The Basics Of Investing In Cryptocurrency

Investing in cryptocurrency has become an increasingly popular topic in recent years. Cryptocurrency is a digital currency that is secured by blockchain technology and is not backed by real assets or tangible securities. It is not controlled or distributed by a central bank and can be used to buy goods and services or traded for a profit. Bitcoin is the most widely used cryptocurrency.

There are several ways to invest in cryptocurrency, including buying it directly through a crypto exchange or broker-dealer, investing in crypto funds and companies, or becoming a crypto miner or validator. When investing in cryptocurrency, it is important to consider the risks involved, such as price volatility and the potential for scams or fraud. It is also crucial to research the different types of cryptocurrencies and understand how they function before making any investment decisions.

Buying cryptocurrency directly

How to buy cryptocurrency from an exchange

If you want to invest in cryptocurrency directly, you can use a cryptocurrency exchange. Here's how:

• Choose a cryptocurrency exchange: It's best to go for a reputable, well-known exchange with a large selection of currencies.
• Establish an account: You will need to provide personal information and verify your identity.
• Fund your account with fiat money: Before you can buy any crypto, you need to fund your exchange account with another currency, such as US dollars.
• Decide which cryptocurrency to buy: You can choose to invest in one or many cryptocurrencies. Research your options to help you decide.
• Place a buy order: Follow the steps required by the exchange to submit and complete a buy order for one or more cryptocurrencies.
• Store your cryptocurrency in a digital wallet: After your purchase is complete, the information you need to access your cryptocurrency is held in a digital wallet. This can be hosted by the cryptocurrency exchange or an independent wallet provider.

Where to buy cryptocurrency

There are thousands of different crypto assets, so the financial apps that support crypto trading offer a very limited selection. Buying cryptocurrency through crypto-first digital wallets and exchange providers will offer users more choice and functionality.

The providers mentioned below are typically referred to as centralized exchanges, as they're managed by a single company. Centralized exchanges offer certain protections, including insurance in case of cybersecurity breaches, regulatory clarity, and help with safeguarding assets. They also tend to have more intuitive user interfaces, making them more accessible for new cryptocurrency investors.

Examples of centralized exchanges include:

• Coinbase
• Gemini
• Kraken
• Binance

Some investors will prefer to use exchanges that align more strongly with the decentralized ethos of the crypto industry at large. Decentralized exchanges, or DEXes, are not run and managed by a single person, company, or organization, but instead, the code it's built on allows for peer-to-peer crypto transactions without intermediaries.

Popular DEX options include:

• Uniswap
• SushiSwap
• DYdX
• 1inch

Things to consider when buying cryptocurrency

Pay attention to transaction fees when making crypto purchases, as these fees can vary widely among currencies.

Investing in cryptocurrency is risky, so it's important not to invest more money than you can afford to lose. The prices of cryptocurrencies, even the most established ones, are much more volatile than the prices of other assets like stocks.

Many investors are nonetheless attracted to the potential upside of investing in crypto. If you decide to invest, it's important to carefully research any digital coin before buying it.

The cryptocurrency space is evolving rapidly, so it's also important to pay attention to new developments that may affect your crypto holdings. Cryptocurrency investors need to understand the tax consequences of using crypto, especially if they purchase something or sell their crypto investments.

Investing in cryptocurrency companies

Another option is to invest in cryptocurrency-focused funds. You can choose from a variety of exchange-traded funds (ETFs), such as index funds and futures funds, as well as a range of cryptocurrency investment trusts. In January 2024, the Securities and Exchange Commission approved the first Bitcoin Spot ETFs, which hold bitcoin and offer shares to investors based on bitcoin spot prices.

Before investing in cryptocurrency companies, it is important to carefully consider the risks involved. Cryptocurrencies are highly speculative and volatile, and there is a possibility of significant losses. It is recommended to invest only what you can afford to lose. Additionally, due diligence is crucial when choosing a crypto brokerage or exchange, as the safety and security of your investments depend on it.

Investing in cryptocurrency-focused funds

You can choose from a variety of exchange-traded funds (ETFs), such as index funds and futures funds, as well as a range of cryptocurrency investment trusts. In January 2024, the Securities and Exchange Commission approved the first Bitcoin Spot ETFs, which hold bitcoin and offer shares to investors based on bitcoin spot prices.

Some crypto-focused funds invest directly in cryptocurrency, while others invest in crypto-focused companies or derivative securities like futures contracts.

If you're considering investing in a crypto-focused fund, be sure to research the fund's holdings, investment strategy, and risks carefully. As with any investment, there are potential rewards as well as risks associated with investing in cryptocurrency-focused funds.

Investing in a cryptocurrency Roth IRA

A Roth IRA is a special type of individual retirement account (IRA) that offers tax advantages. While you pay taxes on contributions, your future withdrawals are tax-free. With a cryptocurrency Roth IRA, you can hold crypto in your retirement account and benefit from the tax advantages.

Rules and Regulations

According to the Internal Revenue Service (IRS), you cannot contribute cryptocurrency directly into your Roth IRA. Instead, new contributions must be made in cash, and you cannot transfer crypto you already own into the account. However, there is no rule against adding crypto to your Roth IRA via purchase, and you can hold crypto in your account as it is considered property by the IRS.

Advantages and Disadvantages

One of the main advantages of a cryptocurrency Roth IRA is the potential for diversification. Crypto is an asset class that is not correlated with stocks and bonds, which may protect your retirement balance. Additionally, crypto offers the potential for significant returns, despite its volatility. The tax advantages of a Roth IRA also apply to your crypto holdings, as you won't be taxed on any gains as long as the money and assets remain in your account.

However, there are also several disadvantages to consider. Crypto IRAs typically come with higher fees, including set-up fees, transaction fees, and annual account management fees. The extreme volatility of crypto makes it a risky choice for retirement investment, especially for those close to retirement who may not be able to weather downturns. Additionally, the complexity of managing a crypto IRA may require working with a niche platform or custodian, and you may need to open multiple accounts to hold both traditional investments and crypto.

Getting Started

If you decide to invest in a cryptocurrency Roth IRA, you will need to locate a custodian who can host your self-directed IRA and enable cryptocurrency trades. Popular custodians that offer crypto investment options include Bitcoin IRA, BitIRA, and Equity Trust Company. You will also need to ensure that the account types, exchanges, and cryptocurrencies available align with your goals, and carefully compare the fees involved.

Alternatives

If you are interested in gaining exposure to crypto but are hesitant to hold it directly in your Roth IRA, there are alternative options. You can invest in crypto-related assets, such as crypto exchange-traded funds (ETFs), crypto stocks, or crypto trusts. These options provide indirect exposure to the crypto industry while potentially reducing risk and complexity.

Becoming a crypto miner or validator

Mining is a way to earn your own cryptocurrency. It involves using your computing equipment to verify transactions on a blockchain. While it doesn't require much effort, it can be costly to set up, so it's important to plan ahead.

Cryptocurrency mining is the way that proof-of-work cryptocurrencies validate transactions and mint new coins. It was the first method used that enabled cryptocurrencies to be decentralised. They function without a central governing body confirming their transactions.

Under the proof-of-work model, which was introduced with Bitcoin, miners check transactions using computing devices that solve complex mathematical equations. By providing the correct answer, the miner has shown proof of work. The first miner to get the correct answer wins the right to confirm a block of that cryptocurrency's transactions. When the block is confirmed, it's added to the cryptocurrency's blockchain, a distributed digital ledger of all its transactions.

The lucky miner also receives a block reward for the trouble of confirming the transactions. The block reward is a set amount of the cryptocurrency they're mining. The rewards usually come from new coins that have been minted and the cryptocurrency's transaction fees.

To start mining cryptocurrency, you'll need a cryptocurrency wallet, mining software, and mining hardware. The equipment you need can be very expensive, but the more you pay for equipment, the more profitable it can be.

Mining pools can help increase your profitability because they share the workload and combine the hash rates of many miners. Before starting, ensure you compare the costs to the time it will take you to recoup your expenses. Mining might not be worth it in the end if you never make up the costs to get set up.

The most profitable cryptocurrencies have become much more difficult to mine than in the past. Most have a mining difficulty that increases over time, and the number of miners with large-scale mining operations has taken over most of the hashing power of each cryptocurrency's network. Hashing power is how many calculations per second a network can complete.

Not every cryptocurrency can be mined because not all use a competitive reward system. Some cryptocurrencies require expensive hardware to mine, and overwhelming demand for this equipment has caused the cost and effort associated with setting up a rig to skyrocket.

To become a crypto miner, you need to:

• Choose a cryptocurrency to mine.
• Buy your mining equipment.
• Set up a crypto wallet.
• Configure your mining device.

Alternatively, you can become a crypto validator. A crypto validator is a participant on a Proof-of-Stake (PoS) blockchain whose job is to validate transactions on the network for rewards. Crypto validators are necessary for the blockchain ecosystem. They are responsible for network security, transaction validation, and consensus building.

The work of a validator can be simplified into three steps:

• Choosing a blockchain network.
• Acquiring the right hardware and software.
• Running and maintaining your node.

Becoming a validator is a complicated topic, but it can be a lucrative source of income. However, it requires specialized knowledge and significant investment in both crypto assets and hardware and software.

Frequently asked questions