A Beginner's Guide To Cryptocurrency Investment

how to invest in cryptocurrencty

Cryptocurrency is a hot topic in investment circles. While some investors view it as a risky alternative investment, others see it as a legitimate option for any investor's portfolio. Cryptocurrencies are digital currencies that generally operate outside the regulation of any individual company or government. They are overseen by an online, decentralised network of users and guarded by encryption through blockchain technology.

If you are new to crypto, it is important to remember that buying cryptocurrency involves inherent risks, just like any investment. Before investing, it is crucial to conduct thorough research and understand how each type of cryptocurrency functions.

There are several ways to invest in cryptocurrency, including buying it directly, investing in crypto funds and companies, or trading on cryptocurrency exchanges. When investing in cryptocurrency, it is important to consider the risks, transaction fees, and potential for financial loss due to the volatile nature of the market.

Characteristics Values
Accessibility Can be bought through crypto exchanges, apps, or brokers
Risk High volatility, potential for financial loss, vulnerable to hacking, scams, and fraud
Regulation Largely unregulated, but the SEC monitors the industry for abuse
Investment type Direct, indirect, or through funds
Investment considerations Portfolio diversification, potential for appreciation, lack of correlation with other asset classes
Storage Hot wallets, cold wallets, or through a broker

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Pick a broker or cryptocurrency exchange

Once you've decided to invest in cryptocurrency, the next step is to choose a broker or a crypto exchange. Both options allow you to buy crypto, but there are some key differences to keep in mind.

A cryptocurrency exchange is a platform where buyers and sellers meet to trade cryptocurrencies. Examples of well-known cryptocurrency exchanges include Coinbase, Gemini, Binance.US, Kraken, Crypto.com, and BitMart. Exchanges often have relatively low fees, but they tend to have more complex interfaces that may be intimidating for new crypto investors. They usually offer multiple trade types and advanced performance charts.

On the other hand, cryptocurrency brokers simplify the process of purchasing crypto by offering easy-to-use interfaces that interact with exchanges for you. Some popular crypto brokers include Robinhood, SoFi, eToro, and Fidelity Investments. While brokers can be more convenient, they may charge higher fees than exchanges, and there may be restrictions on moving your cryptocurrency holdings off their platforms.

When choosing between a broker and an exchange, consider your level of comfort with the complexity of the platform, the fees involved, and the level of control you want over your cryptocurrency holdings. Additionally, ensure that your chosen platform allows fiat currency transfers and purchases made with U.S. dollars, especially if you're new to crypto.

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Set up an account

Once you have chosen a cryptocurrency broker or exchange, you will need to create an account. This generally involves signing up and providing personal information to verify your identity. This process is known as "know your customer" or KYC protocols. You may be asked to enter information from your driver's license or passport, and sometimes a photo of yourself or a form of identification may be required.

It is important to note that the specific requirements may vary depending on the broker or exchange you select. Some platforms may ask for more extensive information as part of their security measures, so be prepared to provide additional details if needed. It is also worth mentioning that you may need to meet certain eligibility criteria to open an account, such as being of legal age and residing in a specific country or region.

After successfully setting up your account, you can proceed to the next step of adding funds to your account before making your first cryptocurrency purchase.

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Add funds to invest

Once you have chosen a broker or exchange and set up an account, you will need to add funds to your account before you can start investing in crypto. You can add money to your account in a variety of ways, including by 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 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.

It is important to be aware that the time it takes for funds to become available in your account varies depending on the deposit method and the broker or exchange chosen. For example, if you are using a platform such as Coinbase, Kraken, Bitstamp, Gemini, Binance, or Bitfinex, the time it takes for funds to become available may differ.

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Initiate your cryptocurrency transaction

Once you have decided on the cryptocurrency you wish to buy, you can enter its symbol (e.g. BTC for Bitcoin) and specify the quantity of coins you want to purchase. Many exchanges and brokers allow you to buy fractional shares of cryptocurrencies with high values, such as Bitcoin or Ethereum. This accessibility ensures that those without significant capital can still invest.

To buy cryptocurrency, you will need to use a cryptocurrency exchange or broker. Examples of well-known exchanges include Coinbase, Binance, Kraken, Gemini, and Binance.US. Examples of brokers include Robinhood and SoFi.

Before you can buy any crypto, you will need to fund your exchange or broker account with fiat money (e.g. US dollars). 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.

It is important to note that while some exchanges allow credit card deposits, these often come with higher interest rates and extra fees. Credit card companies frequently categorise crypto purchases as cash advances, leading to higher interest rates and additional fees. Coupled with fees from both the credit card company and the exchange or broker, you could lose up to 10% of your crypto purchase. Therefore, it is generally recommended to fund your account through other payment methods.

With your account funded, you are now ready to initiate your cryptocurrency transaction and make your first purchase.

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Keep your cryptocurrency secure

Keeping your cryptocurrency secure is a crucial part of investing in crypto. Here are some detailed steps and guidelines to help you secure your crypto investments:

Choose a Secure Storage Option:

  • Crypto Wallets: Crypto wallets are essential for storing your crypto assets, private keys, and wallet addresses. You can choose between hot wallets (online, software-based wallets) and cold wallets (offline, hardware-based wallets). Hot wallets are more susceptible to hacks but offer easier access to your crypto for frequent transactions. Cold wallets, like USB drives or hardware devices, provide top-tier security by storing your crypto offline, away from online hacks.
  • Crypto Exchanges: Crypto exchanges are digital marketplaces that allow you to buy, sell, and trade cryptocurrencies. While they are user-friendly, they are vulnerable to theft and hacking. It's recommended to use exchanges for frequent transactions and choose a reputable exchange that offers two-factor authentication for added security.
  • Paper Wallets: Paper wallets are a phasing-out method of printing your private keys and wallet addresses on paper. They are inexpensive but highly vulnerable to physical damage, theft, or loss.

Best Practices for Securing Your Crypto:

  • Diversify Your Storage: Diversifying your crypto storage can reduce the risk of losing everything. Use a combination of hot and cold wallets, or multiple wallets of each type, to cater to different tokens, investment values, and trading frequencies.
  • Prioritize Security: Always prioritize security when choosing a platform or device for crypto storage. Look for features like two-factor authentication, robust security protocols, and a track record of keeping user assets safe.
  • Back-up Private Keys and Seed Phrases: Safeguard your private keys and seed phrases, as these are crucial for recovering your wallet if you lose access. Consider keeping a physical record of this information, stored offline in a secure location, such as a safe.
  • Research and Compare Options: Research different storage options and compare their security, fees, supported cryptocurrencies, customer service, and recovery options. Choose a storage method that suits your investment goals and risk tolerance.
  • Be Vigilant: Stay vigilant against scams and fraud. Avoid revealing your private keys or seed phrases to anyone. Regularly review and update your security measures to protect your crypto assets.

Frequently asked questions

You can buy cryptocurrency using a crypto exchange or through certain broker-dealers. Examples of popular crypto exchanges include Coinbase, Kraken, Bitstamp, Gemini, Binance, and Bitfinex.

Cryptocurrency is a highly volatile and speculative investment. The prices of cryptocurrencies can fluctuate wildly, and there is a risk of losing all your money. Cryptocurrency exchanges are vulnerable to hacking and other criminal activities. There is also no guarantee that the crypto project you invest in will succeed, as the space is crowded and competitive.

You can store your cryptocurrency in a digital wallet, which can be either a hot wallet or a cold wallet. Hot wallets are always connected to your computer and the cryptocurrency network, making them more vulnerable to cybersecurity breaches and theft. Cold wallets, such as hardware wallets, are offline storage options that are considered more secure but come with the risk of losing your private key.

The two most well-known cryptocurrencies are Bitcoin and Ethereum. Bitcoin is the original cryptocurrency, created in 2009, and has a limited supply of 21 million coins. Ethereum is a blockchain-based platform that enables the creation of decentralised applications and smart contracts. Other popular cryptocurrencies include Tether, Binance Coin, Solana, and Dogecoin.

In the US, the IRS treats cryptocurrency as property, not currency. This means that transactions in cryptocurrency spot markets are considered taxable whenever a taxable event occurs, such as selling crypto for fiat currency or trading it for another asset. Investors are responsible for tracking cost basis, gains, and reporting requirements.

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