Cryptocurrency Investment: Strategies For Beginners To Get Started

Investing in cryptocurrency is a hot topic. With Bitcoin's value surging and an ever-growing number of cryptocurrencies entering the market, many investors are keen to get in on the action. Cryptocurrencies are digital currencies that use cryptographic techniques to allow people to spend them securely without the need for a central bank. They are powered by blockchain technology, which maintains a tamper-proof record of transactions. When investing in cryptocurrency, it's important to do your research, understand the risks, and only invest what you can afford to lose. There are several ways to invest, including buying cryptocurrency directly, investing in crypto funds and companies, or even becoming a crypto miner.

Choosing a platform: Select a crypto-trading service or venue, such as an exchange or brokerage firm

When choosing a platform to invest in cryptocurrency, you are generally looking at crypto-trading services or venues, such as an exchange or brokerage firm. Here are some things to consider when making your decision:

Reputation and Liquidity

Stick to crypto exchanges that have been around for a while and have a good reputation. New crypto exchanges will have fewer investors and lower liquidity, which means there will be very few trades.

Background of the Core Team

Anyone can start a crypto exchange, so it is important to check the background of the founders and the core team. This will give you an idea of the exchange's reliability.

Security Measures

Understand the mechanisms that the exchanges use to safeguard your funds and investments. For instance, a two-step verification process for logging in is essential.

Customer Support

A good customer support system goes a long way in comforting investors, especially those dealing with cryptocurrencies for the first time.

Number of Coins

Find out how many coins the exchange allows you to buy and sell. For example, some investors wanted to trade Dogecoin, but certain exchanges didn't support that cryptocurrency.

Fees

Different exchanges will charge different fees for trading in cryptos and per transaction. These fees can eat into your profits, so it is important to consider them when choosing a platform.

Anonymity

Some exchanges allow users to remain anonymous and are decentralised, not requiring users to enter personal information. This can be helpful for certain demographics, including refugees or those living in countries with little to no infrastructure for government credit or banking. However, popular exchanges in the U.S., like Coinbase, Kraken, Gemini, and Binance, are not decentralised and follow laws that require users to submit identifying documentation.

Payment Options

Depending on the exchange, you may be able to connect your bank account directly or link a debit or credit card. Although you can use a credit card to purchase cryptocurrency, cryptocurrency price volatility combined with a credit card's interest charges could inflate the overall cost of purchasing a token.

Safe Storage

Keeping crypto outside the exchange and in a personal wallet ensures that investors have control over the private key to the funds. An exchange wallet is offered for convenience, but it is not recommended for large or long-term cryptocurrency holdings as the exchange could be hacked.

Regulatory and Tax Status

Before choosing an exchange, be sure to check out the legal, regulatory, and tax status of purchasing cryptocurrency where you live.

Payment options: Connect your exchange to a payment method, such as a bank account or credit card

To start investing in cryptocurrency, you will need to connect your exchange to a payment method. This can be done by linking your bank account or credit card to your chosen crypto exchange.

Connecting a Bank Account

To connect your bank account, you will need to provide your bank details during the registration process. This usually involves entering your personal information and verifying your identity. Once your account is set up, you can fund your exchange account with fiat money, such as US dollars, before purchasing any crypto.

Connecting a Credit Card

Using a credit card to purchase cryptocurrency is possible, but it is generally not recommended due to the high fees and interest rates involved. Only a few major crypto exchanges, such as Binance, Coinbase, eToro, and Kraken, allow credit card purchases. These exchanges may charge additional fees for credit card transactions, which can range from 3% to 5% of the total purchase.

If you choose to use a credit card, you will need to add your card details as a payment method on the exchange. This typically includes entering your full name, card number, card verification value, expiry date, and billing address.

It is important to note that some credit card issuers ban or impose strict rules on cryptocurrency transactions. Therefore, it is advisable to check with your credit card company before proceeding. Additionally, credit card companies may treat crypto purchases as cash advances, resulting in higher fees and interest rates.

Other Payment Options

Besides bank accounts and credit cards, there are alternative payment methods available for purchasing cryptocurrency. These include debit card purchases, cash deposits, and direct deposits or ACH transfers from your bank. Direct deposits are often recommended as they typically incur lower fees compared to credit card transactions.

Placing an order: Decide how much cryptocurrency you want to buy and place a market or limit order

Once you have decided to invest in cryptocurrency, you will need to place an order. This involves deciding how much cryptocurrency you want to buy and placing a market or limit order.

Market Orders

Market orders are standard crypto trades. They are a simple command to buy or sell a cryptocurrency at the best available price on that exchange. In practice, this means buying or selling a cryptocurrency at its most recent price. For example, if the most recent bitcoin trade valued a coin at $20,000, the exchange’s market price is $20,000. Market orders are the easiest orders to implement on an exchange and are executed almost instantly. All you have to do is enter how much cryptocurrency you would like to buy or sell. Then the exchange will match you with an open order in the order book.

Market orders may not get you the best price possible, especially if you’re trading large volumes. Slippage happens when there isn’t enough of an asset available at the current market price to completely fill a market order. As a buyer, this can result in part of your order being filled at a higher price.

Limit Orders

Limit orders let you place an order to buy or sell cryptocurrencies at a certain price. You’ll have to tell the exchange how much you want to buy or sell and the limit of the price you’re willing to accept. For instance, you might place a limit order to buy one bitcoin for $20,000 but no more. That’s useful if you predict that the price of bitcoin will fall to $20,000, and want to buy the coin as soon as it reaches your preferred price. Alternatively, you might place a limit order to sell one bitcoin for no less than $21,000. That’s useful if you want to sell bitcoin as soon as the price reaches $21,000.

The advantage of limit orders is that they allow buyers or sellers to trade at their preferred price without constantly scanning the market. This allows them to take advantage of price swings while not being glued to their screens 24/7.

The downside is that these orders are not guaranteed to execute and may never go through if the cryptocurrency never reaches a certain price specified in the limit order. However, as mentioned above, they are often cheaper to execute as the “maker fee” for these trades is lower than the “taker fee”.

Safe storage: Use a hot wallet for small amounts and active trading, or a cold wallet for larger amounts and long-term storage

When it comes to storing your cryptocurrency, there are two main types of wallets: hot wallets and cold wallets. Both types of wallets protect your public and private keys, which are essential for authorizing crypto transactions. However, hot wallets and cold wallets differ in terms of convenience, security, and accessibility. Here are some detailed insights into each type of wallet and how they can be used for safe storage:

Hot Wallets

Hot wallets are connected to the internet, either through a computer or a mobile device, making them convenient for active trading and quick transactions. They are typically free to use and can be accessed from anywhere with an internet connection. Some popular examples of hot wallets include MetaMask, Exodus, Coinbase Wallet, and Robinhood. Here are some key considerations regarding hot wallets:

• Security: While hot wallets are generally secure, they are more vulnerable to hacking attempts since they are connected to the internet. It is recommended to use additional security measures such as two-factor authentication to enhance the security of your hot wallet.
• Accessibility: Hot wallets provide instant access to your funds and are ideal for storing smaller amounts of cryptocurrencies used for daily transactions. They are user-friendly and suitable for beginners as they do not require extensive technical knowledge.
• Convenience: Hot wallets are designed to be user-friendly and can be seamlessly integrated with cryptocurrency exchanges, making it easy to move assets between your exchange account and wallet. They are a good choice for traders who need quick access to a wide range of assets.
• Suitability: Hot wallets are well-suited for day-to-day transactions, trading on cryptocurrency exchanges, and newcomers to digital currency. They are ideal for storing small amounts of cryptocurrency that you actively trade or use for daily purchases.

Cold Wallets

Cold wallets, on the other hand, are offline storage solutions that keep your private keys secure from cyber threats. They are considered more secure than hot wallets since they are not connected to the internet. Cold wallets are typically physical devices, such as USB drives or hardware wallets, and they offer robust security measures. Some popular examples of cold wallets include Ledger, Trezor, and Tangem Wallet. Here are some key considerations regarding cold wallets:

• Security: Cold wallets provide a higher level of security compared to hot wallets. Since they are offline, they are less vulnerable to hacking attempts, phishing attacks, and malware. They give you full control over your private keys, making it much more difficult for unauthorized access.
• Accessibility: Cold wallets may require additional steps to access your assets, as they are typically offline. They are not as convenient for frequent transactions or active trading, but they are ideal for long-term storage of larger amounts of cryptocurrency.
• Suitability: Cold wallets are suitable for securing large amounts of crypto assets for extended periods. They provide peace of mind for investors who want to hold onto their assets as a long-term investment.
• Backup and Recovery: Cold wallets often offer safe backup and recovery options. You can create multiple backups of your cold wallet, ensuring secure recovery of your funds if the original wallet is lost, damaged, or compromised.
• Cost: Cold wallets usually come with an initial cost, ranging from $50 to $250 for hardware wallets. While this is an additional expense, it is often considered a worthwhile investment for the added security and peace of mind.

Combining Hot and Cold Wallets

It is important to note that you can use both hot and cold wallets simultaneously. This combination allows you to balance convenience and security. You can keep a small portion of your digital assets in a hot wallet for active trading and daily transactions, while storing the majority of your crypto assets in a cold wallet for long-term storage and added security.

Risks and volatility: Understand the risks of investing in crypto, including its high volatility and limited regulation

Investing in cryptocurrencies is risky, and investors should conduct extensive research before investing. The price of cryptocurrencies is extremely volatile, and there are many factors that contribute to this price fluctuation. One of the main factors is supply and demand. As an asset, Bitcoin is subject to the whims of investors and traders, and speculation about price movements plays a critical role in its value at any given moment. The actions of investors and large holders of Bitcoin, often referred to as "Bitcoin whales", can also influence its price. For example, if whales were to suddenly start selling their Bitcoin holdings, prices would likely plummet as other investors panic and follow suit.

Another factor contributing to the volatility of Bitcoin is media hype and publicity. Media outlets, influencers, and well-known cryptocurrency fans can create investor concerns, leading to price fluctuations. It is not uncommon for these sources to present unverified information and predictions from "experts", often to benefit the people who hold large numbers of coins.

The regulatory environment surrounding cryptocurrencies is also constantly evolving and can impact their price. For example, in 2021, China's government and central bank announced that all cryptocurrency transactions or facilitation were illegal, and Bitcoin's price dropped as miners scrambled to relocate. Rumors about regulations can also impact Bitcoin's price in the short term, and the significance of these impacts is still being analyzed and debated.

Additionally, the relatively new and decentralized nature of cryptocurrencies means that they are not supported by governments or other financial institutions, and their value can be affected by political and economic events.

Finally, the limited supply of Bitcoin, and cryptocurrencies in general, can also impact their price. Bitcoin is limited to 21 million coins, and as the circulating supply gets closer to this limit, prices are likely to climb.

Overall, the extreme volatility of cryptocurrencies means that investing in them is risky, and investors should be comfortable with the potential for high gains or losses before deciding to invest.

Frequently asked questions