A Beginner's Guide To Cryptocurrency Etf Investing

Investing in cryptocurrencies like Bitcoin and Ethereum doesn't have to be complicated. One of the safest ways to gain exposure to cryptocurrencies is through Exchange Traded Funds (ETFs). ETFs are baskets of assets that share a common theme, and they offer a simple, lower-risk solution for investors who want to access the cryptocurrency market without the complexities of buying digital currencies directly. While the U.S. Securities and Exchange Commission (SEC) has been cautious about approving crypto ETFs, other countries like Canada have approved them, and there are workarounds for U.S. investors who want to access these investment vehicles. This includes investing in foreign ETFs traded on exchanges outside the U.S. or opting for crypto trusts and funds that provide indirect exposure to cryptocurrencies and blockchain technology.

Understand the risks of investing in cryptocurrency

Before investing in cryptocurrency, it is important to understand the risks involved. Cryptocurrencies are a young and emerging market, and investing in them is highly speculative and involves a substantial degree of risk. Here are some of the key risks you should be aware of:

Price Volatility and Manipulation

Cryptocurrency prices can be extremely volatile, with sharp and sudden moves in price. This volatility is driven by market sentiment, speculation, and manipulation. The unregulated and anonymous nature of digital asset markets makes them susceptible to sentiment, emotion, and publicity, which can cause prices to fluctuate wildly. Crypto exchanges, media owners, and influential investors can manipulate prices, and the lack of regulatory frameworks adds to the uncertainty.

Cybersecurity Threats and Hacking

Cryptocurrency exchanges and trading platforms are frequent targets of hacking attempts and other malicious activities. There is also a risk of losing access to your cryptocurrency holdings if you lose the private keys to your digital wallet. It is crucial to choose secure wallets and backup methods to protect your investments.

Regulatory and Tax Uncertainty

The lack of clear regulations around cryptocurrencies can be a concern for investors. Governments and regulatory bodies are still figuring out how to classify and manage cryptocurrencies, which can lead to uncertainty about tax obligations and how tax laws apply to crypto activities.

Scams and Fraud

Cryptocurrency investors are often targeted by scammers and tricksters. It is important to be wary of fake websites, phishing emails, and unsolicited investment offers. Crypto scammers use social media and promises of high returns to target young and minority investors.

Technical Complexity and Human Error

Sending and receiving cryptocurrencies require inputting long strings of numbers and letters as receiving addresses. Even experienced users can make mistakes while typing or copying and pasting these addresses, and transactions on the blockchain are usually irreversible.

Forks and Discontinuation

Cryptocurrency trading carries the risk of hard forks or discontinuation, which can lead to substantial price volatility. It is the investor's responsibility to stay informed about potential blockchain forks and their potential impact on their investments.

Know the best platforms to buy cryptocurrency

When it comes to investing in cryptocurrency, there are several platforms to choose from. Here are some of the best ones:

Coinbase

Coinbase is one of the most well-known and largest cryptocurrency exchanges in the US. It offers an intuitive, user-friendly interface and a straightforward onboarding process, making it a great choice for beginners. Coinbase provides a comprehensive variety of learning materials and resources, encouraging users to explore different aspects of blockchain and web3 through its Coinbase Earn program. Security is also a key feature, with Coinbase offering four types of two-factor authentication and an insurance policy to protect custodial accounts of up to $250,000. However, it's important to note that Coinbase's fee structure can be confusing and higher compared to other exchanges.

Kraken

Kraken is a well-established and reputable cryptocurrency exchange, offering a generous fee schedule and comprehensive trading tools. It supports more than 230 cryptocurrencies and is known for its robust security measures. Kraken Pro, its advanced trading platform, provides a customizable interface and a wealth of tools for experienced crypto traders. Kraken has never suffered a large-scale hack since its launch in 2011, demonstrating its commitment to security. However, it is not available in New York or Washington, and its staking program is not accessible to US customers.

Crypto.com

Crypto.com stands out for its huge selection of digital assets, low fees, and user-friendly experience. It offers trading in crypto derivatives, customizable alerts, and watchlists, catering to both beginners and advanced traders. Crypto.com previously had a wide range of staking and rewards options, but these are no longer available to US customers.

Robinhood Crypto

Robinhood Crypto is a solid choice for those looking for an app that combines crypto and stock trading. While it initially lacked certain features, Robinhood has improved its crypto offering over time. However, it's important to note that the crypto offering within the Robinhood brokerage app has limitations, such as the inability to trade crypto-to-crypto directly.

Gemini

Gemini is a platform that caters to both beginner and advanced crypto traders. It offers a simple, intuitive interface and a wealth of educational materials through its Cryptopedia library. Gemini also stands out for its strong security measures, including an integrated hot wallet. However, its fee structure can be convoluted, and it lacks certain popular coins.

Bisq

Bisq is a decentralized exchange that follows the decentralised ethos of Bitcoin. It offers an open-source platform that is completely decentralised, with no third-party involvement in cryptocurrency transactions. Bisq supports a wide range of coins and traditional currencies, along with various payment methods. It also enhances security and privacy through features like multi-signature and a security deposit system.

Learn how to store your cryptocurrency

When it comes to storing your cryptocurrency, you have several options, including hardware devices, applications, and even a simple piece of paper. Each storage method comes with its own set of risks and considerations related to security, usability, and convenience. Here are the key things you need to know about storing your cryptocurrency:

Understanding Crypto Wallets

Before choosing a storage method, it's important to understand the different types of crypto wallets available:

• Custodial vs. Non-Custodial Wallets: Custodial wallets involve a third party managing your private keys, while non-custodial wallets (also known as self-custody wallets) give you full ownership and control of your private keys.
• Hot vs. Cold Wallets: Hot wallets are connected to the internet, making your crypto easily accessible. However, they are more susceptible to hacks. Cold wallets, on the other hand, are offline storage methods, providing a higher level of security but less convenience.

Types of Crypto Storage Options

• Crypto Exchanges: These are online platforms that allow you to buy, sell, and trade cryptocurrencies. They offer custodial hot wallets, where the exchange holds your private keys. While convenient, they carry a higher risk of hacking. Examples include Coinbase, Crypto.com, and Binance.US.
• Hardware Wallets (Cold Storage): Hardware wallets are physical devices, such as USB drives or smart cards, that store your private keys offline. They offer a high level of security but require careful handling and can be inconvenient for frequent transactions. Examples include Ledger Nano X and Trezor Model T.
• Mobile Wallets (Hot Wallets): These are applications that you can download on your smartphone, allowing you to send, receive, and store crypto. They are convenient and easy to use but carry a potential risk of losing funds if not properly secured or backed up.
• Desktop Wallets (Hot Wallets): These are programs that reside on your computer. They are less secure than cold storage methods and may not be suitable for storing large amounts of crypto.
• Web-based Wallets (Hot Wallets): These are wallets hosted by a web service, where you store your private keys with a third party. They are not considered very secure as they are susceptible to hacking.
• Paper Wallets (Cold Storage): Paper wallets involve printing out your private and public keys, usually in the form of QR codes. This method is highly secure and practically free, but it is the least user-friendly option.

Best Practices for Storing Cryptocurrency

To ensure the safety of your crypto assets, consider the following best practices:

• Use a combination of hot and cold wallets. Store the majority of your crypto in a cold wallet for added security, and use a hot wallet for smaller amounts that you want readily available for trading.
• Regularly back up your crypto wallets and keep multiple secure copies of your recovery phrases (also known as seed phrases). Store them in a safe place that only you can access.
• Keep your software and security measures up to date, such as two-factor authentication and encryption protocols.
• Choose a reputable and compliant crypto platform that follows regulatory guidelines and has high security standards.
• Educate yourself about the mechanics of your chosen wallet to minimize the chance of user error.

Research the different types of cryptocurrency

Researching the different types of cryptocurrency is an essential step when considering investing in cryptocurrency ETFs. Here's a detailed guide to help you with your research:

Understanding the Cryptocurrency Landscape

Before investing in cryptocurrency ETFs, it's crucial to understand the diverse landscape of cryptocurrencies. Cryptocurrencies are digital or virtual currencies that use cryptography to secure transactions and control the creation of new units. They are decentralized, meaning they are not controlled by any central authority or government. The first and most well-known cryptocurrency is Bitcoin, which was created in 2009. Since then, thousands of other cryptocurrencies, often referred to as "altcoins," have emerged. These include popular options such as Ethereum, Tether, Binance Coin, and many others.

Evaluating Popular Cryptocurrencies

When researching cryptocurrencies, it's helpful to focus on the most popular and established options first. Here are some key cryptocurrencies to consider:

• Bitcoin (BTC): Introduced in 2009, Bitcoin is the original and most well-known cryptocurrency. It runs on a decentralized blockchain and has a limited supply of 21 million coins.
• Ethereum (ETH): Ethereum is both a cryptocurrency and a blockchain platform. It allows developers to create decentralized apps (dApps) and smart contracts. Ethereum is the second-largest cryptocurrency by market cap.
• Tether (USDT): Tether is a stablecoin, meaning its value is tied to the US dollar. It is often used as a medium when traders move between other cryptocurrencies.
• Binance Coin (BNB): BNB is the cryptocurrency issued by Binance, a popular crypto exchange. It can be used for trading, payment processing, and booking travel arrangements.
• Solana (SOL): Solana is a newer cryptocurrency known for its fast transaction speeds and robust blockchain platform. It was launched in 2020 and has a capped supply of 480 million coins.
• USD Coin (USDC): USD Coin is another stablecoin backed by US dollars, similar to Tether. It aims for a stable 1 USD to 1 USDC ratio.
• Ripple (XRP): Ripple is a payment protocol and cryptocurrency designed for fast and low-cost international money transfers. It has partnerships with hundreds of financial institutions.
• Dogecoin (DOGE): Dogecoin started as a joke in 2013, based on the Doge meme. Despite having no competitive advantage, it has gained widespread popularity and is considered the first meme coin.
• Cardano (ADA): Cardano is an open-source blockchain platform created by a co-founder of Ethereum. It aims to solve various problems, including making financial services and identity records more accessible.

Analyzing Key Factors

When researching cryptocurrencies, consider the following factors:

• Market Capitalization: Market cap is a crucial indicator of a cryptocurrency's value. It represents the total dollar value of all coins in existence. Larger market caps indicate more established and valuable cryptocurrencies.
• Price History: Evaluate the price history of a cryptocurrency to understand its growth and volatility. Some cryptocurrencies, like Bitcoin and Ethereum, have experienced tremendous price increases over the years.
• Technology and Use Cases: Understand the technology behind each cryptocurrency, such as blockchain type (proof-of-work or proof-of-stake) and its potential applications, including smart contracts, decentralized finance, or stablecoin functionality.
• Regulation and Security: Cryptocurrencies are subject to evolving government regulations, and some have faced regulatory issues. Consider the level of security and transparency provided by each cryptocurrency's blockchain.
• Liquidity and Adoption: Assess the liquidity of a cryptocurrency, which refers to how easily it can be bought or sold. Also, consider the level of adoption and acceptance by businesses and the broader community.

Diversification and Risk Management

It's important to remember that investing in cryptocurrencies carries risks due to their volatile nature. To manage these risks, consider diversifying your investments across multiple cryptocurrencies or using exchange-traded funds (ETFs) that provide exposure to a basket of cryptocurrencies. This can help reduce the impact of price fluctuations in any single cryptocurrency.

Staying Informed

The cryptocurrency market is rapidly evolving, so staying informed is essential. Follow news and analysis from reputable sources, and consider joining communities or forums where you can discuss developments with other investors. Regularly review the performance and fundamentals of the cryptocurrencies you're interested in to make informed investment decisions.

Explore alternative investment options

If you're looking for alternative investment options, there are a few options to consider. One option is to invest in cryptocurrency stock ETFs, which are made up of the stock of multiple companies that own cryptocurrency or have some business in the world of cryptocurrency. These ETFs are linked to crypto but do not actually own any. Instead, they hold shares in companies that have invested in crypto or whose business involves cryptocurrency trading, mining, or other services. Examples of these types of ETFs include the Amplify Transformational Data Sharing ETF (BLOK) and the First Trust Indxx Innovative Transaction & Process ETF (LEGR).

Another option is to invest in foreign ETFs that own cryptocurrencies. For example, the Purpose Bitcoin ETF (BTCC) and the CI Galaxy Ethereum ETF (ETHX.B) are traded on the Toronto Stock Exchange in Canada. These funds are focused only on a few cryptocurrencies, mainly Bitcoin and Ethereum. Investing in these funds can be easier than figuring out how to purchase virtual currencies directly, but it may be more complicated to buy them as they are sold on a foreign stock exchange.

Additionally, you can consider investing in ETFs that give you exposure to the broader cryptocurrency economy rather than solely in crypto tokens. ETFs like the Siren Nasdaq NextGen Economy ETF (BLCN), Amplify Transformational Data Sharing ETF (BLOK), and First Trust Indxx Innovative Transaction & Process ETF (LEGR) invest in companies that research, develop, or support blockchain technology. These funds present less risk than buying cryptocurrencies directly since blockchain technology is used in other sectors, and the ETFs spread your money across multiple regulated companies.

Finally, you could also consider investing in individual cryptocurrencies, crypto futures contracts, or crypto-related companies directly. However, this option may be more complicated and requires more technical knowledge.

Frequently asked questions