The Crypto Investment Guide: Getting Started

Investing in cryptocurrency is risky, but it can be a lucrative endeavour for those willing to take the chance. Cryptocurrency is a decentralised virtual currency, meaning it is not issued, backed, or regulated by a central authority like a government. Instead, it is secured by blockchain technology. There are thousands of cryptocurrencies to choose from, but the most well-known is Bitcoin.

If you want to invest in cryptocurrency, you'll need to follow a few steps. First, you'll need to choose a broker or crypto exchange. Next, create and verify your account, and deposit some money. Then, you can place your first cryptocurrency order. Finally, select a storage method, such as a hot or cold wallet.

Choosing a crypto exchange or brokerage

Reputation and Security

It is important to choose a reputable and secure platform to buy and store your crypto coins. Some popular options include Coinbase, Robinhood, eToro, FTX, Gemini, and BlockFi, among others. It is also essential to consider the level of security offered by the exchange, as crypto is susceptible to hacking and other losses.

Fees and Features

Take note of the fees charged by the exchange or brokerage, as these can vary significantly. Consider the features offered, such as the ability to trade a wide range of crypto coins, instant access to trade, and the option to transfer your crypto out of the brokerage account.

Regulation and Compliance

Different exchanges will have varying levels of regulation and compliance with know-your-customer (KYC) requirements. Ensure that the exchange you choose meets the necessary regulatory standards and complies with any relevant laws and regulations in your jurisdiction.

User Experience and Customer Service

Consider the user-friendliness of the platform, especially if you are a beginner. Some exchanges offer an easy-to-use interface, while others may be more complex and better suited for advanced traders. It is also essential to look into the customer service provided by the exchange, as some users have reported poor experiences with certain platforms.

Payment Methods

Different exchanges will support different payment methods for funding your account. The fastest and cheapest way is typically through an online funds transfer from a connected bank account. Some exchanges may also accept payment via credit card or payment apps like PayPal.

Availability and Accessibility

Check the availability and accessibility of the exchange in your region. Some exchanges may have limited features or coins available for users in certain countries. Ensure that the exchange you choose supports the crypto coins you want to invest in and is accessible from your location.

Opening an account

To open an account to invest in cryptocurrency, you'll need to follow a few steps. Firstly, choose the right cryptocurrency exchange or brokerage. Popular places to buy Bitcoin include Coinbase, Robinhood, eToro, FTX, Gemini, and BlockFi, among many others. Take note of fees and the reputation of the exchange when picking where to buy Bitcoin. Also, if you plan to transfer your Bitcoin out of the brokerage account, make sure that feature is supported, as not all brokerages give you that option.

Once you've picked your ideal account, it's time to open your brokerage or cryptocurrency account. For those in the United States, you'll need to share your basic contact information and valid identification to meet the exchange's know-your-customer (KYC) requirements.

After that, you'll need to fund your account. The fastest and cheapest way is usually with an online funds transfer from a connected bank account. Depending on your exchange, you may also be able to use payment apps like PayPal. Some cryptocurrency exchanges give you instant access to trade, while others may require you to wait for funds to clear before buying.

• You don't need a lot of money to invest in Bitcoin. For example, on Coinbase, you can buy as little as $2 of Bitcoin at a time.
• Understand the risks of investing in Bitcoin. It's possible that Bitcoin's value could increase dramatically, but it could also drop to zero.
• Be aware of the tax consequences of investing in cryptocurrency, especially in the US. The IRS considers crypto to be property, not currency, for tax purposes, and you'll need to report and pay taxes on any capital gains.
• Don't invest more than you can afford to lose. Cryptocurrency is a risky investment, and it's important to understand the technology and the risks before investing.
• Do your research and don't succumb to peer pressure or fear of missing out. Just because a coin is trending or has seen a surge in value doesn't mean it's a good investment.

Funding your account

The fastest and cheapest way to fund your account is usually with an online funds transfer from a connected bank account. Depending on your chosen exchange, you may also be able to use payment apps such as PayPal. Some exchanges will give you instant access to trade, while others may require you to wait for funds to clear before buying. If you can buy cryptocurrency immediately, you may have to wait until the deposit clears before you can withdraw funds from the account.

When you think the moment is right, click the buy button to enter an order. The exchange will turn your dollars into Bitcoin, stored in the same cryptocurrency account, similar to holding stocks in a brokerage account. Once your trade executes, you are officially a Bitcoin owner.

It's important to note that Bitcoin transactions occur instantly on some exchanges, while others may process a transaction on the Bitcoin blockchain that takes some time to complete. Standard Bitcoin transactions require four confirmations and take about 40 minutes to complete, according to an exchange called Kraken. However, you can choose to pay higher transaction fees for faster processing times with some exchanges.

Alternatives to buying Bitcoin directly

If you want to buy cryptocurrency through a third party, you can take advantage of a growing number of alternative investment options. For example, Grayscale Bitcoin Trust enables investors to invest in Bitcoin through a traditional investment fund that, in some ways, is similar to an ETF. The shares of this fund trade with the symbol GBTC on the OTC exchange OTCQX and can be purchased through your brokerage account.

Another way to get indirect exposure to Bitcoin and the crypto industry is through other cryptocurrency and blockchain industry-focused ETFs, like Siren NASDAQ NexGen Economy (BCLN), Bitwise Crypto Industry Innovators (BITQ), and Capital Link NextGen Protocol ETF (KOIN). Consider fees and risks when investing in any ETF, particularly one focused on a relatively new industry.

Entering a purchase order

To enter a purchase order for a cryptocurrency, you will need to follow a few steps. Firstly, you will need to select a crypto-trading service or platform, such as an exchange or a brokerage firm. Popular cryptocurrency exchanges include Coinbase, Kraken, Gemini, and Binance, while Robinhood is an example of a brokerage firm that offers crypto trading. Once you have chosen your platform, you will need to connect it to a payment method, such as your bank account, debit card, or credit card. Keep in mind that using a credit card to purchase cryptocurrency can incur additional processing fees and interest charges.

After setting up your payment method, you can place your order by selecting the cryptocurrency you wish to buy and specifying the amount you want to purchase. Different platforms may offer various order types, such as market orders, limit orders, stop-loss orders, or instant orders. Market orders are standard crypto trades where you buy or sell the cryptocurrency at the best available price on that exchange. Limit orders allow you to specify the maximum price you are willing to pay or the minimum price you are willing to sell at. Stop-loss orders are triggered when the cryptocurrency reaches a certain price, at which point they become market orders. Instant orders are similar to market orders but involve the exchange of fiat currencies, such as US dollars, for cryptocurrencies.

When placing your order, consider the fees charged by the platform for different payment methods and transactions. Additionally, be mindful of any legal, regulatory, and tax implications associated with purchasing cryptocurrency in your jurisdiction.

Once you have placed your order and it has been fulfilled, ensure that you store your purchased cryptocurrency securely. Consider using a cold wallet, such as a hardware wallet or paper wallet, which is not connected to the internet and provides better protection against theft.

Understanding the risks

Investing in cryptocurrency is a high-risk endeavour and it is important to understand the risks before investing. Here are some of the critical risks associated with investing in cryptocurrencies:

Price Volatility and Manipulation

Cryptocurrency prices are extremely volatile, and this volatility is driven by various factors, including market sentiment, speculation, and manipulation. The unregulated and anonymous nature of digital asset markets makes them susceptible to wild price swings, which can make it challenging for investors to build confidence and secure gains. Crypto exchanges, media owners, and influential investors can manipulate prices, and this manipulation appears to be widespread, although not yet widely proven.

Regulatory Uncertainty

The lack of consistent regulatory frameworks across different jurisdictions adds to the uncertainty of investing in cryptocurrencies. The classification of cryptocurrencies as commodities or virtual currencies is still unclear, and investors are concerned about the potential for future restrictions or even an outright ban. The regulatory landscape is complex and disorganized, and the lack of clear guidelines, particularly regarding tax obligations, scares off potential investors.

Security and Consumer Rights

Storing cryptocurrencies securely is a significant challenge. There have been numerous incidents of theft from personal wallets and exchanges, and hacking remains a constant threat. Unlike traditional investments through banks or brokerages, cryptocurrencies do not have official safeguards or insurance. If assets are lost or stolen, investors cannot recover them, and mistaken transactions cannot be reversed.

Peer-to-Peer Transaction Risks

Cryptocurrencies can be traded on various online platforms, but many of these platforms are unregulated and provide limited transparency. When trading directly between parties, all risks, such as double-selling, are borne by the transacting parties. Additionally, trading platforms and exchanges have come under scrutiny due to cases of fraud, business failure, or security breaches, and investors may not receive compensation for losses incurred.

Loss of Private Key

Cryptocurrencies are typically stored in a digital wallet, and access is controlled by both a public and a private key. If the private key is lost, destroyed, or compromised, the investor may lose access to their digital wallet and their cryptocurrency holdings. If acquired by a third party, they may gain unauthorized access to the investor's assets.

Other Cyber-Security Risks

Trading platforms and third-party service providers are vulnerable to hacking and other malicious activities. There is no perfect way to prevent technical glitches, human error, or hacking attempts, and these platforms have experienced significant losses due to cyber-attacks. Additionally, if malicious actors gain control of a sufficient number of consensus nodes on the blockchain network, they may be able to alter it.

Network Slow-Down

A blockchain network can experience a slow-down if the rewards for solving blocks and transaction fees are not sufficiently high or if a high volume of transactions occurs simultaneously. This can impact the speed of transactions and potentially lead to delays in processing.

Dilution Due to Competition or Forks

Cryptocurrencies are based on protocols that govern peer-to-peer interactions, and dissent among users regarding these protocols can result in a "fork," creating two separate networks and cryptocurrencies. This can lead to dilution and impact the value of the original cryptocurrency.

Taxation and Regulatory Compliance

The tax treatment of cryptocurrencies varies across jurisdictions, and there is a lack of clarity on the tax obligations and record-keeping requirements for investors. This uncertainty can lead to unexpected tax liabilities and compliance issues for investors.

Loss of Confidence and Market Adoption

Most cryptocurrencies are not backed by central banks, national or international organizations, or assets, and their value is solely determined by market participants' perception. A loss of confidence in digital currencies or the underlying blockchain technology could lead to a collapse in trading activities and an abrupt drop in value. Additionally, market adoption of cryptocurrencies remains low due to regulatory concerns, technology shortfalls, public misunderstandings, and the emerging nature of the technology.

Currency-Conversion Risks

Policies or interruptions in depositing or withdrawing fiat currency from trading platforms can impact investors' ability to convert between fiat and cryptocurrencies. Changes in regulations or anti-money laundering policies can also trigger pricing and trading volume decreases.

Given these risks, it is crucial to approach cryptocurrency investments with caution and conduct thorough research before investing.

Frequently asked questions