It’s never been easier to purchase cryptocurrencies. You simply sign up for an exchange, press “Buy,” and voila- you’re a full-fledged crypto trader.
But investing entails more than just purchasing your preferred coin. As a seasoned investor, you’re likely to have a lot of concerns regarding cryptocurrency, such as what you need to know before investing, how to buy it, and how to safely store (and safeguard) your funds.
In this guide on how to invest in cryptocurrencies, we’ll answer these and other important questions.
3 Things to Know Before Investing in the Cryptocurrency Market
Cryptocurrency Remains a High-Risk, Volatile Investment
Cryptocurrencies have a high degree of volatility. Bitcoin is a good illustration of this, as it’s not uncommon for it to lose 30% one week and then soar to new highs the next.
Bitcoin may be performing exceptionally well in comparison to when it first became popular, but the gains are neither consistent nor assured. Anyone who purchased BTCUSD in late 2017 and sold before October 2020 lost money.
If you do decide to invest in cryptocurrency, we recommend starting with a small amount of your portfolio.
Cryptocurrency holdings are not insured by the Federal Deposit Insurance Corporation (FDIC).
Your checking and savings accounts will be covered for up to $250,000 each if your bank fails. However, if your cryptocurrency exchange goes bankrupt, is hacked, or simply closes down without warning, you’re out of luck.
Cryptocurrency Can Be Taxed
Gains on cryptocurrencies are taxable. The IRS began taxing cryptocurrency profits as capital gains in 2014, and the crypto community has received at least 24,000 warnings since then.
How to Start Investing in Crypto
Select an Exchange
When it comes to investing in cryptocurrency, the first step is to choose a reputable exchange. An exchange is where you’ll buy, sell, and most likely store your cryptocurrency.
Fortunately, cryptocurrency has been around long enough for the most popular exchanges to become relatively stable and user-friendly. There are numerous exchanges that we recommend in general, but here are three of the finest for beginners:
For most newcomers, Coinbase is a great place to start. They’re a publicly traded firm with over 73 million customers, and they’re known for their excellent and intuitive user interface, as well as the option to earn free cryptocurrency with Coinbase Learn. The inability to extract your private key to a cold wallet and higher-than-average fees are both disadvantages. Binance.US competes with Coinbase by offering reduced fees, a wider range of cryptocurrencies, and more complex services. While this isn’t a deal-breaker because regulatory inspection is widespread among crypto platforms, it’s something to keep in mind.
BlockFi enables investors to obtain crypto-backed loans. You can also earn bitcoin back on any purchases made with The BlockFi Rewards Visa® Signature Credit Card if you want to earn even more crypto. More information can be found in our BlockFi Review.
Choose The Cryptocurrencies You Want To Invest In
The digital currency Bitcoin isn’t the only one in town. In fact, there are over 7,500 different types of cryptos.
Fortunately, most exchanges only have a few dozen. These are the most reputable and viable currencies with a significant market capitalization.
Here are some examples of today’s most popular cryptos:
Bitcoin (BTCUSD): The king of cryptos is still alive and well, and can be bought on any major exchange.
Ethereum (ETH): The second most valuable cryptocurrency by market capitalization rose to prominence through innovation, allowing smart contracts to be recorded on the blockchain.
Dogecoin (DOGE): Dogecoin was created as a joke — a affectionate spoof of cryptocurrency — in just 2 hours. Despite this, DOGE has a market capitalization of $85 billion, demonstrating the power of speculation and internet talk.
Binance Coin (BNB): Binance Coin (BNB) is the world’s largest cryptocurrency exchange’s own coin (Binance.US is the USA-only version). It has gained popularity as a result of its widespread acceptance and potential to lower Binance’s transaction fees.
Which should you purchase? Because cryptocurrency is so risky and unpredictable, deciding which cryptos to include in your portfolio may come down to personal preference. Do you believe Ethereum, for example, has more technological merit and global applications than Bitcoin?
When it comes to verifying companies, stock traders may look at form 10-Ks, while crypto investors should look at whitepapers, such as the one for Bitcoin.
Decide How Much Cryptocurrency To Purchase
What percentage of your portfolio should be crypto? I’ve written a whole piece about it, but here’s the TL;DR version:
When I approached two seasoned finance advisors for a precise figure, they gave me two different answers:
“Maybe 10% – so if crypto tanks, you can still retire – but I still wouldn’t recommend it.”
“Get $100,000 in safe investments first,” because if you secure $100,000 in safe investments by the time you’re 35, and keep depositing another $100 monthly, you’ll retire a millionaire.
Cryptocurrency does not fit into an asymmetric risk profile, which is why seasoned wealth managers aren’t great supporters of it. You can’t create a 99 percent assured prosperous future upon it because it’s too uncertain.
What’s the bottom line? Begin small. Keep your portfolio to 10%, or even 5%, of your total assets.
Keep Your Private Keys Safe In A Wallet
After you’ve purchased some cryptocurrency, you’ll need to decide where you’ll keep your private keys.
To summarize, hot and cold wallets exist both online and offline. A hot wallet allows you to easily access and trade your cryptocurrency, and the security measures in place to secure it are better than ever.
However, as hackers get more daring, some crypto traders, particularly long-term holders, opt to save their private key to a cold wallet – a USB or hard disk kept in a safe.
A hot wallet may suffice for now if you’re dabbling with tiny quantities and anticipate you’ll keep buying a little on the regular.
Preserve Your Investment
The last step is to protect your cryptocurrency investment. The only way to get this step wrong is to acquire cryptocurrency and then forget about it. You can prevent cryptocurrency investment blunders by: Adding your cryptocurrency to your main investing dashboard so you can see its progress over time.
Because crypto trading is still in its infancy, keep an eye on the news to see if your selected exchange is being scrutinized by regulators.
Immerse yourself in the world of cryptocurrencies. Then sort by new and hot topics on the crypto subreddit. Consider becoming a member of a crypto community on your favourite social media platform, or visiting crypto conferences or meetings in person.
Keep track of whether governments are outlawing cryptocurrency or, on the other hand, blessing it as legal tender and erecting a Bitcoin city atop a volcano.
Continue to educate yourself about new cryptos and blockchain implementation, and get paid in crypto for it on Coinbase Learn.
Other Cryptocurrency Investment Options
The only way to “invest” in cryptocurrency is to buy it. Here are some additional, less-risky options to think about.
Earn Cryptocurrency For “Free” By Learning And Mining
As previously said, studying about crypto on services like Coinbase can earn you a free trickle of cryptocurrency. For example, by watching a two-minute video, you can earn $2 in Stellar (XLM):
You can mine crypto for free if you have a strong computer with a gaming-capable graphics card. Mining is the process of renting your computer’s processing power to the blockchain in exchange for a small amount of cryptocurrency.
Invest in cryptocurrency stocks and exchange-traded funds (ETFs)
Want to invest in cryptocurrency but don’t want to buy it? You’ve come to the right place. The Securities and Exchange Commission recently approved the first Bitcoin futures ETF, which you can learn more about in our story Crypto ETFs: How to Invest in a Bitcoin ETF.
You can also invest in the cryptocurrency business by purchasing stock in firms that are heavily focused on or involved in the future of the digital currency. For example, you can invest in Coinbase (COIN), mining firms like Hut 8 Mining (HUT), or chipmakers like Nvidia (NVDA) that indirectly support crypto by producing mining chips .
Invest in Blockchain Technology
One last way to invest in crypto without purchasing it is to invest in the technology that underpins it: blockchain.
Only two of the world’s top 100 publicly traded firms invested in blockchain initiatives in 2014. That number has now risen to 81.
There are also blockchain ETFs, such as the Amplify Transformational Data Sharing ETF (BLOK), that offer a good mix of blue chips and hot newcomers.
The Benefits and Drawbacks of Investing in Cryptocurrency
Pros
Massive gains are possible
Bitcoin, in particular, has been the best-performing investable asset over the last decade. It could crash or continue on its upward track.
You Get to Invest in a New Technology
Blockchain technology is affecting practically every industry – public, financial, and medical — and your cryptocurrency investment is helping to support those industries.
You can get some for “free”: You can’t “mine” stocks or earn free real estate by watching short movies, but you can do either to get some crypto for “free”!
Investing in Crypto Isn’t the Only Option
Crypto and blockchain exchange-traded funds (ETFs) are a convenient way for stock traders to add crypto to their portfolio without taking on the high risk of holding genuine crypto.
Cons
High volatility and risk
Traditional wealth advisors advise limiting your portfolio allocation to no more than 10% of your total assets, if at all. Crypto is still too unpredictable to bet the farm on, which is why traditional wealth advisors recommend limiting your portfolio allocation to no more than 10% of your total assets, if at all.
Susceptible to Theft, Fraud, and Con Artists
Squid is the most recent bitcoin scam, with its developers pocketing $3.38 million in investor funds.
Most victims of the 2014 Mt. Gox hack, which resulted in the theft of 850,000 Bitcoin, have yet to receive a single currency.
Frequently Asked Questions
Do You Have to Pay Cryptocurrency Taxes?
Yes. Short-term profits are taxed at a rate of 10 to 37 percent, while long-term gains are taxed at a rate of 0 to 20 percent.
These three items, according to the IRS, are non-taxable and do not require reporting:
- Purchasing cryptocurrency with cash and storing it (affectionately known as HODLing)
- Donating cryptocurrency to a tax-exempt charity or a non-profit
- Transferring cryptocurrency from one wallet to another
The following, on the other hand, must be declared and will be taxed as capital gains:
- Seling cryptocurrency for cash (even if you lost money on your initial investment)
- Paying for products and services with cryptocurrency
- One coin is exchanged for another
- Crypto you mined
- Being compensated in crypto or via an airdrop.
- Getting cryptocurrency as a bonus or reward
You could be fined if you don’t report your assets. The penalties for delinquent taxes are the same – and, as the IRS puts it, “they can add up fast”:
- There is a late filing fee.
- A penalty for not paying on time
- On top of both fines, there is interest.
- Your total penalty might be up to 25% of the amount you owe in delinquent taxes.
Should You Put Your Money Into Cryptocurrency?
You should consider investing in crypto if:
You want to diversify your portfolio by adding highly high-risk assets: If you’ve already assessed your risk tolerance and are trying to diversify your portfolio, crypto is a great place to start.
You believe in crypto’s and blockchain’s mission: Perhaps you see crypto and blockchain technologies as a type of ESG investing because you believe in their positive qualities.
You may want to drop the idea of investing in cryptocurrency if:
You’re a risk averse person: Cryptocurrency is a high-risk, high-volatility, and high-unpredictability investment. It may not be a good fit for your portfolio if it causes you more anxiety than excitement.
It’s your very first investment: Before investing in crypto, it’s best to have $100,000 in safe investments, according to Varun Marneni, a certified financial planner with Atlanta’s CPC Advisors.
You’re suffering from FOMO: Fear isn’t a good way to invest. FOMO should not be used as a reason to buy cryptocurrency, or any other investable asset for that matter. Besides, you don’t need cryptocurrency to get wealthy.
Final Thoughts
Buying and investing in cryptocurrency has never been easier. In many respects, cryptocurrency is still the Wild West – a frantic gold rush with little governmental oversight — and while fascinating, it isn’t for everyone.
If you decide to invest in cryptocurrency, make sure you educate yourself on the risks, best practices, and industry news. Also, remember to pay Uncle Sam his dues!
