How to Invest in Blockchain

Investing in blockchain assets for beginners

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Blockchain is the technology that powers cryptocurrencies like Bitcoin, Ethereum, and Dogecoin. Blockchain technology transparently tracks the creation and exchange of cryptocurrencies and other digital assets. If you own any cryptocurrency, then you are already a blockchain investor.

You can invest in blockchain assets if you know how to buy, sell, and store your digital assets safely. It also pays to know the risks associated with blockchain investments. Keep reading to learn more about investing in blockchain assets like cryptocurrencies.

How To Invest in Blockchain in 5 Steps

The most direct way to invest in the blockchain is to buy cryptocurrencies, which use blockchain technology. If you want to invest in crypto, then follow these five steps to get started:

  1. Choose your blockchain-based assets

    Start by researching the various blockchain investment options. The most popular cryptocurrencies are currently Bitcoin and Ethereum, though you can invest in more than 6,000 different cryptocurrencies and countless non-fungible tokens (NFTs). Pick the digital asset you think aligns best with your investment goals and risk tolerance.

  2. Choose a cryptocurrency exchange or brokerage

    You can purchase many different cryptocurrencies through popular crypto exchanges like Coinbase or brokerage firm like Robinhood. Each exchange and brokerage has a different fee structure and available assets.

  3. Fund your cryptocurrency account with fiat currency

    Your next step is to fund your cryptocurrency account using your local currency, such as U.S. Dollars. You can do that by linking your credit or debit card or even your PayPal account, depending on what is accepted by your account. Due to the unique risks of cryptocurrency, it’s best to avoid investing more than you can afford to lose.

  4. Buy your chosen cryptocurrency

    Once your deposit clears, which may happen instantly, you can click the buy button for any cryptocurrency available on the exchange.

  5. Decide where to store your crypto

    While you can store your cryptocurrency in a wallet hosted by the cryptocurrency exchange, your crypto investment is more secure in a less accessible wallet. The most secure crypto wallets are hardware wallets that are not online.

    Not all cryptocurrency exchanges and brokerages allow you to send your crypto to an outside wallet. For example, Robinhood and SoFi allow you to buy cryptocurrency, but you can’t send it out of your account.

What You Need To Know Before You Invest in Blockchain

Blockchain assets in the form of cryptocurrencies are a relatively new asset class. While Bitcoin has been around for a decade, most cryptocurrencies are still in their infancy. As a result, investing in blockchain assets is considered by many to be risky. 

If you decide to hold or transfer blockchain assets outside of a major exchange, it’s important to understand that you need a way to store your blockchain assets. Whether you keep your blockchain holdings with a crypto exchange or in an external hardware wallet, a crypto wallet is an essential part of investing in blockchain assets.

Understand the Risks of Investing in Blockchain Assets

Blockchain assets like crypto are inherently risky and not suitable for all investors. Bitcoin prices, for example, are extremely volatile. In May of 2021, Bitcoin lost half of its value compared to the highs of the prior month, which isn’t the first time the cryptocurrency has experienced such a drop.

A new regulation or law could impact the value and create volatility in crypto assets.

While extremely unlikely, it’s possible that the U.S. government could make Bitcoin and similar blockchain assets illegal or could impose new, restrictive regulations. Investors could turn their backs on the industry. Because of these risks, it’s important to avoid investing more than you can afford to lose. That means not investing your life savings, retirement, or other essential funds into such a risky asset class.

Pros and Cons of Investing in Blockchain

Pros
  • Potential investment gains

  • Distributed ledger security

  • Decentralized finance features


Cons
  • High risk and volatility

  • Difficult to fix mistakes

  • Possible to lose access


Pros Explained

  • Potential investment gains: Some believe that many blockchain assets will more than double in value in the coming years, making cryptocurrencies a potential moneymaker for investors.
  • Distributed ledger security: The distributed ledger technology used by cryptocurrencies makes blockchains extremely secure and difficult to manipulate.
  • Decentralized finance features: The blockchain enables crypto assets to be exchanged directly between anyone in the world with a compatible blockchain wallet, with no central governing authority or other intermediary required.

Cons Explained

  • High risk and volatility: Blockchain asset prices tend to be quite volatile. Each cryptocurrency has some risk of its value declining to zero.
  • Difficult to fix mistakes: If you use the blockchain to send cryptocurrency to the wrong address, or if your account is hacked, it’s unlikely you’ll be able to recover your crypto assets.
  • Possible to lose access: If you lose access to a software wallet or misplace a physical hardware wallet, you could lose access to your Bitcoin or other cryptocurrencies.

How To Start Investing in Blockchain Assets

If you’re ready to get started investing in the blockchain by buying cryptocurrency, then follow these steps to make your first crypto investment:

Open an Account

To buy cryptocurrency, you need access to a cryptocurrency exchange or brokerage such as Coinbase or Robinhood. Most major exchanges and brokerages that offer cryptocurrencies require you to enter your personal contact information and Social Security number, plus answer some questions about your investment experience and income source.

Most exchanges and wallets will not allow users below the age of 18 years to open an account.

You don’t need an account with a centralized brokerage or exchange to hold and trade cryptocurrencies. You can use a decentralized exchange like Exodus or PancakeSwap to buy, sell, and trade blockchain assets more anonymously and independently. You need your own cryptocurrency wallet to use this type of exchange.

Decide Which Blockchain Assets To Buy

For many new blockchain investors, Bitcoin seems like the obvious choice. Bitcoin is the original digital asset that relies on blockchain technology to function securely. Thousands of new blockchain assets, many of them cryptocurrencies, have come to market in the years since Bitcoin launched.

Many new cryptocurrency blockchains have emerged out of changes to the original Bitcoin software. When a large number of users on a blockchain agree to its change protocol to create a new one blockchain, its called a fork.

Instead of or in addition to buying cryptocurrencies directly, you can invest in public companies or funds with significant exposure to blockchain technology. Companies like Riot Blockchain, a Bitcoin mining company, confer significant exposure to Bitcoin and other cryptocurrencies through traditional investment accounts. You can also buy shares in funds with a blockchain focus, such as some exchange-traded funds managed by ARK Investment Management, which has at its helm crypto enthusiast Cathie Wood.

Make Your First Transaction

Actually buying Bitcoin or another blockchain asset via a crypto exchange is as easy as buying a stock, bond, or mutual fund. Follow the exchange’s website or mobile app prompts to buy your desired blockchain asset.

Depending on the exchange where you buy, what blockchain asset you buy, and how you buy it, the transaction may go through instantly or take more than an hour. Once you click the buy button, be patient for your transaction to go through. Then your new cryptocurrency will show up in your account or crypto wallet.

What To Watch Out for After You Invest in Blockchain

Once you invest in crypto to get exposure to the blockchain, it pays to pay attention to your investment risk, potential security issues, and tax implications. Let’s break down each of these:

  • Risk: The cryptocurrency markets are constantly changing. It’s not uncommon for blockchain asset values to rise or fall more than 10% in a day. A comment by a celebrity or government official could be enough to drive a major price change for a cryptocurrency. Pay close attention to the risk profile of any blockchain asset you own and be prepared for a wild ride if you’re investing in cryptocurrency.
  • Security: It’s vital to keep your accounts as secure as possible, even if that means accessing them is less convenient. If you lose your blockchain assets, you may have no recourse to recover that value. Using a hardware wallet is generally the most secure method of storing cryptocurrencies.
  • Taxes: Even if your cryptocurrency gains are not reported to the IRS in the same way that your employer reports your income, you must pay capital gains taxes on blockchain investment profits when you sell. Not unlike other income, failure to report crypto income and pay taxes on the gains can lead to penalties, interest, and even jail time for serious offenses.

Should I Invest in Blockchain Assets?

Deciding to invest in blockchain assets is a personal decision. It’s up to you and should be based on your personal risk tolerance. Only you can decide if blockchain assets like Bitcoin are right for you.

Blockchain investing should be considered speculative and is best for those with at least some prior investment experience. 

Cryptocurrencies can be highly risk and volatile, so it’s best to avoid investing more than you can afford to lose. 

While you could see your blockchain investments double, triple, or even 10x in value, they can also fall to zero. If you decide to invest in cryptocurrencies, do so with caution.

Frequently Asked Questions (FAQs)

How can beginners invest in blockchain?

Beginners can invest in blockchain assets through a cryptocurrency exchange. Popular exchanges for investors in the U.S. include Coinbase, Binance, Gemini, FTX, and Robinhood. In most cases, you need a funded, verified account to make your first blockchain investment. If that's not for you, you can consider investing in shares of companies or funds that focus on blockchain technology.

Do I need a lot of money to invest in blockchain assets?

You don’t need a lot of money to invest in blockchain assets. Most cryptocurrency exchanges support fractional purchases where you can buy less than $10 of cryptocurrency at a time. Using Coinbase, for example, the minimum investment is $2.

What is the best way to invest in blockchain?

Depending on your investing goals, the best way to invest in blockchain assets could be through a major cryptocurrency exchange. Some investors may choose to use a decentralized exchange paired with a hardware cryptocurrency wallet. You may also consider investing in shares of companies or funds that focus on blockchain technology. Understanding how the blockchain works can help you to make the best decisions based on your investment goals.