Investing In Crypto: Building The Foundation For Success

Investing in cryptocurrency infrastructure is a hot topic. Cryptocurrency is a digital currency that is secured by blockchain technology. It is a decentralised system that does not rely on a central authority or intermediaries. This makes it nearly impossible to counterfeit or double-spend. However, it has also led to its use in criminal activities and concerns about its environmental impact. Investing in the infrastructure of cryptocurrency means investing in the technology that underpins it, namely blockchain. Blockchain is a distributed ledger that records transactions and is maintained by a network of individual nodes or computers. It has the potential to disrupt many industries, including finance and law, and investment in this area is critical to realising its full potential.

Investing in blockchain infrastructure

Blockchain technology is a distributed ledger system that enables secure, direct transactions without the need for intermediaries. It has the potential to revolutionise finance and other industries, and its secure nature makes it particularly useful for cryptocurrency systems.

How to Invest in Blockchain Infrastructure

There are several ways to gain exposure to blockchain infrastructure and technology.

• Directly purchasing and storing cryptocurrency: This is the most common way to invest in blockchain and the wider cryptocurrency ecosystem. You can purchase established cryptocurrencies like Bitcoin and Ethereum, or newer coins.
• Investing in crypto funds: You can invest in exchange-traded funds (ETFs), index funds, futures funds, and cryptocurrency investment trusts. These funds may focus on a single cryptocurrency or a group of them, and they can be traded on traditional stock exchanges.
• Investing in companies with a focus on cryptocurrency: You can invest in companies that support cryptocurrency, such as Coinbase and PayPal, or those with large amounts of cryptocurrency on their balance sheets, like MicroStrategy. You can also invest in cryptocurrency mining companies and mining hardware makers.
• Crypto Roth IRA: For those seeking the tax advantages of an individual retirement account (IRA), a crypto Roth IRA allows investment in cryptocurrency while also providing more secure storage for your holdings.
• Becoming a crypto miner or validator: Mining or validating cryptocurrency is a direct way to invest in blockchain infrastructure. Miners and validators can earn rewards in crypto, which can be held as an investment or exchanged for another currency.
• Purchasing crypto-focused stocks: Many companies that trade or develop cryptocurrency technology have shares traded on traditional stock markets. These include crypto services and infrastructure providers, as well as companies that hold cryptocurrencies on their balance sheets.

Things to Consider

• Risk: Cryptocurrency markets are highly volatile, and prices fluctuate widely. It's important to carefully research any investment and not invest more than you can afford to lose.
• Transaction fees: Transaction fees vary widely among currencies, so it's essential to pay attention to these fees when making crypto purchases.
• Storage: If you purchase cryptocurrency, consider how you will store your digital assets. Online exchanges are convenient but vulnerable to hacking. Cold (offline) hardware wallets are one of the safest options for storing your private keys.
• Regulation: The regulatory status of cryptocurrencies is still evolving, and a sudden regulatory change could impact the market.
• Time horizon: Investing in cryptocurrency should be planned with a long-term time horizon in mind to account for periodic downturns.

Buying cryptocurrencies directly

After selecting an exchange and a cryptocurrency to purchase, you will then need to choose between a market order and a limit order. A market buy order is when the digital asset is purchased at the current market value. This is often preferred for those starting out in the market. Some exchanges also offer an "instant buy" service that does the same thing, although the fees may be a little higher.

A limit order, on the other hand, is more suitable for experienced investors. A buy limit order is when a set purchase price is specified. This would be applied if the current market value is above the price at which you would like to enter the market, allowing you to set a lower price and wait for the market to drop.

If you are investing for the long term, dollar-cost averaging is one of the best techniques for evenly distributing your capital. Dollar-cost averaging involves making small investments regularly rather than in one lump sum. The idea is to spread your capital over a longer time frame to take advantage of fluctuations in the market, such as when the price drops. Sticking to a regular schedule also helps eliminate the emotional side of investing, such as buying after seeing a big rally in price, which can be a trap for new investors.

This could mean making a series of small investments weekly, monthly, or quarterly, depending on what works best for you. Over time, if the underlying cryptocurrency has increased in value, your average purchase price will be much less than the current market price.

You can set up a recurring buy service through exchanges such as Coinbase, Crypto.com, or Gemini. The fees are usually a bit higher than purchasing on the spot market. Alternatively, you can use a round-up app such as Bamboo to make regular micro-investments.

Investing in crypto funds

Crypto funds are a way to access cryptocurrency markets without the hassle of directly storing and managing the digital assets. There are several types of funds that provide exposure to the cryptocurrency market, including exchange-traded funds (ETFs), index funds, hedge funds, and 401ks.

ETFs and index funds are similar in that they track the price of a single or a group of cryptocurrencies, allowing investors to gain exposure to the market without needing to hold the digital assets themselves. Index funds, in particular, provide broader exposure to a group of cryptocurrencies or blockchain-related companies, thus theoretically reducing risk. Examples of cryptocurrency index funds include the Bitwise 10 Index Fund and the Reality Shares Nasdaq NexGen Economy ETF.

Hedge funds, on the other hand, are partnerships that pool money from investors and employ risky strategies to target high returns. Cryptocurrency hedge funds are highly volatile due to the nature of the underlying asset. It is important to note that hedge funds typically require a large upfront investment and are more suitable for high-net-worth individuals. Examples of cryptocurrency hedge funds include Pantera Capital and Coin Capital.

Additionally, crypto funds such as Grayscale and Osprey offer retail investors the opportunity to invest in Bitcoin trusts. These trusts allow investors to buy and sell shares through ordinary brokerages without the need to set up digital wallets or use a crypto exchange. However, it is important to note that the market value of these trusts can deviate significantly from the value of the Bitcoin they hold, adding an element of risk to the investment.

When investing in crypto funds, it is crucial to understand the risks involved. Cryptocurrency markets are highly volatile, and prices can fluctuate significantly. As with any investment, it is important to conduct thorough research and only invest what you can afford to lose.

Crypto storage options

There are two types of storage options for crypto wallets: "hot" storage and "cold" storage. Hot storage refers to an application or platform that is connected to the internet and allows you to manage your cryptocurrency holdings. Examples of hot wallets include MetaMask, Exodus, and Mycelium. Many crypto exchanges, including Coinbase, Gemini, and Binance, also offer hot wallets. Hot wallets are user-friendly, mostly free, and convenient, especially if linked to a particular exchange. However, they are more vulnerable to hacking since they are always online.

On the other hand, cold storage holds a user's private keys offline, adding an extra layer of security. Hardware wallets are the most common type of cold storage solution, with devices like Ledger and Trezor allowing users to buy, exchange, and stake cryptocurrencies. Cold storage provides portability, enhanced security, autonomy, and full control over private keys and assets. However, it comes at a higher price point, and transfers between cold storage devices can be more cumbersome.

To ensure the safety of your cryptocurrency, you may opt for a combination of hot and cold storage options. Most exchanges, including Coinbase, utilise a mix of cold and hot storage methods, with cold storage being recommended for large amounts of cryptocurrency or assets that users do not need to access frequently.

Crypto mining

Mining is conducted by miners using hardware and software to generate a cryptographic number that is equal to or less than a number set by the Bitcoin network's difficulty algorithm. The first miner to find the solution to the problem receives bitcoins as a reward, and the process begins again. This reward incentivises miners to assist in the primary purpose of mining: to earn the right to record transactions on the blockchain for the network to verify and confirm.

Miners need a graphics processing unit (GPU) or an application-specific integrated circuit (ASIC). The majority of the Bitcoin network's mining capacity is owned by large mining firms and pools. It is still possible to participate in Bitcoin mining with a regular at-home personal computer if you have one of the latest and fastest GPUs. However, the chances of receiving any reward by mining solo are minuscule. To be able to mine with some chance of success, you'll need to invest in one of the top GPUs (often called video cards) for your computer or an ASIC.

Today, most of the Bitcoin mining network's hashing power is made up of ASIC machine mining farms and pooled individual miners. ASICs are many orders of magnitude more powerful than CPUs or GPUs. They gain more hashing power and energy efficiency every year as new chips are developed and deployed. For the right price (more than $11,000), you could mine at 335TH for 16.0 joules per tera hash (16 watts at one trillion hashes per second).

Mining pools are operated by third parties and coordinate groups of miners. By working together in a pool and sharing the payouts, miners have a better chance of being rewarded than they would working alone. Most pools use a payout system based on how much work you contribute. Pools make the process of mining cryptocurrency easier and ensure a guaranteed income.

Frequently asked questions