A Beginner's Guide To Crypto Currency Investment

Investing in cryptocurrency is a hot topic, but it's not for the faint-hearted. Cryptocurrencies are highly speculative assets that have seen significant swings in prices. They are traded on public exchanges, but they are generally not subject to the same regulations as stocks and other traditional investment products.

There are several ways to invest in cryptocurrency. You can buy it directly through a cryptocurrency exchange, or via certain traditional brokers, money transfer apps, or even Bitcoin ATMs. You can also gain exposure to cryptocurrency by investing in companies with a partial or total focus on it, or by investing in a cryptocurrency-focused fund.

It's important to remember that investing in cryptocurrency is risky, so it's generally advised not to invest more money than you can afford to lose.

Buy crypto directly

There are several ways to buy crypto directly. You can use a cryptocurrency exchange, a traditional stockbroker, a money transfer app, a Bitcoin ATM, or a Bitcoin exchange-traded fund (ETF).

Cryptocurrency Exchanges

You can purchase Bitcoin and other cryptocurrencies from cryptocurrency exchanges. Many offer dozens of cryptocurrency choices, while some only have Bitcoin and a few alternatives. They carry a variety of different fees and consumer protections, so do your due diligence before choosing. Some popular exchanges include Gemini, Kraken, Coinbase, and Crypto.com.

Traditional Stockbrokers

A few traditional stockbrokers, like Robinhood, Webull, TradeStation, and Fidelity, also offer access to Bitcoin or other cryptocurrencies.

Money Transfer Apps

Cash transfer services like PayPal, Venmo, or Cash App allow their users to purchase Bitcoin and other cryptocurrencies using the apps. You can purchase, store, send, and sell Bitcoin and other cryptocurrencies directly through the apps, which is convenient if you're used to those interfaces.

Bitcoin ATMs

Bitcoin ATMs act like in-person Bitcoin exchanges. Individuals can insert cash into a machine and use it to purchase Bitcoin, which gets transferred to online wallets for users. Before you carry out a transaction, make sure you look at the fees you'll be charged, and have a plan for where to send the Bitcoin once you buy it.

Bitcoin Exchange-Traded Funds (ETFs)

On January 10, 2024, the Securities and Exchange Commission opened the door for spot Bitcoin ETFs, which track the price of Bitcoin and trade over major exchanges. This was a long-awaited approval, and one that is expected to make it even easier for traditional investors to gain access to Bitcoin. The spot Bitcoin ETFs started trading on January 11, 2024, and are available through traditional brokerage accounts.

Invest in crypto companies

Investing in crypto companies is an option if you want to gain exposure to the crypto space without purchasing digital currencies directly.

You can invest in companies with a partial or total focus on cryptocurrency. These include:

• Cryptocurrency mining companies
• Mining hardware makers
• Companies that support cryptocurrency, such as Robinhood Markets Inc. (HOOD) and PayPal Holdings Inc. (PYPL)
• Companies that hold large amounts of cryptocurrency on their balance sheets, like MicroStrategy Inc. (MSTR)

You can also invest in companies that hold equity in businesses building products and services in the blockchain ecosystem, such as Pantera.

Invest in crypto funds

Investing in cryptocurrency is risky, so it is important to understand the risks and do your research before investing. If you are willing to take on the risk, there are several ways to invest in cryptocurrency funds.

Exchange-Traded Funds (ETFs)

Exchange-traded funds are an investment fund that holds multiple underlying assets. Cryptocurrency ETFs hold cryptocurrencies, cryptocurrency futures contracts, or equities related to cryptocurrencies. ETFs are traded on stock exchanges and can be bought and sold like stocks. Some examples of cryptocurrency ETFs include:

• Siren Nasdaq NexGen Economy ETF (BLCN)
• First Trust Indxx Innovative Transaction & Process ETF (LEGR)
• Bitwise Crypto Industry Innovators (BITQ)
• Global X Blockchain ETF (BKCH)

Mutual Funds

Mutual funds are investment funds that hold a variety of stocks, bonds, or other securities. Cryptocurrency mutual funds invest in cryptocurrencies, cryptocurrency futures contracts, or companies related to cryptocurrencies. Some examples of cryptocurrency mutual funds include:

• Grayscale Bitcoin Cash Trust
• Grayscale Digital Large Cap Fund
• Bitwise 10 Crypto Index Fund

Cryptocurrency Trusts

Cryptocurrency trusts allow investors to trade shares in trusts that hold large pools of a cryptocurrency. However, these can trade at a premium or discount to the net asset value, involve high volatility, hefty fees, and other risks. Some examples of cryptocurrency trusts include:

• Grayscale Bitcoin Cash Trust
• Grayscale Digital Large Cap Fund
• Bitwise 10 Crypto Index Fund

Crypto Funds

Some crypto-focused funds invest in cryptocurrency directly, while others invest in crypto-focused companies or derivative securities such as futures contracts. An example of a crypto fund is the Schwab Crypto Thematic ETF, which provides exposure to companies that may benefit from the development or utilisation of cryptocurrencies and other digital assets.

Invest in a crypto Roth IRA

A Roth IRA is a special individual retirement account (IRA) in which you pay taxes on contributions, and then all future withdrawals are tax-free.

According to the Internal Revenue Service (IRS), you cannot contribute cryptocurrency directly into your Roth IRA, but there is no rule about adding crypto to your Roth IRA via purchase. However, very few traditional Roth IRA providers allow you to do this. This has led to the emergence of "Bitcoin IRAs" or "Crypto IRAs", which are retirement accounts designed to let you invest in cryptocurrencies.

With a crypto IRA, you can invest in crypto for your retirement. However, investors should carefully consider whether these accounts are suitable for retirement planning, given the high fees and the extreme volatility of cryptocurrency.

Advantages

• Diversification: Cryptocurrency is an asset class that is not correlated with stocks and bonds, which is what most Americans hold in their retirement accounts. This may help protect your retirement balance, even though crypto prices can be quite volatile.
• Potential returns: While Bitcoin may be very volatile, it also offers the potential for huge gains.
• Tax advantages: Each time you sell crypto for a profit, you owe capital gains. Buying and selling crypto in a self-directed IRA alleviates this burden as you aren't taxed as long as the money and assets remain in your account.

Disadvantages

• Additional fees: Unlike with normal IRAs, which very seldom charge any fees, self-directed IRAs typically come with several additional fees, including set-up fees, transaction fees and annual account management fees.
• Crypto exchange limitations: Some Bitcoin IRA companies only allow you to trade on affiliated currency exchanges.
• Price volatility: Market volatility is a substantial risk for crypto, especially for investors close to retirement.
• No tax loss harvesting: In a taxable investment account, you can use tax loss harvesting. That means you can use some of your investment losses to offset capital gains taxes. This is not possible in a Bitcoin IRA.
• Retirement planning complexity: You cannot invest in traditional securities like stocks and bonds in a Bitcoin IRA. And no one should invest all of their retirement nest egg in cryptocurrency. Anyone who opts for a Bitcoin IRA should maintain at least one other account for the balance of their retirement investments. This can add a layer of complexity to your retirement planning.

Become a crypto miner or validator

Becoming a crypto miner or validator is another way to invest in cryptocurrency. This method is perhaps the most direct way to invest in cryptocurrency. Crypto miners and validators can earn rewards in crypto, which they can either hold as investments or exchange for another currency.

Miners and validators play a crucial role in the security and functionality of blockchain networks. They achieve this by validating transactions and adding new blocks to the blockchain. However, there are some key differences between the two roles.

Crypto Miners

Miners are responsible for validating transactions on blockchains that use a Proof-of-Work (PoW) consensus mechanism, such as Bitcoin. They use specialised computers to solve complex mathematical problems, and the first miner to solve the puzzle receives a block reward and a transaction fee. This process is known as mining and requires significant computational power and energy resources.

The process of becoming a crypto miner typically involves a high barrier to entry due to the need for powerful and expensive hardware.

Crypto Validators

Validators, on the other hand, validate transactions on Proof-of-Stake (PoS) blockchains such as Ethereum and Solana. Instead of competing to add blocks to the blockchain, validators are selected by the network based on the amount of cryptocurrency they hold and are willing to stake as collateral. This method reduces the cost of setting up mining infrastructure and energy consumption compared to PoW mining.

To become a validator, a network participant must lock up a specific amount of the network's native cryptocurrency through a process called crypto staking. This amount serves as collateral to ensure the validator's honesty. Validators are incentivised to follow the rules, as their staked funds can be slashed if they engage in any malicious behaviour.

The process of becoming a crypto validator varies depending on the chosen cryptocurrency but typically involves setting up validator nodes and staking tokens as collateral.

Frequently asked questions