Crypto Investment Guide: Strategies For Beginners

Investing in crypto is a hot topic, with thousands of cryptocurrencies to choose from. The crypto market has established itself as a notable player in the financial markets, but it can be challenging to grasp the current state of the industry and make informed choices. Here are some essential things to know about investing in crypto:

- Crypto tokens are digital assets based on cryptography. They derive value from unique use cases, and transactions are recorded on a blockchain, a decentralised, transparent ledger.

- There are various ways to invest in crypto, including buying cryptocurrencies directly, investing in crypto funds and companies, or becoming a crypto miner or validator.

- Popular cryptocurrencies include Bitcoin, Ethereum, Binance Coin, Solana, and Dogecoin.

- Crypto can be purchased through exchanges, apps, or certain broker-dealers. Examples include Coinbase, Kraken, Gemini, and Crypto.com.

- Crypto investing carries risks due to volatility and potential regulatory changes. It's important to carefully research any crypto coin before investing and not invest more than you can afford to lose.

- Crypto wallets are used to store, manage, and transact crypto. There are hot wallets, which are always connected to the internet, and cold wallets, which are offline and considered more secure.

How to buy crypto

There are several ways to buy crypto, each with its own pros and cons. Here is a step-by-step guide on how to buy crypto:

• Choose a platform: Select a reputable and well-known cryptocurrency exchange platform that offers a large selection of currencies. Examples include Coinbase, Kraken, Bitstamp, Gemini, Binance, and Bitfinex.
• Create an account: You will need to provide personal information and verify your identity to complete the registration process.
• Fund your account: Before buying any crypto, you need to deposit fiat money (e.g. US dollars) into your exchange account.
• Choose your cryptocurrency: Research and decide which cryptocurrency you want to invest in. Besides the well-known options like Bitcoin and Ethereum, there are thousands of other cryptocurrencies available.
• Place a buy order: Follow the steps provided by the exchange platform to submit and complete your purchase.
• Store your cryptocurrency in a wallet: You can choose between a hot wallet (online) or a cold wallet (offline). A hot wallet is more convenient and faster for transactions, but it is also more vulnerable to cybersecurity threats. A cold wallet, on the other hand, offers more security but takes longer for transactions.

It is important to remember that investing in cryptocurrency is risky, and the prices can be highly volatile. Make sure you understand the risks involved and only invest what you can afford to lose. Additionally, pay attention to transaction fees, as they can vary widely among currencies.

Crypto wallets

Hot Wallets

Hot wallets are digital tools that are always connected to the internet. They are often available as a standalone product or as an add-on through popular crypto exchanges. Hot wallets make it easy to execute crypto transactions but are more vulnerable to hackers. Examples of hot wallets include:

• Coinbase Wallet
• MetaMask
• Crypto.com DeFi Wallet
• Exodus Crypto Wallet
• Gemini Crypto Wallet

Cold Wallets

Cold wallets are physical gadgets that are not connected to the internet. They are designed to store your digital keys offline, either on a hardware device or a sheet of paper. Examples of cold wallets include:

• Ledger Crypto Wallet
• Ellipal Titan Crypto Wallet
• SafePal Crypto Wallet
• KeepKey
• Ledger Nano S Plus

When choosing a crypto wallet, it is important to consider your trading frequency, the types of crypto you want to trade, your budget, and the functionality you need. It is also crucial to prioritize safety and security features to protect your crypto assets from potential cyber threats.

Crypto exchanges

There are two main types of crypto exchanges: centralized and decentralized. Centralized exchanges are managed by a single authority, such as a brokerage company, and are more user-friendly. Decentralized exchanges distribute responsibility for facilitating and verifying crypto trades among users, increasing accountability and transparency.

When choosing a crypto exchange, it is important to consider factors such as fees, security, the availability of desired cryptocurrencies, educational resources, and customer support. Some popular crypto exchanges include Coinbase, Binance, Kraken, and Gemini. These exchanges offer a wide range of cryptocurrencies, competitive fees, and user-friendly interfaces. It is worth noting that the availability of certain exchanges and cryptocurrencies may vary depending on your location due to regulatory compliance.

Crypto investment options

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.

There are several ways to invest in cryptocurrency, from buying crypto directly to investing in crypto funds and companies. Here are some options to consider:

Buy Cryptocurrency Directly:

You can choose to directly purchase and store one or more cryptocurrencies. This is probably the most common way to add crypto exposure to your portfolio. You can buy well-known digital currencies like Bitcoin and Ethereum or invest in newly released coins. Cryptocurrencies can be purchased through crypto exchanges, apps, or certain broker-dealers.

Invest in Cryptocurrency Companies:

You can invest in companies with a partial or total focus on cryptocurrency. This includes cryptocurrency mining companies, mining hardware makers, and companies that support cryptocurrency, such as Robinhood Markets Inc. (HOOD) and PayPal Holdings Inc. (PYPL). You can also invest in companies that hold large amounts of cryptocurrency on their balance sheets, like MicroStrategy Inc. (MSTR).

Invest in Cryptocurrency-Focused Funds:

If you don't want to choose individual crypto companies, you can invest in a cryptocurrency-focused fund. There are exchange-traded funds (ETFs), index funds, futures funds, and cryptocurrency investment trusts to choose from. The first Bitcoin Spot ETFs were approved in January 2024, allowing investors to invest in bitcoin without directly owning it.

Invest in a Cryptocurrency Roth IRA:

If you want to combine the benefits of investing in cryptocurrency with the tax advantages of an individual retirement account (IRA), you can consider a cryptocurrency Roth IRA. Using a crypto IRA provider can also offer more secure storage for your crypto holdings.

Become a Crypto Miner or Validator:

Mining or validating crypto is another way to invest in cryptocurrency. Miners and validators can earn rewards in crypto, which they can hold as investments or exchange for another currency.

Other Options:

In addition to the above options, you can also gain exposure to cryptocurrency through financial derivatives, such as CME's Bitcoin futures, or other instruments like Bitcoin trusts and ETFs.

When investing in cryptocurrency, it's important to do your research, understand the risks, and carefully consider how much of your portfolio you want to allocate to digital assets.

Crypto investment risks

Investing in cryptocurrency is risky, and it's important not to invest more money than you can afford to lose. Here are some of the key risks associated with crypto investments:

Volatility and Price Fluctuations

The price of cryptocurrencies is incredibly volatile due to the young age of the market. Wild price swings can occur within a day or even minutes, making trading dangerous. For example, in 2018, the price of Bitcoin dropped to under $7,000 just a few months after reaching an all-time high of over $20,000.

Regulatory and Legal Risks

Cryptocurrencies are currently unregulated by governments and central banks, which can lead to unexpected changes in market sentiment and sharp price moves. Additionally, there are significant inconsistencies among regulators regarding the legal status of digital currencies, and the potential for future restrictions on the right to acquire, own, or trade them.

Cybersecurity and Technical Risks

Cryptocurrency exchanges and trading platforms are vulnerable to hacking, technical glitches, and human error. If private keys are lost, destroyed, or compromised, investors may lose access to their digital wallets and assets.

Loss of Confidence and Market Sentiment

Most cryptocurrencies are not backed by central banks or other assets, and their value is determined solely by market participants. A loss of confidence in digital currencies or negative market sentiment can lead to a collapse in trading activities and an abrupt drop in value.

Forks and Discontinuation

Cryptocurrency trading carries the risk of hard forks or discontinuation, which can result in substantial price volatility and suspension of trading.

Taxation and Regulatory Changes

There is uncertainty regarding the tax treatment of cryptocurrency investments, which vary across jurisdictions. Regulatory changes can also impact the future value of cryptocurrencies, with the worst-case scenario being a ban rendering them worthless.

Peer-to-Peer Transaction Risks

Many cryptocurrency marketplaces facilitate direct peer-to-peer transactions without providing clearing or intermediary services, leaving all risks between the transacting parties. This can include issues such as double-selling.

High Fees and Charges

Transaction fees can vary widely among cryptocurrencies, and charges associated with trading and holding crypto assets may be higher than with other asset classes.

Dilution and Competition

The proliferation of competing cryptocurrencies and "forks" in blockchain networks can lead to dilution and impact the value of existing coins.

Environmental Concerns

The energy-intensive process of crypto mining has come under criticism for its environmental impact, and regulations or changes in energy policies could affect the viability of crypto mining operations.

Scams and Fraud

The prevalence of scams and fraud in the cryptocurrency space is a significant risk for investors.

Frequently asked questions