Cryptocurrency Investments: A Beginner's Guide To Getting Started

Cryptocurrency is a digital currency that can be used to buy goods and services or traded for profit. Bitcoin is the most widely used cryptocurrency. It is important to conduct thorough research and understand how each type of cryptocurrency functions before making any investment decisions. Cryptocurrency investing can take many forms, from buying cryptocurrency directly to investing in crypto funds and companies. For direct investing in crypto coins, you can buy cryptocurrency using crypto exchanges or apps or through certain broker-dealers.

Understand the risks

Investing in cryptocurrency is risky, and it's important to understand the risks involved before investing. Here are some key points to consider:

• Price Volatility: Cryptocurrency prices are highly volatile and prone to rapid surges and crashes. For example, Bitcoin's value surged to nearly $65,000 in November 2021 before dropping to around $17,000 in 2022. Such volatility can cut against the basic ideas behind the projects that cryptocurrencies support. For instance, people may be reluctant to use Bitcoin as a payment system if they are unsure of its value from one day to the next.
• Regulatory Risks: The regulatory landscape for cryptocurrencies is complex and evolving. A sudden regulatory crackdown could make it challenging to sell cryptocurrencies or trigger a market-wide price drop. For example, China has banned cryptocurrency exchanges, transactions, and mining within its borders.
• Counterparty Risks: Many investors and merchants rely on exchanges or other third-party custodians to store their cryptocurrency. Theft, loss, or failure by one of these third parties could result in losing your entire investment.
• Management Risks: Due to the lack of coherent regulations, there are limited protections against deceptive or unethical management practices in the cryptocurrency space. Many investors have lost substantial sums due to mismanagement or failure to deliver promised products.
• Programming Risks: Many investment and lending platforms in the cryptocurrency space use automated smart contracts to control the movement of user deposits. Investing in these platforms assumes the risk of bugs or exploits in these programs, which could result in losing your investment.
• Market Manipulation: Market manipulation remains a significant concern in the cryptocurrency market. Influential people, organizations, and exchanges can act unethically and manipulate prices, affecting investors' portfolios.
• User Risk: Cryptocurrency transactions are irreversible. If you send cryptocurrency to the wrong address or lose your private keys, your funds may be lost forever. By some estimates, about one-fifth of all Bitcoins are now inaccessible due to lost passwords or incorrect sending addresses.
• Criminal Activities: Cryptocurrencies have become popular tools for criminal activities such as money laundering, illicit purchases, and ransomware. This association with criminal activities may impact the perception and regulatory environment for cryptocurrencies.
• Environmental Impact: Cryptocurrency mining, particularly for coins like Bitcoin, consumes a significant amount of energy. A comparison by the University of Cambridge found that worldwide Bitcoin mining consumes more than twice as much power as all U.S. residential lighting.

Given these risks, it is crucial to conduct thorough research and carefully evaluate your risk tolerance before investing in cryptocurrencies. Diversifying your investments and not investing more than you can afford to lose are also essential considerations when entering the volatile world of cryptocurrency.

Choose a broker or exchange

Choosing a broker or exchange is an important step in investing in cryptocurrency. You can buy cryptocurrency through a broker or a cryptocurrency exchange.

Cryptocurrency Brokers

Cryptocurrency brokers simplify the process of buying crypto but may charge higher fees or restrict moving holdings off-platform. Examples of brokers include Robinhood and SoFi. Some investors prefer holding coins in crypto wallets offered by these platforms for added security.

Cryptocurrency Exchanges

Cryptocurrency exchanges such as Coinbase, Gemini, Kraken, and Binance.US offer platforms for buying and selling digital currencies. These platforms can be overwhelming for new investors, and user-friendly options usually have higher fees compared to standard trading platforms. To minimize expenses, consider mastering the standard trading platform before or shortly after your first cryptocurrency purchase.

Factors to Consider

When choosing a broker or exchange, there are several factors to consider:

• Fees: Compare the fees charged by different platforms, as they can vary significantly.
• Security: Cryptocurrency exchanges are often vulnerable to theft or hacking, so it is essential to choose a platform with robust security measures.
• User-friendliness: Some platforms may be more user-friendly than others, especially for beginners.
• Coin selection: Different exchanges offer different selections of cryptocurrencies. If you are interested in a specific coin, ensure that the exchange you choose supports it.
• Regulatory compliance: Ensure that the broker or exchange you choose complies with relevant regulations and is licensed to operate.
• Customer support: Consider the level of customer support offered by the platform and whether it meets your needs.

Set up an account

Setting up an account is the second step to investing in cryptocurrency. After selecting a cryptocurrency broker or exchange, you will need to create an account. This generally involves signing up and providing personal information to prove your identity, often known as Know Your Customer (KYC) protocols. This may involve entering information from your driver's license or passport. Sometimes, you may need to provide a photo of yourself or a form of identification.

Once you have set up an account, you can add funds to your account through various methods, including connecting it to your bank, initiating a wire transfer, or using a debit or credit card for payment. It is important to note that while some exchanges allow credit card deposits, these can come with risks and additional costs. Credit card companies often categorise crypto purchases as cash advances, leading to higher interest rates and extra fees.

Fund your account

Funding Your Account

Before you can start investing in crypto, you must ensure funds are available in your account. You can add money to your account through various methods, including connecting it to your bank, initiating a wire transfer, or using a debit or credit card for payment. The time it takes for funds to become available in your account varies depending on the deposit method and the cryptocurrency broker or exchange chosen.

While some exchanges allow credit card deposits, these come with risks and additional costs. Credit card companies often categorise crypto purchases as cash advances, leading to higher interest rates and extra fees. Coupled with fees from both the credit card and the exchange, you could lose up to 10% of your crypto purchase.

If you're thinking about getting into cryptocurrency, it can be helpful to start with one that is commonly traded and relatively well-established in the market. These coins typically have the largest market capitalisations.

Thoughtfully selecting your cryptocurrency, however, is no guarantee of success in such a volatile space. Sometimes, an issue in the deeply interconnected crypto industry can spill out and have broad implications on asset values.

For instance, in November 2022, the market took a major hit as the cryptocurrency exchange FTX struggled with liquidity issues amid a spike in withdrawals. As the fallout spread, cryptocurrencies both large and small saw their values plummet.

Choosing a Platform

There are two ways to go about purchasing crypto – either through a broker or a cryptocurrency exchange.

Cryptocurrency brokers simplify buying crypto but may charge higher fees or restrict moving holdings off-platform. Examples include Robinhood and SoFi. Some investors prefer holding coins in crypto wallets offered by these platforms for added security.

Cryptocurrency exchanges such as Coinbase, Gemini, and Binance offer platforms for buying and selling digital currencies. However, these platforms can be overwhelming for new investors. While user-friendly options make buying easier, they usually have higher fees compared to standard trading platforms. To minimise expenses, consider mastering the standard trading platform before or shortly after your first cryptocurrency purchase.

Molina's rule of thumb is to allocate a maximum of 10% of your portfolio to crypto, then use a longer-term passive investing strategy for the rest of your financial assets. "It's important to understand crypto as another part of your long-term investment strategy," he adds.

Diversification ensures that you are effectively spreading out your risk. This way, when the crypto market experiences volatility, you have more opportunities to have other pieces of your portfolio make money to offset any loss.

Risks and Considerations

Cryptocurrencies are generally used to pay for services or as speculative investments. Crypto prices are extremely volatile, and the industry is filled with uncertainty.

There are also tax consequences to buying and selling cryptocurrencies. Cryptocurrencies are taxed as property, rather than currency. That means that when you sell them, you'll pay tax on the capital gains, or the difference between the price of the purchase and sale. And if you're given crypto as payment or as a reward for an activity such as mining, you'll be taxed on the value at the time you received them.

Cryptocurrency is a relatively risky investment, no matter how you slice it. Generally speaking, high-risk investments should make up a small part of your overall portfolio – one common guideline is no more than 10%. You may want to look first to shore up your retirement savings, pay off debt, or invest in less-volatile funds made up of stocks and bonds.

Make your first transaction

Now that you have set up your account and added funds to it, you can make your first cryptocurrency transaction. Decide on the cryptocurrency you wish to buy, and enter its symbol, for instance, BTC for Bitcoin, and specify the quantity of coins you want to purchase. Many exchanges and brokers allow the purchase of fractional shares of cryptocurrencies with high values, such as Bitcoin or Ethereum. This accessibility ensures that those without significant capital can still invest.

You can buy cryptocurrency using a crypto exchange or through certain broker-dealers. Crypto exchanges are businesses that allow you to buy or sell cryptocurrencies from other users at the current market price, similar to a stock. Examples of popular crypto exchanges include Coinbase, Kraken, and Binance.

Alternatively, you can use certain broker-dealers to buy cryptocurrency. Broker-dealers simplify buying crypto but may charge higher fees or restrict moving holdings off-platform. Examples include Robinhood and SoFi.

After buying the coins, you will need to transfer them to a digital wallet or use a third-party service like Coinbase to store your coins. If you are using a broker, crypto is usually held in a crypto wallet linked to the exchange. If you prefer a more secure storage option, you can transfer your assets to a separate hot or cold wallet.

Hot wallets are cryptocurrency wallets operated on internet-connected devices like tablets, computers, or phones. While convenient, they pose a higher theft risk due to their continuous internet connection. Cold wallets, such as USBs or hard drives, are offline and disconnected from the internet, providing top-tier security for storing cryptocurrency. However, there is a risk of permanently losing access to your cryptocurrency if you lose the associated keycode or experience device failure.

Frequently asked questions