Mar 9, 2022
How to Invest in Cryptocurrency: A Beginner’s Guide
The growing interest, adoption, and investment in cryptocurrency, also called crypto for short, has many investors curious about getting into the game. This beginner’s guide will define cryptocurrency as an asset class and take you through the basics of investing in it. Learn what crypto is, the different types, what to consider before investing, and details to help you determine if it has a place in your portfolio. And if you decide you’re ready to explore crypto investing, you’ll find a step-by-step guide on how to invest in cryptocurrency.
What is cryptocurrency?
Cryptocurrency is a virtual currency that, like cash, is a source of purchasing power. It’s also an avenue for investment and, like other investment assets, can be bought with the objective of financial return. “Long-term investing in cryptocurrency, and not speculative trading, is a way to participate in this transformative technology and their developing applications. It’s impossible to predict the future, but it seems clear that crypto and the underlying technologies will be more ubiquitous, ” Stash Chief Investment Officer Douglas Feldman says.
Unlike most forms of currency, cryptocurrencies are decentralized, meaning they are not issued, backed, or regulated by a central authority like the U.S. government. Feldman notes that “this decentralization idea is an important feature of its design.” Units of cryptocurrency, known as coins or tokens, are created digitally through a validation process that relies on blockchain, a powerful technology that can be used in a vast array of processes, not just for crypto. Also known as distributed ledger technology, blockchain produces a secure encrypted record of the value of each virtual coin and its associated transactions. Those records are distributed and linked across the network of parties, or computers, accessing the blockchain; in theory, the blockchain can be accessed by anyone with an internet connection. This system was designed with security, transparency, speed, and accuracy in mind.
Types of cryptocurrencies
While the word cryptocurrency itself is a generic term for virtual currencies using blockchain technology, there are many different types: over 5,000 as of early 2021. Bitcoin was one of the earliest cryptocurrencies created and remains the best known. Collectively, all other coin-based cryptocurrencies are called “altcoin,” or alternative to bitcoin.
Several cryptocurrencies have gained high profiles, amassed large market value, and developed broad bases of users and investors in recent years.
Top 10 cryptocurrencies by USD market cap
What to consider before investing in cryptocurrency
Cryptocurrency can be volatile, with large swings in value over short periods of time, which may give you pause if you’re risk averse. Keep in mind that anyone can launch a cryptocurrency, and how it’s regulated is in flux, so it’s vital to thoroughly vet any possible investments to avoid scams.
You may also find it helpful to consider why you want to invest in crypto. Are you looking to cash in on a trend, or do you have a thought-out strategy in mind? Feldman notes that, “because crypto is relatively new to mainstream investors, the risks of investing are difficult to analyze.”
Another factor Feldman suggests investors consider is that, “while cryptocurrency might be a powerful long-term investment opportunity, it may be wise to use caution and be clear about your intentions and expectations before diving in. When investing, it’s critically important to take a long-term perspective. This is especially true for assets that can move rapidly up or down like crypto. When investing in highly volatile assets, it’s easy to make the mistake of emotionally driven decisions, such as buying when the price is rising in a fear of missing out or selling out when prices go down. Typically these are not good investing strategies.”
Is cryptocurrency a good investment?
Whether crypto will be a good investment for you depends on many factors. As with all investing, the answer comes down to things like your tolerance for risk, both in financial terms and in psychological terms, and your time horizon, as well as how diversified your portfolio is. The volatility of crypto means that the value of your coins can go up or down quickly, and sometimes dramatically.
Simply because an asset is available to trade does not necessarily mean that it’s the right investment for your situation. And as discussed above, all investing carries the risk that you could lose money.
How much should you invest in cryptocurrency?
Some experts recommend investing no more than 1% to 5% of your net worth. When looking at how much of your portfolio to invest in crypto, Feldman suggests that “limiting your overall exposure to crypto is crucial and it’s important to never invest more than you could afford to lose. While having a small exposure to crypto can dramatically improve the risk adjusted return profile of a diversified portfolio, the overall amount that one should invest in crypto should be dictated by your overall investment portfolio and your risk tolerance.”
With that in mind, diversification within crypto is another aspect to consider. “The specific crypto assets you’re holding matter a lot,” Feldman explains. “For example, certain large-cap coins like Bitcoin are likely to be larger, more liquid, and potentially less volatile than some of the smaller-cap, more speculative cryptocurrencies. Thus, you should consider the mix of cryptos you own in addition to the overall amount of crypto in your portfolio.”
Pros of investing in cryptocurrency
- Some experts compare crypto to gold: both are fungible and durable because they’re hard to destroy, scarce due to finite supply, and their purchasing power is not defined by any central authority.
- Thanks to the characteristics that drive the “digital gold” analogy, Bitcoin is often analyzed as a potential inflation hedge.
- Thanks to the decentralization and transparency of the distributed ledger, it’s difficult to compromise the network integrity behind cryptocurrencies.
Cons of investing in cryptocurrency
- The cryptocurrency market is highly volatile; it can be difficult to predict when values will rise or fall, and the drivers of large swings in value may not always be clear.
- Though crypto blockchains are very difficult to hack, individuals can be susceptible to hacking, due to the same risks inherent in any online activity.
- Cryptocurrencies are not currently subject to much government regulation, so transactions don’t come with legal protection.
How to invest in cryptocurrency in 2022
Crypto investing is becoming more accessible every day. A number of exchanges, similar to those used for traditional investments, are available. You can set up an account in minutes. But, just like investing in any asset, doing your research on a particular currency prior to investing may be wise. If you’re wondering how to invest in cryptocurrency for the first time, the following five steps can get you started.
Step 1: Choose what cryptocurrency to invest in
In the same way that you’d evaluate the potential risks and financial health of a company before buying its stock, you’ll want to understand and carefully evaluate the different, unique characteristics of each cryptocurrency you’re considering for investment. You may choose to invest in one or several different cryptocurrencies.
Vetting cryptocurrencies can be more difficult because they have become a popular vehicle for fraud, such as pump-and-dump schemes. Those risks might leave you wondering how to invest in cryptocurrency without falling victim to a scam. Feldman points out that “in order to avoid pump-and-dump schemes, you should not invest in smaller/newer cryptos that are being heavily promoted on social media platforms. Remember that it’s your responsibility to analyze the investment risk of a given cryptocurrency and that social media experts may not have your best interests in mind. Additionally, you may be able to minimize your exposure to risk of fraud and cybersecurity risk by investing through a large, reputable platform.”
Step 2: Select a cryptocurrency exchange
You must buy cryptocurrency through an exchange such as Coinbase.com, Binance.us, Crypto.com, or Kraken.com. Some factors you may wish to consider when selecting an exchange are security, fees, the volume of trading, minimum investment requirements, and the types of cryptocurrency available for purchase on a given exchange.
Step 3: Consider storage and digital wallet options
Crypto is entirely digital, so you need a digital place to store the coins you owe. One option, according to Feldman is your investment platform. “As the cryptocurrency market has developed, most newer participants choose to store their cryptocurrency investments with the investment platform they’re using,” Feldman explains. “If you invest with Coinbase, for example, the platform will be responsible for custody and safekeeping of your assets; that type of platform will be regulated, well-protected against hacking and cyber threats, and carry lots of financial insurance,” says Feldman.
If you choose not to invest through the more popular platforms, you’ll need a crypto wallet; these hold the private keys that allow you to access your crypto by unlocking the digital identity that is associated with your ownership, recorded on the blockchain. You can opt for either a “hot” or “cold” digital wallet. A hot wallet is accessible via the internet and is generally more convenient. A cold wallet is a physical storage device, much like a USB drive, that keeps your cryptocurrency keys completely offline and generally more secure.
Step 4: Decide how much to invest
Just like any investment, the amount you choose to put into crypto will depend on many factors, such as your budget, risk tolerance, and investing strategy. You’ll also want to consider any minimum investment requirements and transaction costs, which vary across crypto exchanges.
If you want to invest in a cryptocurrency with a high value per coin, Feldman points out, “most exchanges allow you to invest on a dollar basis, rather than buying a whole coin, so you don’t have to come up with tens of thousands of dollars to invest in Bitcoin, for example. Focus on the total dollars you want to invest and not the number of coins you want to buy. Also, always remember, never invest more than you can afford to lose”
Step 5: Manage your investments
Cryptocurrency is a unique investment, because it can be used to buy things and can also be held as a long-term investment; how you manage your crypto holdings depends on your investing strategy and goals. You may wish to consider applying the Stash Way, a philosophy focused on regular investing, diversification, and investing for the long term. Stash can help you manage your crypto investments with automated investing portfolios that include cryptocurrency.
How to keep your cryptocurrency secure
Taking precautions to keep your crypto investment secure is one of the unique concerns that come with this type of investing. Some tips that may help:
- Deal only with reputable exchanges and digital wallet providers.
- Protect access with strong passwords, two factor verification, and secure internet connections.
- Be vigilant about phishing scams that target crypto users.
- Don’t share your password or key with anyone.
Related investments to explore
If you’re not quite ready to dive into cryptocurrency, there are some related investments to consider. For example, some Exchange Traded Funds (ETFs) offer “ways to play” in the crypto market, but do not directly hold cryptocurrency or its derivatives. In general, these ETFs hold stock in companies with exposure to or involvement in processes that interact with or support crypto markets by participating in mining or simply by holding large balance-sheet positions in cryptocurrency. These investments allow you to dabble in this emerging landscape without taking the cryptocurrency plunge.
Investing in cryptocurrency with Stash
Whether crypto leaves you feeling delighted or daunted, understanding how to invest in cryptocurrency opens up your options if you decide to explore this type of security. With Stash, you can gain exposure to select cryptocurrencies through the Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Trust (ETHE), which are now components of Stash Smart Portfolios.
Cryptocurrency investing FAQ
What do I need to know before buying cryptocurrency?
Cryptocurrency can be a risky investment, so approach it with your eyes open to potential pitfalls. Digital currency can be volatile, it’s largely unregulated, and there are many unknowns about how this new form of currency will develop in the future.
What to look for in a cryptocurrency to investment
Every cryptocurrency is different, so the best option depends on your individual circumstances. That said, beginning investors may wish to explore more established currencies, as there is plenty of information about how they work and their performance over time. Feldman points out that “Bitcoin can be a very natural place to start, thanks to its size, its unique store-of-value characteristics, the lower technical complexity backing the investment case, and the mature institutional market supporting it.”
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