Cryptocoin Investment: Strategies For Beginners To Get Started

Investing in cryptocurrency is a hot topic. With thousands of cryptocurrencies to choose from, it can be overwhelming for beginners. Cryptocurrency is a digital currency that is secured by blockchain technology and traded between consenting parties with no broker. It is not backed by any central government authorities, making it immune to government interventions. The most well-known cryptocurrency is Bitcoin, but there are many others such as Ethereum, Binance Coin, and Dogecoin. Cryptocurrency investing can take many forms, from buying crypto directly to investing in crypto funds and companies. For direct investing, you can use crypto exchanges or apps, or certain broker-dealers. It is important to note that investing in cryptocurrency is risky and it is recommended not to invest more money than you can afford to lose.

Buy cryptocurrency directly

If you want to invest in cryptocurrency directly, you can use a cryptocurrency exchange or a broker-dealer. Here is a step-by-step guide on how to buy cryptocurrency directly:

Step 1: Choose a Cryptocurrency Exchange

Your best option is a well-known, reputable exchange with a large selection of currencies. Examples of popular exchanges include Coinbase, Binance, Crypto.com, Anycoin Direct, and BitPay.

Step 2: Create an Account

You will need to provide personal information and verify your identity to complete the registration process. This is also known as 'Know Your Customer' (KYC) procedures.

Step 3: Fund Your Account

Before you can buy any crypto, you need to deposit fiat money (e.g. US dollars or euros) into your exchange account. You can usually do this via bank transfer, credit card, or debit card.

Step 4: Choose Which Cryptocurrency to Buy

You can choose to invest in one or multiple cryptocurrencies. It is important to research your options to help you decide. Some of the most well-known cryptocurrencies include Bitcoin, Ethereum, Litecoin, Dogecoin, and Ripple.

Step 5: Place a Buy Order

Follow the steps required by the exchange to submit and complete a buy order for your chosen cryptocurrency.

Step 6: Store Your Cryptocurrency in a Digital Wallet

After your purchase is complete, you can access your cryptocurrency through a digital wallet. This wallet can be hosted by the cryptocurrency exchange or an independent wallet provider. You can also choose to send your cryptocurrency to a personal wallet.

It is important to note that investing in cryptocurrency is risky, and it is recommended not to invest more money than you can afford to lose. The prices of cryptocurrencies are highly volatile and can be affected by various factors, including regulatory changes and market demand.

Invest in crypto funds

Investing in crypto funds is a way to gain exposure to the cryptocurrency market without directly owning any digital coins. Crypto funds are financial products that pool investor money to purchase crypto-assets, such as Bitcoin or Ethereum, through a standard brokerage account. These funds may invest in a single type of cryptocurrency or a basket of different cryptocurrencies. It's important to note that when investing in a crypto fund, you own shares of the fund rather than directly owning the underlying crypto-assets.

There are two main types of crypto funds: mutual funds and exchange-traded funds (ETFs). Mutual funds are actively or passively managed and typically trade once per day, while ETFs trade during normal trading hours. Both types of funds have management fees, known as expense ratios, which can impact long-term returns. As of early 2022, it was challenging to gain exposure to any cryptocurrency other than Bitcoin through a mutual fund or ETF.

When investing in a crypto fund, it's essential to consider the advantages and disadvantages. Crypto funds are simpler to buy than actual cryptocurrencies, as they can be purchased through existing brokerage accounts. They can also be easily held in retirement accounts or other tax-advantaged investment vehicles. The mutual fund industry is highly regulated, providing added security for investors.

However, there are some drawbacks to investing in crypto funds. The price performance of a futures-based crypto mutual fund may differ from the performance of the underlying cryptocurrency. Expense ratios, typically over 1%, can reduce long-term returns. Liquidity is limited as mutual funds trade only once per day, while cryptocurrencies trade 24/7. Additionally, investors do not technically own any cryptocurrencies when investing in these mutual funds.

Overall, investing in crypto funds can be a viable option for those who want exposure to the cryptocurrency market without the risks and complexities of directly owning digital coins. However, it's important to carefully consider the pros and cons before making any investment decisions.

Invest in crypto companies

Investing in crypto companies is a way to gain exposure to the cryptocurrency market without directly purchasing cryptocurrencies. Crypto companies can be a more stable investment than cryptocurrencies themselves, which are prone to volatile price swings.

There are several ways to invest in crypto companies, including:

• Stocks: Buying stocks in companies that incorporate blockchain technology or benefit from cryptocurrency usage is a direct way to invest in the crypto space. These companies can be found on stock exchanges or the over-the-counter market. Examples include Nvidia, Block, and Coinbase.
• Exchange-Traded Funds (ETFs): ETFs provide access to a basket of crypto and blockchain-related companies with a single investment. Examples include the GlobalX Blockchain ETF and spot Ether ETFs.
• Crowdfunding: Some early-stage blockchain companies raise money through crowdfunding, allowing investors to get in on the ground floor. While this is a riskier option, it can also lead to higher returns.
• Bitcoin Trusts and Mutual Funds: These funds are managed by professionals who invest in Bitcoin and other cryptocurrencies on behalf of their clients. Examples include the Grayscale Bitcoin Trust and Osprey Bitcoin Trust.

When investing in crypto companies, it's important to remember that the industry is still in its early days and subject to regulatory changes. As such, it's crucial to do your research and only invest what you can afford to lose.

Store crypto in a digital wallet

Crypto wallets are designed to store your private key, keeping your crypto secure and accessible. They also allow you to send, receive, and spend cryptocurrencies like Bitcoin and Ethereum.

There are several types of crypto wallets, including physical devices, software, and even paper. The most common types are hosted wallets, non-custodial wallets, and hardware wallets.

Hosted Wallets

Hosted wallets are the most popular and easy-to-set-up crypto wallets. When you buy crypto using an app like Coinbase, your crypto is automatically held in a hosted wallet. It's called hosted because a third party keeps your crypto for you, similar to how a bank keeps your money in a checking or savings account. The main benefit of a hosted wallet is that if you forget your password, you won't lose your crypto. However, a drawback is that you can't access everything crypto has to offer.

Non-Custodial Wallets

Non-custodial wallets, like the Coinbase Wallet, put you in complete control of your crypto. These wallets don't rely on a third party to keep your crypto safe. While they provide the software necessary to store your crypto, the responsibility of remembering and safeguarding your password falls entirely on you. If you lose or forget your password, there is no way to access your crypto. Non-custodial wallets also allow you to access more advanced crypto activities like yield farming, staking, lending, and borrowing.

Hardware Wallets

Hardware wallets are physical devices, usually about the size of a thumb drive, that store the private keys to your crypto offline. Most people don't use hardware wallets because of their increased complexity and cost. However, they can keep your crypto secure even if your computer is hacked. To set up a hardware wallet, you need to buy the hardware, install the software, and then transfer crypto to your wallet.

When choosing a crypto wallet, consider your trading needs and preferences. For day-to-day trading and accessibility, a hot wallet (connected to the internet) may be more suitable. If you plan on storing a large amount of crypto and value security over convenience, a cold wallet (offline) might be a better option.

Mine crypto or act as a validator

Mining and validating are two distinct but crucial procedures that safeguard the integrity of a blockchain and its native cryptocurrency.

Mining Crypto

Miners are the workhorses of Proof-of-Work (PoW)-based cryptocurrencies like Bitcoin. They validate transactions and create new blocks by solving complex mathematical puzzles. This process is crucial for the security and functionality of the network. Miners compete to be the first to solve these puzzles, and the winner gets to propose a new block to the network of nodes, receiving a reward in the form of newly minted coins and transaction fees.

Mining is computationally intensive and requires significant energy resources. The high entry barrier to becoming a miner is due to the need for powerful and expensive hardware. Additionally, the PoW process has been criticised for its high energy consumption, which can have a significant environmental impact.

Acting as a Validator

Validators play a crucial role in securing the network and validating transactions, especially in Proof-of-Stake (PoS) consensus mechanisms. In PoS-based cryptocurrencies like Ethereum, validators are chosen to propose new blocks based on the amount of cryptocurrency they hold and are willing to "stake" as collateral. Validators validate transactions and propose new blocks, which are then verified by other validators in the network.

The selection of validators in a PoS system is more energy-efficient than the competitive mining process in PoW. Validators are rewarded with transaction fees and sometimes additional coins created by the network, typically shared among all validators in proportion to their stakes.

While mining requires significant computational power and energy, becoming a validator is relatively more accessible, though it may require holding a significant amount of cryptocurrency.

Both mining and validating are robust security mechanisms, but they achieve security through different means. PoW relies on the high cost of attacking the network, while PoS leverages the financial interest of validators in maintaining network integrity.

Frequently asked questions