Cryptocurrency Investment: Getting Started And Understanding The Basics

Cryptocurrency is a digital currency that is not issued by any central authority, such as a government or bank. It is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Cryptocurrencies are created through a process called mining, which involves solving complex puzzles to verify transactions on a blockchain. The most well-known cryptocurrency is Bitcoin, which was created in 2009. Cryptocurrencies can be bought and sold on crypto exchanges and held in digital wallets. They can also be traded for a profit or used to buy goods and services. Investing in cryptocurrency is highly speculative and comes with a range of risks, including price volatility, regulatory uncertainty, and the possibility of scams and fraud.

How to buy cryptocurrency

Choose a Broker or Crypto Exchange

Firstly, you need to select a broker or a crypto exchange. While both options allow you to buy crypto, there are some key differences to consider. A cryptocurrency exchange is a platform where buyers and sellers meet to trade cryptocurrencies. Exchanges often have low fees but can be intimidating for beginners due to their complex interfaces. On the other hand, cryptocurrency brokers offer user-friendly interfaces that interact with exchanges for you, but they may charge higher fees and restrict the movement of your cryptocurrency holdings off the platform.

Create and Verify Your Account

Once you've chosen a broker or exchange, you'll need to sign up and create an account. Depending on the platform and the amount you plan to buy, you may need to verify your identity to prevent fraud and meet regulatory requirements. This step may include submitting a copy of your driver's license or passport, and sometimes even a selfie, to prove your identity.

Deposit Cash to Invest

The next step is to fund your account. You can typically do this by linking your bank account, authorizing a wire transfer, or using a debit or credit card. However, be cautious when using a credit card, as these transactions are often processed as cash advances with higher interest rates and additional fees.

Place Your Cryptocurrency Order

With funds in your account, you're ready to place your first cryptocurrency order. There are hundreds of options to choose from, including well-known names like Bitcoin and Ethereum, as well as lesser-known cryptos. You can usually purchase fractional shares, allowing you to buy a portion of high-priced tokens.

Select a Storage Method

Cryptocurrency exchanges are not insured or backed by protections, so it's crucial to choose a secure storage method. You can leave your crypto on the exchange in a "hot wallet," which is convenient but has a higher risk of theft since it's connected to the internet. Alternatively, you can use a "cold wallet," which is not connected to the internet and offers more security. Cold wallets can take the form of external devices like USB drives or hard drives, but be cautious, as losing the associated keycode or device failure may result in losing your cryptocurrency.

Crypto wallets

Hot Wallets

Hot wallets are digital tools that are usually accessible from a phone or desktop computer. They are often available as a standalone product or as an add-on through popular crypto exchanges. Some examples of hot wallets include:

• Coinbase Wallet
• MetaMask
• TrustWallet
• Electrum
• BlueWallet
• Exodus
• Crypto.com
• Zengo

Cold Wallets

Cold wallets store your digital keys offline, usually on a hardware device or a sheet of paper. Hardware wallets usually come in the form of a USB drive, while "paper" wallets may store your keys via print-out QR codes, written text, or engraved material. Some examples of cold wallets include:

• KeepKey
• Ledger Nano S Plus
• SafePal

When choosing a crypto wallet, it's important to consider factors such as security, functionality, cost, supported currencies, and accessibility. Additionally, active traders may benefit from having both a hot wallet and a cold wallet, using the former for frequent transactions and the latter for long-term storage.

Crypto ETFs

The first type is a spot crypto ETF, which invests directly in cryptocurrency and trades on behalf of investors. These ETFs buy bitcoins or other digital assets and store them. The first spot crypto ETFs were approved by the SEC in January 2024, with the Bitwise Bitcoin ETF (BITB) being one of them.

The second type is a crypto futures ETF, which does not hold digital tokens. Instead, it invests in crypto futures contracts. These funds track the expected price of one or more cryptocurrencies by trading futures, which are standardized agreements to exchange assets on a specific day for a preset price. For example, a bitcoin futures ETF uses futures contracts to mimic the fluctuations in the price of bitcoin.

However, there are also some disadvantages to consider. Crypto ETFs tend to have higher fees than direct cryptocurrency investments, and investors must defer to the fund's management strategy. Additionally, crypto ETFs can only be traded during market hours, unlike cryptocurrencies, which can be traded 24/7.

It is important to note that the crypto market is largely unregulated, and the volatility of cryptocurrency prices adds another layer of risk to these investments.

Crypto regulation

Cryptocurrency is a digital currency, such as Bitcoin, that is used as an alternative payment method or speculative investment. Cryptocurrencies are not backed by real assets or tangible securities and are traded between consenting parties with no broker. They are tracked on digital ledgers, which are decentralised and not controlled by a central authority.

The growth of cryptocurrency has prompted governments around the world to explore ways to regulate it. As of January 2024, some governments have created frameworks to provide protection for users, while others are yet to implement any regulations.

The European Union was the first to adopt measures to regulate cryptocurrency, requiring crypto service providers to detect and stop illicit uses. The U.S. has also been approaching regulation, but it is still a highly debated topic with no clear resolution. The SEC has been regulating the sector, filing lawsuits and complaints against crypto-centric businesses such as Ripple, Coinbase, and Binance.

Other countries have varying approaches to crypto regulation. China, for example, has banned crypto enterprises from operating in the country, while Canada has been more proactive, approving a Bitcoin exchange-traded fund and requiring crypto trading platforms to register with provincial regulators.

In the U.K., crypto assets are recognised as regulated financial instruments, and crypto exchanges and wallet providers must comply with reporting obligations to prevent financial sanctions offenses. Japan takes a progressive approach, recognising cryptocurrencies as legal property and requiring exchanges to register and comply with anti-money laundering and counter-terrorism financing obligations.

Australia, Singapore, and South Korea also have regulations in place, with Australia introducing regulatory requirements for initial coin offerings and Singapore issuing guidance to discourage advertising crypto services to the public.

Overall, the regulation of cryptocurrency is still a work in progress, with governments and regulators trying to balance consumer protection with the need to encourage innovation in the space.

Crypto as an investment strategy

Cryptocurrency is a digital currency that can be used as an alternative payment method or speculative investment. It is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Cryptocurrencies are generally not issued or backed by any central authority, and transactions are recorded on a blockchain, a distributed ledger that is enforced by a network of computers.

Advantages of Crypto as an Investment Strategy

• Cryptocurrencies are not issued by central authorities, making them immune to government interference or manipulation.
• They enable faster and cheaper money transfers without the need for third-party intermediaries.
• They can be used to generate returns through decentralized finance applications and staking.
• They streamline remittances by serving as intermediate currencies for cross-border money transfers.
• Transactions are pseudonymous, providing some level of privacy.

Disadvantages of Crypto as an Investment Strategy

• Cryptocurrencies are highly volatile, and their value can fluctuate significantly.
• They have become centralized, with wealth concentrated among a few large holders.
• Mining cryptocurrencies requires a lot of energy, making it expensive to participate in the network.
• There are off-chain security issues, as cryptocurrency exchanges and wallets have been hacked in the past.
• The regulatory status of cryptocurrencies is still evolving, and a sudden crackdown could impact their value.

Factors to Consider when Investing in Crypto

• Do your research: Understand the specific cryptocurrency, its purpose, and its underlying technology.
• Assess the risks: Be aware of user, regulatory, counterparty, management, programming, and market manipulation risks.
• Consider your investment goals and risk tolerance: Crypto is a high-risk investment and may not be suitable for everyone.
• Diversify your portfolio: Invest in multiple cryptocurrencies to mitigate the impact of losses in a single holding.
• Choose reputable exchanges and wallets: Ensure the security and legitimacy of the platforms you use to buy, sell, and store your cryptocurrencies.

In conclusion, crypto can be a viable investment strategy for those who understand the risks and are comfortable with the volatile nature of the asset class. It offers advantages such as decentralization, faster transactions, and the potential for high returns. However, it also comes with significant drawbacks, including volatility, high energy consumption, and regulatory uncertainties.

Frequently asked questions