A Beginner's Guide To Cryptocurrency Investment

Cryptocurrency is a digital currency, such as Bitcoin, that is used as an alternative payment method or speculative investment. It gets its name from the cryptographic techniques that let people spend them securely without the need for a central government or bank.

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.

However, 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.

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 capitalizations.

How to buy cryptocurrency

Choose a broker or a crypto exchange

If you want to buy cryptocurrencies, you first need to choose either a broker or a crypto exchange. Both enable you to buy crypto, but there are differences between the two options. A crypto exchange is an online platform where buyers and sellers meet to trade cryptocurrencies, paying fees to the exchange for facilitating the process. Well-known cryptocurrency exchanges include Coinbase, Binance, and eToro. Cryptocurrency brokers, on the other hand, offer easy-to-use interfaces that interact with an exchange on your behalf, but they may come with restrictions on moving your holdings.

Create and verify your account

Once you've chosen a cryptocurrency broker or exchange, you can sign up and start an account. Depending on the platform and the amount of crypto you plan to buy, you may need to verify your identity using official paperwork, such as a passport or driver's license, and a selfie. Only once the verification process is complete will you be able to buy and sell cryptocurrencies.

Fund your account

You can deposit money into your crypto account by linking it to your bank account or by making a payment with a debit or credit card. Not all providers allow you to use their credit cards to buy crypto, and some may add fees to the transaction.

Place a cryptocurrency order

Once the money is in your brokerage or exchange account, you can place your first cryptocurrency order. There are thousands of cryptocurrencies to choose from, including well-known options such as Bitcoin and Ethereum. Most exchanges and brokers allow customers to buy fractional shares of certain cryptocurrencies.

Store your cryptocurrency

When you buy cryptocurrency through an exchange, it's usually stored in a crypto wallet linked to the exchange. You might choose to transfer it from the exchange to a separate 'hot' or 'cold' wallet for extra security. A hot wallet is stored online and is convenient but carries a higher risk of theft. A cold wallet, on the other hand, is not connected to the internet, making it a more secure option. Cold wallets can take the form of external devices such as a USB drive, but if you lose the key code or the device fails, you may never be able to retrieve your cryptocurrency.

Other Options for Buying Cryptocurrency

In addition to brokers and exchanges, there are a few other ways to buy cryptocurrency:

• Exchange-Traded Funds (ETFs): While crypto-based ETFs are not yet available in the UK, they have been introduced in other countries and may be an option in the future.
• Shares in Crypto-Related Companies: You can gain exposure to the crypto market by buying shares in companies that use or own cryptocurrencies and blockchain technology, such as Nvidia, PayPal, and Square.
• Money Transfer Apps: Cash transfer services like PayPal, Venmo, and Cash App allow users to buy, store, and sell Bitcoin and other cryptocurrencies directly through their apps.
• Bitcoin ATMs: These work like normal ATMs, but you can use them to buy and sell Bitcoin.

Final Thoughts

Remember that investing in cryptocurrency is risky due to the potential for high losses from security breaches and market volatility. It's important to do your research, understand the risks, and only invest what you can afford to lose.

The risks of investing in cryptocurrency

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 main risks of investing in cryptocurrency:

Volatility and Manipulation

The cryptocurrency market is extremely volatile, with sharp and sudden price moves driven by unexpected changes in market sentiment. This makes it difficult for investors to build confidence and secure gains. Volatility in crypto prices generally stems from three sources: sentiment, speculation, and market manipulation. Crypto exchanges, media owners, and influential investors can manipulate prices, and the unregulated and anonymous nature of digital asset markets makes this easier.

Security and Custody

Storing cryptocurrencies is risky, with significant incidents of theft occurring on personal wallets and exchanges. Hacking remains a constant threat if cryptocurrencies are not correctly stored and protected. Investors cannot recover assets that get lost or stolen, and mistaken transactions cannot be reversed. Unlike traditional investing, cryptos don’t have official safeguards or insurance, and rebates on lost investments depend on the organisation you’re dealing with.

Regulatory and Tax Uncertainty

Cryptocurrencies are currently unregulated by governments and central banks, but this is starting to change. There is a high degree of uncertainty regarding regulatory frameworks, and investors are concerned about the possibility of future restrictions, which may significantly impact the value of cryptocurrencies or even lead to a complete loss of value. There is also a lack of clarity regarding the tax treatment of cryptocurrencies, which scares off some investors.

Cyber-Security Risks

Trading platforms and third-party service providers are vulnerable to hacking and other malicious activities. If malicious actors gain control of sufficient consensus nodes on the Bitcoin Network or other means of alteration, the blockchain may be altered. There is also a risk of losing the private key to your digital wallet, which could result in the loss of your bitcoins or other cryptocurrencies.

Trading Platform and Exchange Risks

Digital currency trading platforms are largely unregulated and provide limited transparency. They have come under increasing scrutiny due to cases of fraud, business failure, or security breaches, where investors could not be compensated for losses. There is also a risk of currency conversion issues, as policies or interruptions in the deposit or withdrawal of fiat currency can impact investors' ability to convert.

How to store cryptocurrency

When you own cryptocurrency, one of the most important things to consider is how to store it safely. Cryptocurrency doesn't have the same types of protection as money in a bank account or investments made through a broker. As the owner, storing your crypto safely is your responsibility. If you lose access to your crypto, it's most likely gone. It is estimated that 3.7 million Bitcoin have been lost forever.

There are several different options for storing cryptocurrency, including hardware devices, applications, and even a simple piece of paper. Once you know more about each storage method, you can choose the wallet (or wallets) that will keep your crypto safe.

Hot Wallets

Hot wallets are connected to the internet and can be accessed at any time. They include all online cloud wallets, most mobile and software wallets, and exchanges. They give you control over your crypto and are almost always free and easy to use. You can send and receive crypto very quickly with this type of wallet. However, because they are connected to the internet, hot wallets carry the risk of being hacked.

Cold Wallets

Cold wallets are not connected to the internet and allow you to store your funds offline. You can still receive funds at any time, but no one can transfer them out. Cold wallets are widely considered the best option from a security perspective as your crypto cannot be stolen by hackers while it is offline. There are two main types of cold wallets:

• Hardware wallets are small physical devices that connect to your computer and store cryptocurrency. They connect to the internet when sending and receiving cryptocurrency, but otherwise keep your funds offline. Examples include the Ledger Nano X and Trezor Model T.
• Paper wallets are a printout of public and private keys, usually as both a string of characters and as scannable QR codes. Paper wallets are free to make and provide greater security by keeping your crypto offline. However, they are the least user-friendly cryptocurrency storage option.

Most cryptocurrency holders use both cold and hot wallets. Hot wallets are handy for frequent trading, while cold wallets are better for long-term holding of crypto assets.

Custodial Wallets

A custodial wallet is when a third party holds your crypto for you, either through cold (offline) storage, hot (online) storage, or a combination of the two. When you buy coins from cryptocurrency exchanges, apps, or stock brokers, they typically put it in a custodial wallet they control. Many investors use custodial wallets with no issues, and there are advantages to this type of wallet:

• They require the least amount of work on the user's part.
• Since your crypto is stored in your account, it's easy to access if you want to trade it.
• You don't need to worry about losing a crypto wallet as long as you can access your account.

However, a major disadvantage of custodial wallets is that a third party controls your crypto, so you are relying on their security measures and trusting that they won't lock you out of your account.

Best Practices for Storing Cryptocurrency

• Store the bulk of your crypto in a cold wallet since it is the most secure option.
• Use a hot wallet for smaller amounts of crypto that you want available for trading.
• Physically record the recovery phrases for your crypto wallets and keep them in a secure location that only you can access.
• Never share your crypto wallet's recovery phrase or private keys with anyone, and don't save them to your computer.
• Always enable two-factor authentication (2FA).
• Don't keep cryptocurrency in an exchange for a prolonged period or longer than necessary.
• Be aware of phishing sites and confirm that you are logging into the right address.
• Check that websites are secured with HTTPS and log in only to secure websites with a valid HTTPS certificate.
• Use a secure Wi-Fi connection. Never connect to your online wallet, exchange account, or another critical security point via public WiFi.

The future of cryptocurrency

The paradoxical nature of cryptocurrency is highlighted by investors who believe in regulation but are concerned about its impacts, and who are eco-conscious despite crypto's huge carbon footprint. The market is also affected by the involvement of large corporations and governments, which goes against the decentralised, anti-establishment ethos of crypto's early culture.

In the long term, it seems unlikely that any government or group of nations will be able to stop the cryptocurrency idea entirely, but they can slow down its progress and steer the final product. Cryptocurrency may not replace fiat currencies, but it has the potential to disrupt the global financial system.

How to invest in cryptocurrency indirectly

Investing in cryptocurrency doesn't always have to be a direct affair. Here are some ways you can invest in crypto indirectly:

Invest in Companies that Hold Cryptocurrency

Some publicly traded companies have cryptocurrency holdings. These companies are betting on the success of crypto, and you can too, with the companies acting as a buffer. Checking a company's balance sheet can reveal how much they have invested in crypto. For example, as of June 30, 2021, Tesla held $1.31 billion in digital assets, which equates to about 2.4% of its total assets.

Invest in its Infrastructure

Another way to gain exposure is to invest in companies that have a stake in the cryptocurrency industry. For example, Coinbase (COIN) is a platform where investors can buy and sell cryptocurrencies, and it's publicly traded. Riot Blockchain Inc. (RIOT) is another publicly traded company that focuses on cryptocurrency mining and helps build crypto infrastructure.

Exchange-Traded Funds (ETFs)

An ETF is a financial instrument that tracks underlying securities, an index, or other financial products traded on exchanges. ETFs are typically bought and sold on a stock exchange throughout the trading day, much like stocks. While there are currently no cryptocurrency ETFs that have been approved by the Securities and Exchange Commission (SEC), there is demand for them. A bitcoin ETF, for instance, would track the price of bitcoin.

Crypto and Your 401(k)

In 2022, Fidelity announced that clients could add Bitcoin to their 401(k) accounts. This was a major step toward bringing cryptocurrencies into mainstream investment portfolios.

Credit Card Rewards

Some credit cards allow you to earn crypto as a reward, similar to cash back or miles. For example, the Gemini Credit Card and cards offered by Crypto.com and Coinbase exchanges offer crypto rewards. With these cards, you can invest in crypto without actually buying it.

Crypto and Blockchain Stocks

You can also invest in companies that work in blockchain technology or hold cryptocurrency on their balance sheets. These companies are often involved in crypto mining, software development, and other blockchain-based services. Examples include Riot Blockchain (RIOT), Canaan Inc. (CAN), HIVE Blockchain Technologies (HIVE), and Bitfarms (BITF).

These indirect methods of investing in crypto can be cheaper and possibly less risky than purchasing crypto directly. However, it's important to carefully consider the pros and cons, including security, fees, and the risk of losses, before investing.

Frequently asked questions