Get Started With Crypto: A Guide For Americans

Investing in cryptocurrency is a hot topic, but it's also a risky and volatile one. If you're thinking about investing in crypto in the USA, there are a few things you should know.

First, it's important to understand what cryptocurrency is. Cryptocurrencies are digital currencies that generally operate outside the regulation of any company or government. They are often referred to as digital coins or tokens and are guarded by encryption through blockchain technology.

When investing in cryptocurrency, you have a few options. You can choose to buy cryptocurrency directly through a crypto exchange or broker, invest in cryptocurrency companies, invest in cryptocurrency-focused funds, or even become a crypto miner or validator.

It's important to remember that investing in cryptocurrency is risky, and the prices of cryptocurrencies can be highly volatile. Before investing, be sure to do your research and only invest what you can afford to lose.

Understand the risks

Before investing in cryptocurrency, it is important to understand the risks involved. Cryptocurrency is a highly speculative and volatile asset class, and the prices of even the most established cryptocurrencies like Bitcoin can fluctuate dramatically. The unregulated and decentralised nature of cryptocurrency also means that it is more susceptible to cyberattacks, system crashes, and human errors.

Volatility

Cryptocurrency prices can be extremely volatile, and even a small piece of news or a rumour can cause the price to drop quickly. This volatility can be advantageous for sophisticated investors who can execute trades rapidly or have a solid grasp of the market fundamentals. However, for new investors, it can be challenging to navigate, and they may end up buying high and selling low.

Regulatory Changes

The regulatory landscape for cryptocurrency is constantly evolving, and there is a risk that new restrictions or even bans could be implemented. For example, the recent arrest of Sam Bankman-Fried, the founder of FTX, resulted in investors losing access to their assets.

Security

The decentralised nature of cryptocurrency makes it more secure and transparent than traditional electronic money transfers. However, hot wallets, which are connected to the internet, are attractive targets for hackers, and there have been instances of millions of dollars of Bitcoin being lost due to theft or forgotten access codes.

Lack of Investor Protections

Investments in cryptocurrency are not insured by the Securities Investor Protection Corporation, unlike traditional stock brokerage accounts. While some exchanges provide private insurance, this does not protect against individual online breaches, such as password theft.

Illiquidity

Cryptocurrency is still not widely accepted as a form of payment, and there are limited merchants that accept crypto compared to those that accept traditional currencies. This lack of liquidity can impact the ability to convert crypto holdings into cash or use them for everyday transactions.

High Fees

Transaction fees for purchasing, storing, and trading cryptocurrency can vary widely and can add up quickly, eating into your investment returns. Additionally, using credit cards to purchase crypto can incur high interest rates and additional fees, making it a risky and expensive option.

Speculative Nature

The value of cryptocurrency is based on market perception and demand. Unlike stocks, where a company's profits can drive returns, many crypto assets rely solely on the market becoming more bullish for investors to profit. This speculative nature makes cryptocurrency a risky investment, and there is a possibility of losing your entire investment.

Tax Consequences

Investing in cryptocurrency can create a complex tax situation, and it is important to understand the tax implications of purchasing, selling, or using crypto to make informed investment decisions.

Impact of FOMO

The fear of missing out (FOMO) is a common psychological factor that influences investment decisions in the cryptocurrency market. Investors may feel pressured to buy crypto due to the hype and the potential for large price movements. However, it is important to remember that crypto prices are highly volatile, and there are no guarantees of returns.

In conclusion, investing in cryptocurrency carries significant risks, and it is crucial for investors to carefully consider their financial situation, conduct thorough research, and only invest what they can afford to lose. Diversification and a long-term investment horizon can help mitigate some of the risks associated with this asset class.

Choose a broker or exchange

Choosing the right broker or exchange is a critical step in investing in cryptocurrencies. Here are some factors to consider when making your decision:

Reputation and Regulation

It is essential to select a broker or exchange with a solid reputation and a track record of secure and reliable operations. Look for platforms that are regulated by financial authorities and ensure they have robust security measures and protocols in place to protect your investments.

Supported Cryptocurrencies

Different brokers and exchanges offer varying selections of cryptocurrencies. If you are interested in investing in specific cryptocurrencies beyond Bitcoin, ensure that the platform you choose supports those coins. Some platforms offer a wide range of cryptocurrencies, while others may be more limited.

Fees and Charges

Brokers and exchanges typically charge transaction fees, trading fees, and withdrawal fees. Compare the fee structures of different platforms to find one that aligns with your investment strategy and helps you minimise costs. Be cautious of platforms with unusually high fees or hidden charges.

Security and Safety

As the crypto market is a prime target for hackers, prioritise platforms with robust security measures. Look for features such as two-factor authentication, cold storage of assets, and insurance against losses due to security breaches. Your chosen platform should also have a good track record of safeguarding user funds and data.

User Interface and Functionality

Consider choosing a platform with an intuitive and user-friendly interface, especially if you are a beginner. A well-designed platform will make it easier to navigate the trading process and access the features you need. Some platforms also offer educational resources and market analysis tools to help you make informed decisions.

Customer Service and Support

Opt for a broker or exchange that provides responsive and reliable customer support. As a crypto investor, you may encounter technical issues or have questions, and prompt assistance from the platform can make a significant difference in your trading experience.

Payment Methods

Different platforms support different payment methods for depositing and withdrawing funds. Ensure that the broker or exchange you choose accepts your preferred payment method, whether it's bank transfers, credit cards, or other digital payment options.

Location and Accessibility

Verify that the broker or exchange is accessible in your location and serves your local fiat market. Some platforms may have restrictions or limitations based on your geographical location, so it's essential to check beforehand.

Trading Tools and Features

If you are an advanced trader, look for platforms that offer a range of trading tools and features such as advanced order types, margin trading, and futures trading. These tools can help you execute more sophisticated trading strategies and enhance your overall trading experience.

Remember, choosing the right broker or exchange is a personal decision that depends on your unique needs and preferences. Conduct thorough research, compare multiple options, and consider utilising platforms that offer demo accounts or trials to help you make an informed choice.

Set up and verify your account

Setting up and verifying your account is the second step in the process of investing in cryptocurrency. After selecting a cryptocurrency broker or exchange, you will need to create an account. This generally requires signing up and providing personal information to prove your identity, often known as Know Your Customer (KYC) protocols. This may involve entering information from your driver's license or passport, and sometimes a photo of yourself.

The platform may also ask you to submit a copy of your driver's license or passport, and you may even be asked to upload a selfie to prove your appearance matches the documents you submit. This is an essential step to prevent fraud and meet federal regulatory requirements. You may not be able to buy or sell cryptocurrency until you complete the verification process.

Fund your account

Before you can start investing in crypto, you must ensure funds are available in your account. You can add money to your account through various methods, including linking your bank account, 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 cryptocurrency broker or exchange chosen.

While some exchanges allow credit card deposits, these come with risks and additional costs. Credit card companies often categorize 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.

If you're using cash in one of these apps, you may wind up using a third-party service such as MoonPay to fill your order. Such services can cost a bit more than regular exchanges but offer some advantages in the form of quick, relatively painless transactions.

It's important to manage risk, but that will come at an emotional cost. Selling a losing position hurts, but doing so can help you avoid worse losses later.

Select a storage method

When selecting a storage method for your cryptocurrency, you have a few options to choose from. These include leaving your crypto on the exchange, using a hot wallet, or opting for a cold wallet. Each method has its own set of advantages and disadvantages, so it's important to understand them before making a decision.

Leaving your crypto on the exchange is a convenient option, especially if you're just starting. When you buy cryptocurrency, it's typically stored in a "crypto wallet" attached to the exchange. However, you might want to consider transferring it to a separate hot or cold wallet if you don't like the provider or want enhanced security. Doing so will usually incur a small fee.

Hot wallets are crypto wallets that are stored online and run on internet-connected devices such as tablets, computers, or phones. They are convenient and easy to use, but they come with a higher risk of theft since they are always connected to the internet. If you lose your private keys or recovery phrase, your crypto assets could be lost forever.

Cold wallets, on the other hand, are not connected to the internet, making them a more secure option for holding large amounts of cryptocurrency. They come in various physical forms, such as USB drives, smart cards, or even paper-based documentation. While cold wallets offer better security, they are less convenient and require careful handling of physical devices. If you lose or damage your cold wallet, your crypto assets could be lost permanently.

When choosing a storage method, it's essential to consider your needs and risk tolerance. If you prioritize convenience and ease of access, a hot wallet might be suitable. However, if security and peace of mind are your top priorities, a cold wallet could be a better option. Additionally, you can use a combination of both, with the bulk of your crypto in a cold wallet and a smaller amount in a hot wallet for trading.

Lastly, remember to regularly update your security measures, such as two-factor authentication and encryption protocols, to protect your crypto assets effectively.

Frequently asked questions