A Beginner's Guide To Investing In Cryptocurrency

Investing in cryptocurrency is a hot topic, but it's also a risky business. Cryptocurrencies are decentralised, digital currencies that are not issued, backed or regulated by a central authority like a government. They are secured by blockchain technology and their value is based on a combination of scarcity and the perception that they are a store of value, an anonymous means of payment, or a hedge against inflation.

There are several ways to invest in cryptocurrency, from buying it directly to investing in crypto funds and companies. You can buy cryptocurrency using a crypto exchange or through certain broker-dealers. But before you do, it's important to understand the risks and only invest what you can afford to lose.

How to buy cryptocurrency

Step 1: Understand the Basics

Before investing in cryptocurrency, it's important to understand the basics. Cryptocurrency is a digital currency that doesn't rely on a central authority like a bank to verify transactions or create new units. Instead, it uses cryptography and blockchain technology to secure and verify transactions. Blockchain is a decentralised system that records transactions in blocks, creating a chain of blocks that is difficult for hackers to alter.

Step 2: Research Different Cryptocurrencies

There are thousands of cryptocurrencies available, with Bitcoin being the most popular and well-known. Others include Ethereum, Cardano, XRP, Solana, and Dogecoin. When evaluating a cryptocurrency to invest in, consider how the supply increases and what will drive demand for the coin. Read the white paper published by the cryptocurrency team, research the team's skills and experience, and gauge the community sentiment.

Step 3: Choose an Exchange or Broker

To purchase cryptocurrency, you'll need to use a cryptocurrency exchange or a traditional broker that supports crypto trading. Popular exchanges include Coinbase, Gemini, Kraken, GDAX, and Bitfinex. Among traditional brokers, Robinhood was one of the first to offer crypto trading. Other options include Webull, TradeStation, and Fidelity.

Step 4: Fund Your Account

Once you've chosen an exchange or broker, you'll need to fund your account with fiat currency (e.g. dollars or euros) or, in some cases, with another cryptocurrency like Bitcoin or Ethereum. You can typically use a debit card, bank transfer, or other payment methods to add funds to your account.

Step 5: Place Your Order

After funding your account, you can place an order to buy the cryptocurrency of your choice. The process is similar to placing orders on a stock market trading platform. You specify the amount you want to buy, and the exchange will match your order with a seller.

Step 6: Store Your Cryptocurrency

Once you've purchased your cryptocurrency, you'll need to store it in a secure place. This is typically done using a cryptocurrency wallet, which can be a software wallet or a hardware wallet. Software wallets are more convenient for active trading, while hardware wallets offer more security but are less accessible.

Step 7: Consider the Risks and Volatility

Investing in cryptocurrency carries risks due to its volatile nature. The prices of cryptocurrencies can fluctuate significantly in a short period, and there are limited regulations to protect investors. It's important to understand these risks and only invest what you can afford to lose. Diversifying your investments across multiple cryptocurrencies can help mitigate some of the risks.

How to store cryptocurrency

Storing cryptocurrency safely is essential, as losing access to your crypto could mean it's gone forever. There are several options for storing your cryptocurrency, each with its own advantages and disadvantages. Here is a guide to help you choose the best storage method for your needs.

Custodial Wallets

A custodial wallet is a type of wallet where a third party, such as a crypto exchange like Coinbase, holds your crypto for you. This can be done through cold (offline) storage, hot (online) storage, or a combination of both. Custodial wallets are convenient and require less work on the user's part. Your crypto is easily accessible for trading, and there is no risk of losing the wallet. However, the downside is that you are relying on the security measures of the third party and trusting that they won't lock you out of your account. Additionally, custodial wallets are not as secure as using your own wallet.

Non-Custodial Wallets

Non-custodial wallets are those that you use to store your keys without any third-party involvement. These wallets can be either hot or cold wallets. Hot wallets are software that stores your keys online and are convenient for making transactions. However, they are vulnerable to hacking. Cold wallets, on the other hand, are offline wallets that are not connected to the internet and are considered much safer. Hardware wallets, such as the Ledger Nano X or Trezor Model T, are popular options for cold wallets and usually connect to your device via USB. While these wallets offer a higher level of security, they are less convenient and may require an additional cost for the device.

Paper Wallets

A paper wallet is a simple and practically free 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 provides greater security by keeping your crypto offline, it is less user-friendly than hardware or hot wallets.

Best Practices for Storing Cryptocurrency

• Use a combination of wallets: Store the majority of your crypto in a cold wallet for security and a hot wallet for smaller amounts that you want readily available for trading.
• Record your recovery phrases: Physically write down or use a steel tool to record the recovery phrases for your crypto wallets. Keep these phrases in a secure location that only you can access.
• Never share your private information: Do not share your recovery phrase, private keys, or multifactor authentication (MFA) code with anyone. Additionally, avoid saving this information to your computer or an online cloud backup service.

How much to invest

When it comes to investing in cryptocurrency, there is no one-size-fits-all answer to how much you should invest. The amount you choose to invest will depend on your financial situation, risk tolerance, and investment goals. Here are some important considerations to help you decide how much to invest in cryptocurrency:

Risk and Diversification

Cryptocurrency is a highly volatile and risky asset class. It is subject to dramatic price swings and is not suitable for conservative investors. When deciding how much to invest, consider your risk tolerance and diversification strategy. It is generally recommended to invest only a small portion of your portfolio in cryptocurrency, as the risk of substantial losses is high. One common rule of thumb is to invest no more than 10% of your portfolio in risky assets like cryptocurrency. Diversifying your investments across multiple cryptocurrencies and other asset classes can help mitigate some of the risks associated with crypto investing.

Investment Goals and Time Horizon

Consider your investment goals and time horizon when deciding how much to invest in cryptocurrency. If you are investing for the long term, you may be able to ride out the short-term price volatility and focus on the potential for long-term gains. On the other hand, if you are a short-term investor or trader, you may want to be more cautious with your investment amount, as the high volatility of crypto prices could result in significant losses over a shorter time frame.

Financial Situation and Affordability

Only invest an amount that you can afford to lose. Cryptocurrency investing is risky, and there is a possibility that you could lose your entire investment. Assess your financial situation and ensure that your essential needs and financial obligations are met before allocating money towards crypto investments. Start with a small investment if you are new to crypto or unsure about the risks involved. Many crypto exchanges have minimum purchases of $10 or less, allowing you to gain exposure to crypto without risking a large amount of capital.

Regulatory and Tax Considerations

The regulatory environment for cryptocurrency is still evolving, and the future is uncertain. The lack of regulatory protections and insurance for crypto investments adds to the risk. Additionally, pay close attention to the tax implications of crypto investing. Buying, selling, and using cryptocurrency for transactions can have tax consequences, and it's important to understand how these may impact your overall financial situation and investment returns.

In summary, the amount you choose to invest in cryptocurrency will depend on your individual circumstances and risk tolerance. It is crucial to carefully consider the risks and volatility associated with crypto investing before deciding how much to allocate to this asset class. Start with a small investment if you are new to crypto, and gradually increase your allocation as you gain knowledge and comfort with the market. Remember to treat any crypto investments as part of a diversified portfolio, rather than a standalone investment strategy.

Risks and volatility

Cryptocurrency is a rapidly growing market, but it is fraught with risk and volatility. Cryptocurrencies are speculative assets with no intrinsic value, and their market value is based entirely on speculation and demand. This makes the prices incredibly sensitive to slight changes in investors' expectations, resulting in huge fluctuations.

The inherent volatility of cryptocurrencies is due to their decentralised nature, lack of regulation, and influence by external factors such as global events, advancements in blockchain technology, market sentiment, and speculation. The absence of a central authority also means that crypto transactions are irreversible, and there is little recourse if your account is hacked or if the coin you invest in turns out to be a scam.

The extreme volatility of cryptocurrencies is further influenced by the actions of large investors or "whales", who can significantly impact the market by liquidating their holdings. Media outlets, influencers, and industry moguls also play a role in creating investor concerns and driving price fluctuations.

Additionally, the limited supply of Bitcoin means that as the circulating supply gets closer to its limit, prices are likely to climb even higher, making it an attractive investment for those seeking high returns. However, this also contributes to its volatility, as it is difficult to predict what will happen to prices once the limit is reached.

The high volatility of cryptocurrencies is a significant risk factor for investors. It is common for Bitcoin's value to fluctuate by thousands of dollars within a single day, and the impact of negative news or events can be amplified due to the leverage effect.

To manage the risks associated with investing in crypto, it is essential to conduct thorough research, diversify your investments, and be prepared for the inherent volatility of the market.

How to sell cryptocurrency

Selling cryptocurrency is not overly complicated, but it does require careful consideration and research. Here is a step-by-step guide on how to sell cryptocurrency:

• Choose a Crypto Exchange: The first step is to select a reputable and secure cryptocurrency exchange. Examples include Coinbase, Gemini, Kraken, Crypto.com, and Robinhood. These platforms allow you to buy and sell various cryptocurrencies, including Bitcoin and Ethereum. Compare the fees and consumer protections offered by different exchanges before making your choice.
• Fund Your Account: Before you can sell cryptocurrency, you need to fund your account on the chosen exchange. You can typically do this by linking your bank account or using a debit card. Some exchanges may also accept credit cards, but it is generally not recommended to take on high-interest debt to invest in cryptocurrency.
• Place a Sell Order: Once your account is funded, you can place a sell order for the desired cryptocurrency. The exchange will match your order with a buyer, and the transaction will be executed at the specified price.
• Withdraw Your Funds: After the sale is complete, you can withdraw your funds from the exchange. You may be able to transfer the proceeds back to your bank account or debit card. Alternatively, you can often leave the funds on the exchange for future purchases of other cryptocurrencies.
• Consider Taxes and Fees: Remember that selling cryptocurrency may have tax implications. Be sure to consult with a financial advisor or tax professional to understand your local taxation laws regarding capital gains on cryptocurrency transactions. Additionally, be mindful of the fees charged by the exchange for conducting transactions. These fees can eat into your profits, so it's important to factor them into your decision-making.
• Secure Your Profits: If you make a profit from selling cryptocurrency, consider reinvesting a portion of it into more stable assets or diversifying your investment portfolio. This can help reduce the overall risk of your investment strategy.

Remember that the cryptocurrency market is highly volatile, and prices can fluctuate significantly. Always do your research, understand the risks involved, and make informed decisions when selling cryptocurrency.

Frequently asked questions