Let’s face it: nowadays, you can barely turn on the TV or open up your favorite social media app without hearing something about Bitcoin or trading cryptocurrency in general. Whether you understand the specifics about the technology or not, it is clear that everyone, from major corporations to your next-door neighbors, seems to be getting in on the action.
However, before you jump in on the party, it is best to start investing in cryptocurrency once you have a bit of a better understanding of how it all works. After all, this is an investment decision, and everyone knows (or should know) that any investment carries its own level of risk.
Here in this step-by-step guide, I will take you through some of the basics of cryptocurrencies, including how they work, how you can buy and hold them, and how this exciting technology may be able to benefit you and the world around us.
What’s Ahead:
How to Start Investing in Cryptocurrency
First, a Word of Caution
While this article discusses how to invest in cryptocurrency, I want to make it abundantly clear that investing in crypto is speculative and is incredibly risky.
It is challenging to value cryptocurrencies and stock in cryptocurrency companies, so the prices are highly volatile.
Additionally, cryptocurrency exchanges have been hacked due to inadequate security or outright fraudulent behavior. This has led to a lack of trust from investors and consumers who want more regulation on how these crypto exchanges operate.
If you’re at all nervous about investing in crypto, that’s okay. I would never tell someone to invest in something they’re not comfortable with or knowledgeable about. The risks of investing can lead to bankruptcy and life-long financial issues.
With cryptocurrency specifically, you run the risk of losing your entire investment. So just make sure you’re doing your research, and you’re comfortable losing what you put in.
Don’t Put All of Your Eggs in One Basket: Cryptocurrency Allocation
With any investment that you make, one of the most important first steps you can take before putting your money into something is figuring out how big of a piece of your portfolio you want that asset to make up.
The reason why the proper allocation is so important is that cryptocurrencies can be very volatile. By spreading your investments between several different types of assets, you reduce your exposure to the risk of one of those assets losing value. Think of your portfolio as an airplane… If you only have one engine, and that engine dies, the plane crashes. If your aircraft is equipped with four engines and one dies, you still have three more engines to keep you in the air.
Keep these things in mind:
- Make your portfolio allocation into cryptocurrency small, especially when you are first starting. Since many cryptos are so expensive, you want to make sure you stick with small amounts when you first start investing.
- Cryptocurrencies are more like commodities and less like stocks. Unlike stocks, which represent ownership in companies and sometimes provide income in dividend payments, cryptocurrencies behave more like gold and oil as investments.
- Cryptocurrencies were not originally intended to be investments. As I highlighted above, cryptocurrencies were initially designed to be mediums of exchange to supplement or replace modern fiat currency. However, the main difference is that central banks and governments do not control cryptocurrencies’ value as they do with paper currency.
- Up until now, the primary function of cryptocurrency is as a tradable asset with minimal real-world application. The world of crypto is still in its infancy. The adaptation of it as a medium exchange is happening at a much slower pace than initially anticipated. You can; however, quickly exchange bitcoins into local currency when needed.
Pick Your Cryptocurrency Investments
With Bitcoin gaining so much popularity worldwide, other programmers and investors began to create their cryptocurrency forms and debut them onto the markets through ICO’s or initial coin offerings.
Based on the same blockchain technology that Bitcoin was built on, these “Altcoins” provided new opportunities for investors to get in on the crypto craze by being able to buy in at much lower prices than what Bitcoin was trading at. Some of those “newer” cryptocurrencies, like Ethereum, Litecoin, and Ripple, are just as popular as Bitcoin itself.
Believe it or not, Bitcoin, which was the first primary cryptocurrency to be invented, was designed as a way for computers to pay each other for borrowing each other’s processing power and other resources.
It was a novel idea that was largely ignored by those not heavily involved in technology. Its value, at less than a penny per coin, was almost laughable. The creator, who goes by the pseudonym of “Satoshi Nakamoto”, is still unknown up until this day.
Related: How Do You Buy Bitcoin?
Decide on a platform
Your cryptocurrency platform will be your home base – your dashboard – where you’ll buy, sell, trade, and manage your cryptocurrency investment.
If you were hoping to buy crypto through your bank, you should know that the majority of financial institutions do not enable the exchange of crypto on their platforms. There are countless reasons for this – regulatory barriers, security concerns, disinterest – but the bottom line is that you’ll likely have to start fresh on a new platform.
The good news is that in the decade-plus since crypto began changing hands online, countless exchanges have popped up to facilitate safe transactions. Plus, because there’s so much competition for new investors, these platforms have had to constantly innovate and up their game with promos, features, and security.
eToro
One option is eToro – a social trading platform, meaning you can like, comment, and follow other investors on the exchange.
Best of all, if you see a user whose strategy you trust and admire, you can use eToro’s novel CopyTrader™ feature to automatically duplicate their portfolio and activity. The net result of enabling CopyTrader™ is that you essentially get an actively managed account for free, unlocking the ability to passively invest in crypto without FOMO on market moves.
Robinhood
Another option is Robinhood. Robinhood now allows you to invest in cryptocurrency, right within the app. Sign up for an account (which takes only a few minutes), fund it, and choose the crypto you want to invest in.
Here’s our full Robinhood review.
Advertiser Disclosure – This advertisement contains information and materials provided by Robinhood Financial LLC and its affiliates (“Robinhood”) and MoneyUnder30, a third party not affiliated with Robinhood. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Securities offered through Robinhood Financial LLC and Robinhood Securities LLC, which are members of FINRA and SIPC. MoneyUnder30 is not a member of FINRA or SIPC.”
You can see other investment options below:
Keep Your Cryptocurrency Stored Safely
Once you own some cryptocurrency, you must store it securely in what is called a Digital Wallet. You can think of this wallet as a cyber vault that safeguards your assets and is only accessible with unique encrypted keys. The public key is used by those to whom you wish to send assets. Your private key is only accessible by you, allowing you to authorize your holdings’ movement across exchanges.
Related: 6 Best Crypto Wallets To Stash Your Bitcoin
Keep in mind that the “wallet” is like a set of keys used to access your cryptocurrency. However, the assets themselves are stored on the blockchain, a cloud-based, global network of computers that form the backbone of the cryptocurrency infrastructure.
Wallet types:
- Online Wallets. Stored in the cloud but slightly less secure.
- Mobile Wallets. Accessible from smart devices (phones, tablets, etc.).
- Desktop Wallets. It is stored on your computer.
- Hardware Wallets. Typically a USB drive or other portable media.
Note that while you have the option of getting a crypto wallet, you can also use a broker that specializes in cryptocurrency investing – like Webull. Webull lets you trade crypto for free, and your coin is housed with them, so you don’t have to worry about having a separate wallet. From there, you can buy and sell your cryptocurrency like you would a stock.
More Ways to Invest in Cryptocurrency
Did you know that you can now open a secure crypto account with several exchanges explicitly built for public investors? On top of that, the mainstream nature of the largest cryptocurrency, Bitcoin, has opened the door for more traditional financial institutions to start offering access to their clients.
If your goal is solely to buy and hold Bitcoin, you can now do so with popular apps such as PayPal and CashApp, and it is as easy as tapping your finger a couple of times on your phone screen.
The beauty of Bitcoin going mainstream is that you can easily create a Bitcoin wallet with one of these companies and then transfer that wallet to several other crypto-centric companies if you ever decide to become more involved in actively trading crypto assets.
Perhaps the largest of these brokerages that specialize in facilitating the trading of cryptocurrencies is Coinbase, which has grown to become one of the biggest exchanges of its kind. With Coinbase, people who may have already been familiar with popular stock and currency trading platforms can access a user-friendly interface that allows them to actively invest in and trade a vast number of cryptocurrencies in an environment that is already pretty familiar to them.
One of the most extraordinary things about cryptocurrencies is that you can trade them 24 hours a day, seven days a week, allowing them to be one of the few asset classes that can respond to events that may occur. At the same time, other markets are closed for business.
This level of convenience and flexibility allows users to act more quickly to preserve their gains in the event of unforeseen volatility in the markets, in addition to being able to seize opportunities at a record speed that would otherwise be impossible to catch with traditional market hours.
Given this information, it is up to you to decide if you would instead employ a buy and hold strategy with cryptocurrencies making up a portion of your overall investment portfolio or if you would instead dedicate more time to actively trading these assets to profit from daily or weekly price fluctuations.
Suppose you are more of a buy-and-hold investor. In that case, it is probably easiest for you to use Paypal or CashApp to begin building the crypto portion of your portfolio. However, if you seek the excitement of day trading and wish to be more active with the management of your investments, a brokerage like Coinbase may be more appropriate for your needs.
What is Cryptocurrency, and How Does it Work?
The simple answer to this question is that cryptocurrency is a digital asset used to store value and conduct transactions using the blockchain network as its financial backbone. This may sound pretty complex. Although it is a bit complicated at first, it will probably be much easier to understand than old-fashioned fiat currency once you know the basics.
After all, with central banks around the world seemingly printing new money and taking on more new debts at a record pace, it comes as no surprise that investors seek a safe haven investment that can shield them from the consequences of rampant inflation while also being easy to exchange for goods and services.
Gone are the days where people bought physical gold and rare art to achieve this financial shelter. The costs of storing, securing, and purchase insurance for such valuable items are prohibitive for most people anyway. Not to mention the amount of time and coordination it takes to sell these assets in exchange for cash.
Related: 15 Surprising Things You Can Buy With Bitcoin
What Makes Cryptocurrency Investing so Appealing?
Despite the risks, there are a couple of reasons many find crypto investing so attractive:
It is Decentralized
With cryptocurrency, you can invest in a digital asset that trades on an exchange, similar to the way stocks are traded on the market. Even the fiat currencies that countries use can also be traded and exchanged effortlessly in the markets.
What sets crypto apart from the bulk of these other liquid assets is that governments do not control cryptocurrencies. The term “decentralized finance,” or DeFi, is perhaps one of the most exciting things about crypto. It makes the dream of a free and fair market, which is not regulated by a central bank or government authority, a reality for many people.
It is a Liquid Asset
Cryptocurrencies can be seen as unique digital tokens that can be exchanged between people and between computers, with a universal value, no matter where you are on earth. What sets cryptocurrency apart from more conventional investments, like real estate, is that you can invest any amount of money in Bitcoin, or one of the many other digital currencies in existence, and capture the price fluctuations daily.
A Quick Look at Blockchain Technology
The blockchain is a digital network that uses a series of ledgers, which you can think of as permanent digital records, to facilitate the exchange of digital assets like cryptocurrencies. Blockchain technology is finding its way into other applications, such as the shipping industry, the digital art world, and even within the trade of precious stones.
Blockchain technology allows a record of every transaction to be marked and attached to the asset itself, allowing a potential buyer to gain insight into the history of the asset they are trading or investing in.
Because these digital markings are also recorded into the blockchain ledger and cannot be altered by anyone, they create a level of assurance, transparency, and security that was just not possible to attain in the past.
The blockchain works in the same manner for cryptocurrencies as it does for everything else, keeping a digital record mirrored by all of the other computers on the blockchain network that can be used for everything from conducting due diligence to verifying ownership of the assets themselves.
This helps crypto investors feel more secure because it is easy to trace their assets and recover them in the event of theft or a natural disaster. Because the assets’ digital footprint is stored in the cloud, they become resilient against many issues that would otherwise cause a total loss if that value had been held in more traditional or physical assets.
To add to the blockchain’s appeal, it is all run by computers and free from outside influence of any kind, meaning that even governments cannot access your digital wallet without getting your permission first.
Going back to the previous ideas about political and economic instability, it is no wonder that people from different places worldwide have decided to shield their wealth by investing in digital assets that are contained within the blockchain network.
Unlike a traditional bank account, which the government regulates, their assets cannot simply be seized, frozen, or lost due to a collapse in the value of their local currency. Unlike real estate and other physical assets, they can easily and quickly exchange their digital assets for goods and services in a large number of other countries around the globe.
Even if they had to leave everything behind and flee to another part of the world, they would be able to access their cryptocurrency wallet from any internet-connected device on earth.
How Risky is Crypto Trading?
Like any other type of investment in existence, cryptocurrencies are not free from risks. Perhaps one of the most undeniable risks that come with investing in crypto, or anything else for that matter, is that these assets’ prices do move up and down. Sometimes there can be very sharp moves in either direction that can occur at almost any time with no safety net.
One of the benefits of fiat currency is that it is relatively stable in most cases, allowing you to sleep at night without worrying that the value of your money might drop 30% in a few hours.
Although there are a handful of rare cases when this type of volatility event may have happened in a traditional fiat currency, it occurs daily within the cryptocurrency market. Even an asset as significant as Bitcoin can quickly fall in price. A fall of 50% or greater within a day has happened on several occasions for Bitcoin, Ethereum, and other cryptocurrencies in existence.
That being said, there are several ways to protect yourself from the volatility of digital assets. The first strategy, which is a popular strategy for all investment portfolios, is called diversification.
You will likely benefit more from holding various assets across many classes instead of throwing all of your eggs in one basket. Diversification allows at least a portion of your overall portfolio to be protected from the wild price swings that may be taking place in the other asset classes that you are holding, allowing for a more stable overall portfolio.
While some investors may diversify their investments across several different cryptocurrencies, time has shown that as Bitcoin goes, so goes the crypto sphere.
If Bitcoin is crashing one day, chances are that every other cryptocurrency is crashing right along with it. To avoid getting caught in a crypto vacuum, it makes a lot of sense to keep some cash on hand in addition to holding other investments like stocks, bonds, real estate, and others.
The bottom line here is that no investment is 100% risk-free, and you should only invest money that you can afford to lose to mitigate your risk exposure. Also, instead of buying into cryptocurrency, or any investment, all at once, it may be more prudent to employ the strategy known as dollar-cost averaging, where you buy regular amounts of an asset periodically to average your costs. Ultimately, no risk generally equals no reward when it comes to investing in anything.
Related: Dollar-Cost Averaging Explained
What about Taxes?
One of the most common questions that new entrants into the crypto space tend to have is whether or not they have to pay taxes on the money they may gain due to their involvement with trading digital assets.
After all, if these cryptocurrencies and digital assets are decentralized and beyond government authorities’ control, why should you have to worry about paying taxes on them? Well, unfortunately, taxes are something that is written into the laws of the majority of countries on the planet. While you may avoid being noticed for a short time, if you make big profits in crypto, you will likely need to transfer some of that money into a traditional bank account to use it.
The other thing to keep in mind is that the modern world of cryptocurrency exchanges involves companies that have to abide by the rule of law in the countries they are located in, making the reporting of account information upon government inquiry almost entirely unavoidable.
As with any other investment, or source of income, it would be in your best interest to consult with an accountant to find ways to benefit from trading crypto while also keeping your tax burden as small as possible.
Keep in mind that cryptocurrencies are typically not treated as currency when it comes to tax codes across much of the globe. They are viewed as investable assets by the majority of tax authorities around the world. As such, they tend to have certain conditions that can completely change your predicted tax liability based on how much profit (or loss) you make, the length of time during which you held the asset before selling for a profit, and also what type of account you hold the assets in.
In most cases, the profits you make from an asset held for less than a year are generally counted towards your “regular income” and are usually taxed at the highest rates. With that in mind, most countries offer much lower tax rates for investments held for more than 12 months, which is known as the capital gains tax.
For example, in the United States, a person who holds an investment for less than one year and sells that investment for a profit must add that profit to their ordinary income and be taxed appropriately based on their marginal income tax rate. However, if the same individual waited 12 months before selling their investment for a profit, they would only pay a fixed capital gains tax on that profit. Their ordinary income tax burden would not be affected at all.
You know what they say: Taxes and death are the only things that are guaranteed in life, and the same is true when it comes to cryptocurrencies. However, if your goal is more long-term, holding your digital assets in a tax-deferred account, such as a retirement or education savings account, might be the best way for you to avoid big surprises when taxes come due.
Summary
Cryptocurrency is everywhere. It’s in the news, on social media, even Elon Musk is advertising it. Knowing, not only how to invest in it, but if you should is becoming more and more difficult. One thing’s for sure: it’s an extremely risky investment. So if you do decide to pursue crypto trading, making sure you know the basics.
I’ve done my best to lay out the most basic steps for investing in cryptocurrency, the rest of the research is up to you and the individual currency you decide may work best for your portfolio.
Just remember: diversify!
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