Time Crypto Investment: Strategies For Beginners

Investing in cryptocurrency is not for the faint-hearted. Crypto is a volatile asset class, and investors need to be aware of the risks involved. Cryptocurrencies are digital currencies that are not backed by real assets or securities. They are traded between consenting parties with no broker and tracked on digital ledgers.

There are thousands of cryptocurrencies to choose from, each with its own unique characteristics and risks. The most well-known crypto is Bitcoin, which was created in 2009 and is the largest by market capitalization. Other popular cryptos include Ethereum, Binance Coin, Solana, and Dogecoin.

Investing in crypto can be done through crypto exchanges, apps, or certain broker-dealers. It's important to do your research and understand the risks and costs associated with investing in cryptocurrencies before diving in.

How to buy cryptocurrency

Investing in cryptocurrency can be a confusing process, especially for beginners. Here is a detailed and direct guide on how to buy cryptocurrency:

Choose a Broker or Crypto Exchange

Firstly, you need to decide whether to use a broker or a crypto exchange. Both options allow you to buy crypto, but there are key differences. A cryptocurrency exchange, like Coinbase, Gemini or Binance.US, is a platform where buyers and sellers meet to trade cryptocurrencies. Exchanges often have lower fees but more complex interfaces that can be intimidating for beginners. A cryptocurrency broker, like Robinhood or SoFi, offers a user-friendly interface that interacts with exchanges for you, but they may restrict moving your cryptocurrency holdings off the platform.

Create and Verify Your Account

Once you've chosen a platform, you'll need to create and verify your account. This typically involves submitting identification documents, such as a driver's license or passport, to prevent fraud and meet regulatory requirements.

Deposit Cash to Invest

The next step is to deposit money into your account. You can do this by linking your bank account, authorizing a wire transfer, or using a debit or credit card. It's important to note that using a credit card can be risky and expensive due to higher interest rates and additional fees.

Place Your Cryptocurrency Order

Once your account is funded, you can place your first order. There are hundreds of cryptocurrencies to choose from, including popular options like Bitcoin and Ethereum, as well as lesser-known coins. You can usually purchase fractional shares, allowing you to buy a portion of high-priced tokens.

Select a Storage Method

Finally, you need to decide how to store your cryptocurrency. Crypto exchanges typically provide a crypto wallet, but you may want to transfer your coins to a separate hot or cold wallet for added security. Hot wallets are connected to the internet and offer convenience, while cold wallets are offline and provide greater security.

Alternative Ways to Buy Cryptocurrency

In addition to the above process, there are alternative ways to buy cryptocurrency. You can use traditional investment platforms that offer stocks and other assets, mobile payment services, or alternative platforms that support credit or debit card transactions. However, these methods may have higher fees and security concerns.

It's important to remember that investing in cryptocurrency is a volatile and risky endeavour. Make sure you understand the risks and only invest what you are willing to lose.

Crypto wallets

There are two main types of crypto wallets: hot wallets and cold wallets. Hot wallets are connected to the internet and are often available as a standalone product or as an add-on through popular crypto exchanges. They make it easy to execute crypto transactions but are more vulnerable to hackers. Examples of hot wallets include Coinbase Wallet, MetaMask, Crypto.com DeFi Wallet, Exodus Crypto Wallet, and Gemini Crypto Wallet.

Cold wallets, on the other hand, are not connected to the internet. They are usually physical gadgets, such as USB sticks, that store your crypto ownership keys offline. Cold wallets are considered more secure than hot wallets but are less convenient to access. Examples of cold wallets include Ledger Crypto Wallet, Ellipal Titan Crypto Wallet, and SafePal Crypto Wallet.

When choosing a crypto wallet, it is important to consider factors such as security, ease of use, cost, and the types of cryptocurrencies supported. Additionally, it is crucial to back up your private keys and store them in a secure location, as losing them could result in losing access to your crypto assets.

Crypto mining

Miners are incentivised 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. This is done by validating cryptocurrency transactions on a blockchain network and adding them to a distributed ledger. Crypto mining also prevents the double-spending of digital currency on a distributed network.

In the early days of Bitcoin, anyone with a decent home computer could participate in mining. However, as the blockchain has grown, the computational power required to maintain it has increased. As a result, amateur bitcoin mining hasn't typically been profitable for hobbyists in years, and is now mostly done by specialised companies or groups of people who band their resources together.

To be able to mine with some chance of success, you'll need to invest in one of the top graphics processing units (GPUs) for your computer or an application-specific integrated circuit (ASIC). Capable GPUs can range in price from about $1,000 to $2,000; ASICs can cost much more, into the tens of thousands of dollars.

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.

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.

Determining whether crypto mining is worthwhile depends on several factors, including the mining rig's hash rate, electric power consumption, and overall costs. Crypto-mining machines tend to consume a considerable amount of electricity and emit significant heat.

The taxation of crypto mining is also an important consideration, as miners will generally face tax consequences when they are rewarded with cryptocurrency and when they sell or exchange the reward tokens.

Crypto exchange-traded funds

Crypto ETFs work by investing in a portfolio linked to the performance of cryptocurrencies. This can be done through investing in futures contracts or directly holding the cryptocurrency. The ProShares Bitcoin Strategy ETF, for example, tracks bitcoin futures prices by investing in Chicago Mercantile Exchange (CME) bitcoin futures contracts.

In January 2024, the Securities and Exchange Commission (SEC) approved the first 11 spot cryptocurrency ETFs for the US market. These ETFs provide investors with the opportunity to invest in Bitcoin and Ethereum, the two largest cryptocurrencies.

There are several advantages to investing in crypto ETFs. Firstly, they provide exposure to crypto without the additional costs and risks associated with owning and storing digital assets. Secondly, crypto ETFs can help lower the learning curve for investors who are new to the complex world of cryptocurrency. Additionally, crypto ETFs offer more security for investors as they are less susceptible to hacking compared to cryptocurrency exchanges and wallets.

However, there are also some disadvantages to consider. Crypto ETFs generally have higher fees than other ETFs, and the lack of direct ownership of the underlying cryptocurrency may be a drawback for some investors. Additionally, crypto ETFs are subject to the high volatility of the crypto markets, which can increase risk.

Overall, crypto ETFs offer a convenient and accessible way for investors to gain exposure to the cryptocurrency market without the complexities and risks of direct ownership.

Crypto volatility

The crypto market is still relatively new and immature, and this volatility is considered a feature of its high-growth phase. As the market matures, many of the factors driving volatility will likely subside. The introduction of different players, increased institutional participation, and regulatory oversight will all contribute to reducing volatility in the future.

Factors affecting crypto volatility include the unique supply dynamics of digital assets, such as the limited supply of certain cryptocurrencies, which can create conditions for sudden price increases. Large holders, often called "whales," can also significantly impact the market by buying or selling substantial quantities of a particular asset. The relatively small size of the crypto market, with less liquidity and depth, also contributes to higher volatility.

Additionally, crypto markets are heavily influenced by investor sentiment. The immaturity of the market means that positive or negative views can spread quickly, impacting prices. News events, such as COVID-19, can also drive price swings in crypto, and the effects of these events may be exaggerated due to the market's immature nature.

To better manage crypto volatility, investors can consider strategies such as dollar-cost averaging or investing in cryptocurrencies specifically designed to have low volatility, known as stablecoins. Diversifying investments across different asset classes can also help reduce the potential downside of volatile investments.

Frequently asked questions