an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.

The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today. Bitcoin was initially developed primarily to be a form of payment that isn't controlled or distributed by a central bank. While financial institutions have traditionally been necessary to verify that a payment has been processed successfully, Bitcoin accomplishes this securely without that central authority.

Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders. Blockchain describes the way transactions are recorded into "blocks" and time-stamped. It's a complex, technical process, but the result is a digital ledger of cryptocurrency transactions that's hard for hackers to tamper with.

Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.

If you own cryptocurrency, you don’t own anything tangible. What you own is a key that allows you to move a record or a unit of measure from one person to another without a trusted third party.

Cryptocurrencies are fungible, meaning the value remains the same when bought, sold, or traded. One dollar in crypto will always be one dollar. Cryptocurrency isn’t the same as non-fungible tokens (NFTs) with variable values. The value of one NFT dollar depends on the digital asset it’s attached to.

An advantage of cryptocurrency is privacy. When you make a purchase with cryptocurrency, you don’t need to provide any personal information. This protects you from potential identity theft and other fraudulent activities. Another advantage is that cryptocurrency is global, so there’s no need to figure out or pay foreign exchange rates, although it isn’t legal in some countries.

Cryptocurrency is available as coins or tokens. The difference is that tokens are assets that exist on a blockchain, while coins can be virtual, digital, or tangible. Coins are more like traditional money; a digital coin has its own blockchain. Conversely, a token is created on an existing blockchain and can be used as currency or to represent asset ownership.

The most popular cryptocurrencies, after Bitcoin, include Ethereum, Cardano, Solana, Dogecoin, and XRP.

How to buy cryptocurrency

If you're looking to buy cryptocurrency, there are typically three steps involved. These are:

• Choosing a platform: You can either use a traditional broker or a dedicated cryptocurrency exchange. Traditional brokers offer ways to buy and sell cryptocurrency, as well as other financial assets like stocks, bonds, and ETFs. Cryptocurrency exchanges, on the other hand, offer a wider range of cryptocurrencies, wallet storage, interest-bearing account options, and more. When comparing different platforms, consider which cryptocurrencies are on offer, the fees they charge, their security features, storage and withdrawal options, and any educational resources they provide.
• Funding your account: Most crypto exchanges allow users to purchase crypto using fiat currencies (e.g. US Dollar, British Pound, Euro) via their debit or credit cards. However, crypto purchases with credit cards are considered risky, and some exchanges and credit card companies don't support them. Some platforms also accept ACH and wire transfers.
• Placing an order: You can place an order via your broker's or exchange's web or mobile platform. If you are planning to buy cryptocurrencies, you can do so by selecting "buy," choosing the order type, entering the amount you want to purchase, and confirming the order. The same process applies to "sell" orders.

There are also other ways to invest in crypto, such as using payment services like PayPal, Cash App, and Venmo, or investing in Bitcoin trusts, Bitcoin mutual funds, or blockchain stocks or ETFs.

Where to store cryptocurrency

Once you have purchased cryptocurrency, you need to store it safely in a crypto wallet to protect it from hacks or theft. Crypto wallets can be "hot wallets", which use online software to protect the private keys to your assets, or "cold wallets" (also known as hardware wallets), which rely on offline electronic devices to securely store your private keys.

How to store cryptocurrency

When you own cryptocurrency, one of the most important things to consider is how to store it safely. Unlike money in a bank account, crypto does not have the same types of protection. As the owner, storing your crypto safely is your responsibility. If you lose access to your crypto, it's likely gone forever.

There are several different options for storing your cryptocurrency, each with its own advantages and disadvantages. These include hardware devices, applications, and even a simple piece of paper.

Hardware Wallets

Hardware wallets are small physical devices that connect to your computer and store cryptocurrency offline. They are considered the safest option for storing your crypto as they are not connected to the internet and are, therefore, less susceptible to hacks. Examples include the Ledger Nano X, Trezor Model T, and Ellipal Titan.

The main drawback of hardware wallets is the inconvenience of having to connect your device to move crypto, making the process slower than if everything was stored online. They are also not free to use.

Software Wallets

Software wallets are applications that store cryptocurrencies online. They are typically available as desktop and mobile apps, or as web-based hot wallets. Software wallets are usually free, easy to use, and allow you to send and receive crypto quickly.

However, because they store crypto online, they carry the risk of being hacked. For this reason, they are not recommended for storing significant crypto funds.

Paper Wallets

A paper wallet is a physical printout of your public and private keys, usually in the form of a string of characters and scannable QR codes. Paper wallets are a free and highly secure way to store your crypto offline.

However, they are the least user-friendly option for storing crypto, as they require you to follow a set of steps to generate and print your keys. There is also a risk of losing the paper, or of the ink bleeding or the paper deteriorating over time.

Custodial Wallets

A custodial wallet is a default option for crypto storage, where a third party holds your crypto for you, either through cold (offline) storage, hot (online) storage, or a combination of both. When you buy coins from crypto exchanges, apps, or stock brokers, they typically put it in a custodial wallet that they control.

The advantage of custodial wallets is that they require less work on the user's part and are easy to access for trading. However, the downside is that a third party controls your crypto, and you are relying on their security measures.

Best Practices for Storing Cryptocurrency

To keep your cryptocurrency safe, it is recommended to:

• Store the bulk of your crypto in a cold wallet, as it is the most secure option.
• Use a hot wallet for smaller amounts of crypto that you want available for trading.
• Physically record the recovery phrases for your crypto wallets and keep them in a secure location.
• Never share your recovery phrase or private keys with anyone, and don't save them to your computer.
• Always use two-factor authentication when possible.
• Be aware of phishing sites and only connect to secure websites with a valid HTTPS certificate.
• Use a secure Wi-Fi connection and avoid public Wi-Fi.
• Separate your funds by using cold storage for long-term holdings and a hot wallet for trading and transactions.
• Double-check crypto addresses before sending transactions to avoid sending to the wrong address.
• Regularly back up your private keys or seed phrases in secure locations.
• Keep your software up to date to patch security vulnerabilities.
• Use strong passwords and encryption to protect your accounts and devices.

Is cryptocurrency a good investment?

Cryptocurrency is a digital currency, such as Bitcoin, that is used as an alternative payment method or speculative investment. It is based on blockchain technology, which maintains a tamper-resistant record of transactions and keeps track of who owns what.

The Pros

Cryptocurrency can provide astronomically high returns overnight. It can be used as an inflation hedge, given its finite supply. It also offers autonomy and enhanced transparency, as transactions are recorded on blockchains, promoting confidence and decreasing dependency on conventional financial tools. Crypto transactions are also faster and often cheaper than traditional bank transfers, especially for international transactions.

The Cons

Cryptocurrency is extremely volatile and prone to significant price swings. It is also subject to security breaches and cyberattacks, which can result in significant losses for investors. There is also a lack of regulation and oversight, and the risk of losing your private key, without which it is impossible to access your cryptocurrency.

Key Considerations

• Time horizon and risk tolerance: Investing in cryptocurrency tends to be more long-term and disciplined, while trading can be more short-term and speculative. Consider your risk tolerance and whether you can bear the volatility and potential losses.
• Liquidity constraints: Certain cryptocurrencies are more liquid than others, which means you may face illiquidity when buying or selling.
• Due diligence: Conduct thorough research on the cryptocurrency, including its purpose, technology, use case, and the team behind it. Avoid buying based on fear of missing out (FOMO) or a friend's hot tip.
• Diversification: Consider diversifying your investments across various instruments and asset classes to manage risk. Major cryptocurrencies like Bitcoin and Ethereum are generally less risky than newer or smaller-cap coins.
• Regulation and legal status: Cryptocurrency is legal in the U.S., but the lack of a global regulatory framework creates uncertainty. Regulatory changes can significantly impact the market.
• Tax implications: In the U.S., cryptocurrencies are taxed as property, and transactions are taxable events. Consult a tax advisor to understand the tax consequences.

Cryptocurrency can be a good investment if you carefully consider the risks and potential benefits. It is essential to approach it with caution, conduct thorough research, and only invest what you can afford to lose. Diversification, due diligence, and a long-term perspective are key to navigating this volatile market successfully.

Cryptocurrency investing FAQs

In theory, it takes only a few dollars to invest in cryptocurrency. Most crypto exchanges have a minimum trade that might be $5 or $10. However, it's important to note that some trading platforms will take a large chunk of your investment as a fee if you're trading small amounts. Therefore, look for a broker or exchange that minimizes your fees.

Blockchain is a kind of database that records and timestamps every entry into it. It is run with decentralized computer networks, meaning many redundant computers operate the database, checking and rechecking the transactions to ensure accuracy. Cryptocurrency is based on blockchain technology, which produces a secure encrypted record of the value of each virtual coin and its associated transactions.

Some cryptocurrencies reward those who verify the transactions on the blockchain database in a process called mining. For example, Bitcoin miners solve complex mathematical problems as part of the verification process and are rewarded with Bitcoins. To mine Bitcoins, powerful processing units that consume huge amounts of energy are required.

If you're looking to invest in Bitcoin, you can do so through crypto exchanges, traditional brokers, or financial apps. Crypto exchanges tend to have the widest selection of cryptocurrencies and are the most competitive on price. Traditional brokers allow you to trade Bitcoin in addition to other financial assets, though they have a more limited selection of cryptocurrencies. Financial apps now allow trading of Bitcoin and a few other cryptos.

An altcoin is an alternative to Bitcoin. In the past, the term was used pejoratively as Bitcoin was the largest and most popular cryptocurrency. However, with the emergence of other popular cryptocurrencies such as Ethereum and Solana, the term has become somewhat outmoded.

Frequently asked questions