Crypto Investing: Getting In And Out Safely

Investing in cryptocurrency is risky, but it can also be rewarding. Before you start, it's important to understand what you're getting into and make sure you have a strong financial foundation. Here are the key steps to investing in cryptocurrency and getting out:

1. Understand the basics: Cryptocurrency is a virtual currency that is decentralized and secured by blockchain technology. It is important to do your research and understand the different types of cryptocurrencies before investing.

2. Assess your finances: Make sure you have an emergency fund, a manageable level of debt, and a diversified portfolio of investments. Only invest what you can afford to lose.

3. Choose a cryptocurrency exchange: Popular options include Coinbase, Gemini, and Kraken. These platforms offer more choices and functionality than traditional finance apps.

4. Set up an account: You will need to provide personal information and verify your identity to create an account on a cryptocurrency exchange.

5. Fund your account: You can add funds to your account through various methods, including bank transfers, wire transfers, or debit/credit cards.

6. Purchase cryptocurrency: Decide on the cryptocurrency you want to buy and specify the quantity. Many exchanges allow you to purchase fractional shares of cryptocurrencies with high values.

7. Store your cryptocurrency: You can store your cryptocurrency on the exchange or transfer it to a crypto wallet, such as a hot wallet (internet-connected) or a cold wallet (offline).

8. Manage your investments: Consider your investment strategy and goals. Remember that cryptocurrency is volatile, so be prepared for price swings and don't invest more than you can afford to lose.

9. Withdraw your investments: When you're ready to get out, you can sell your cryptocurrency on the exchange or transfer it to a fiat currency and withdraw the funds to your bank account.

Understand the risks

Investing in cryptocurrency is risky, so it's important to understand the potential pitfalls before you start. Here are some of the key risks you should be aware of:

Volatility and Price Manipulation

Cryptocurrency prices are extremely volatile and subject to sharp and sudden moves. This volatility is driven by market sentiment, speculation, and manipulation. Crypto exchanges, media owners, and influential investors can manipulate prices, and the unregulated and anonymous nature of digital asset markets makes this easier.

Regulatory Uncertainty

Cryptocurrencies are currently unregulated by governments and central banks, but this is starting to change. The lack of regulatory frameworks creates uncertainty, and investors are concerned about the possibility of future restrictions or even bans. The complex and disorganized nature of crypto regulations also makes it difficult for investors to understand their tax obligations and record-keeping requirements.

Cybersecurity Risks

Trading platforms and third-party service providers are vulnerable to hacking or other malicious activities. There is also a risk of losing your private key, which could result in losing access to your digital wallet and cryptocurrencies. Additionally, mistaken transactions cannot be reversed, and cryptocurrencies don't have the same official safeguards or insurance as traditional investments.

Forks and Discontinuation

Cryptocurrency trading carries the risk of hard forks or discontinuation, which can cause substantial price volatility. While you may receive notifications about potential blockchain forks, it is ultimately your responsibility to stay informed and find out when these might occur.

Network Slow-Down

A high volume of transactions on the blockchain can cause a slow-down, impacting the ability to create new cryptocurrencies and verify transactions.

Currency-Conversion Risks

Policies or interruptions in the deposit or withdrawal of fiat currency into or out of trading platforms may affect investors' ability to convert between fiat currency and cryptocurrency.

Taxation

There is a substantial uncertainty regarding the tax treatment of cryptocurrencies, which vary across jurisdictions. It is important to seek specific tax advice to ensure compliance with the regulations in your country.

Research the market

Researching the market is a crucial step in investing in cryptocurrency. Here are some key points to consider:

Understand the Cryptocurrency Market

Before investing in cryptocurrency, it's important to have a solid understanding of the market. Cryptocurrencies are decentralised virtual currencies, meaning they are not issued, backed, or regulated by a central authority like governments. They are created digitally through a validation process that relies on blockchain technology, which provides a secure and transparent record of transactions. The volatile nature of the cryptocurrency market, with large price swings, makes it a risky investment. Therefore, it's crucial to do your due diligence before investing.

Diverse Range of Cryptocurrencies

There are thousands of cryptocurrencies available, with Bitcoin being the most well-known and established. Other popular options include Ethereum, Dogecoin, Cardano, and Solana. Each cryptocurrency has unique characteristics, so it's essential to carefully evaluate and analyse them before investing. This includes reviewing white papers, researching the development team, understanding the technology and vision, and assessing the tokenomics, or the distribution and supply of the cryptocurrency.

Keep Abreast of Market Trends

Stay informed about the latest trends and developments in the cryptocurrency market. The market is constantly evolving, and keeping up with news, analysis, and price movements can help you make more informed investment decisions. Utilise resources like CoinMarketCap to track cryptocurrency prices, charts, and market capitalisations. Additionally, follow reputable news sources and analysis platforms to stay updated on the latest advancements and innovations in the space.

Consider Your Investment Strategy

When investing in cryptocurrency, it's important to have a well-defined investment strategy that aligns with your financial goals and risk tolerance. Decide whether you want to invest directly in cryptocurrencies, crypto funds, or companies associated with cryptocurrency. Assess your budget, risk tolerance, and investment horizon to determine how much you can allocate to cryptocurrency investments. Diversification within your crypto portfolio can also help manage risk.

Regulatory and Security Considerations

Cryptocurrency regulations vary across jurisdictions, and it's important to understand the legal and tax implications of investing in your region. Additionally, due to the digital nature of cryptocurrencies, security is a crucial consideration. Choose reputable exchanges and digital wallet providers, protect your access with strong passwords and two-factor authentication, and remain vigilant about potential scams and cybersecurity threats.

Choose a platform

Choosing a platform to trade cryptocurrency can be a daunting task, especially with the number of options available. Here are some key factors to consider when selecting a platform:

• User Interface: A user-friendly interface is crucial, especially for beginners. Look for a platform that is easy to navigate and has a simple buying and selling process.
• Fees: Trading fees, deposit fees, withdrawal fees, and conversion fees can quickly add up and eat into your profits. Compare the fee structures of different platforms to find the most cost-effective option.
• Cryptocurrency Selection: Consider the range of cryptocurrencies offered by the platform. If you're interested in investing in a wide variety of coins, choose a platform with a large selection.
• Security: The safety of your assets is paramount. Look for platforms with robust security measures such as two-factor authentication, encryption, and cold storage of assets.
• Customer Support: As a beginner, having access to reliable customer support is essential. Choose a platform that offers multiple customer service options, including 24/7 support if possible.
• Educational Resources: If you're new to the world of cryptocurrency, opt for a platform that provides educational materials and resources to help you learn about the market and different coins.
• Regulation: Ensure that the platform is regulated by a reputable financial authority and complies with regulatory requirements. This adds an extra layer of protection for your funds.
• Coinbase: One of the largest and most popular cryptocurrency exchanges. It offers a wide range of cryptocurrencies, an advanced trading platform, and educational resources. However, fees can be high unless you use Coinbase Pro.
• Kraken: A well-established platform with a good selection of coins and competitive trading fees. It offers advanced features like margin trading and futures trading. Kraken also provides educational resources and has relatively low Bitcoin withdrawal fees.
• Gemini: Known for its strong security measures and compliance with regulatory requirements. Gemini offers a simple, intuitive user interface and is available in all 50 U.S. states. It also provides a crypto rewards credit card and pays interest on crypto holdings.
• EToro: A good option for beginners, eToro offers a social trading function that allows users to follow and copy the trades of more experienced traders. It has a decent selection of cryptocurrencies and supports traditional investments like stocks and options.
• Robinhood: A commission-free trading platform that allows users to trade cryptocurrencies, stocks, options, and more. Robinhood is known for its user-friendly interface and provides tools and resources to help traders make informed decisions.

Set up a wallet

Setting up a cryptocurrency wallet is the first step to investing in crypto. There are several types of crypto wallets, including custodial wallets, non-custodial wallets, and hardware wallets.

Custodial Wallets

Custodial wallets are similar to bank accounts in that a third party, such as a crypto exchange, controls your private keys and provides custody over your assets. They are accessible and easy to use, especially for beginners, as they are provided by centralized crypto exchanges (CEXs) and allow users to buy crypto with fiat currency using a familiar process. The setup process for a custodial wallet typically involves choosing a CEX, creating an account and providing personal information, completing Know-Your-Customer (KYC) and Anti Money Laundering (AML) requirements, setting up security measures such as a password and two-factor authentication (2FA), and then transferring or purchasing crypto.

Non-Custodial Wallets

Non-custodial wallets, on the other hand, are controlled entirely by the user. This means that if you lose your private keys, there is no third party to help you access the wallet. When setting up a non-custodial wallet, you will need to choose a wallet app, create an account without providing any identifying information, and then transfer cryptocurrency into the wallet. It's important to note that non-custodial wallets may not support the use of fiat currencies for transactions. Examples of non-custodial wallets include Coinbase Wallet, Mycelium, Electrum, and Exodus.

Hardware Wallets

Hardware wallets are physical devices, such as a USB stick or a thumb drive, that store your private keys offline, providing an extra layer of security. Setting up a hardware wallet typically involves purchasing the device, installing the necessary software, setting up a PIN or password, and then transferring cryptocurrency to the wallet. Hardware wallets can be more expensive and less convenient for frequent transactions, but they offer enhanced security for storing large amounts of crypto. Popular options include the Ledger Nano X and the Trezor Model T.

Manage your investments

Once you've invested in cryptocurrency, you'll need to manage your investments. Here are some tips to help you do that:

• Take a long-term perspective: Cryptocurrency is a highly volatile asset class, with large price swings over short periods. It's easy to let emotions drive your decisions, such as buying when the price is rising or selling when prices go down. Taking a long-term perspective can help you avoid making impulsive decisions.
• Diversify your crypto holdings: While the entire cryptocurrency market tends to be unpredictable and volatile, there may be less risk with bigger, more commonly traded cryptocurrencies compared to smaller, more speculative ones. Consider holding a variety of cryptocurrencies in your portfolio to spread out the risk.
• Limit your crypto exposure: Some experts recommend investing no more than 1% to 5% of your net worth in cryptocurrency. At Stash, we recommend holding no more than 2% of your overall portfolio in any one cryptocurrency to limit crypto-specific risks.
• Apply the Stash Way: Consider applying the Stash Way, a philosophy focused on regular investing, diversification, and investing for the long term.
• Use a crypto trust: A crypto trust is similar to any other financial trust but exclusively holds cryptocurrency. Trusts are a good option if you want to pass on wealth from coins to loved ones later down the line.
• Robo-advisors: Robo-advisors like Wealthfront allow you to invest up to 10% of your portfolio in crypto trusts, helping you eliminate some risk.
• Two-factor authentication: Adding two-factor authentication gives you an additional security layer, making it harder for unauthorized users to access your funds.
• Hot wallets: If you're not happy with your exchange's service provider, you can transfer your assets to a hot wallet, which is a cryptocurrency wallet operated on internet-connected devices like tablets, computers, or phones. While convenient, hot wallets pose a higher theft risk due to their continuous internet connection.
• Cold wallets: Cold wallets, such as USBs or hard drives, are offline and disconnected from the internet, providing top-tier security for storing cryptocurrency. However, if you lose the associated keycode or experience device failure, you could permanently lose access to your cryptocurrency.

Frequently asked questions