How to Invest in Cryptocurrency

Investing in Cryptocurrency for Beginners

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Cryptocurrencies are a digital form of currency and considered by some to be an exciting investment opportunity. You’ve probably heard of Bitcoin, first described in a white paper and launched in 2009 and the currency that kicked off the enthusiasm for crypto. 

Cryptocurrencies work using an electronic distributed ledger system called the blockchain. Blockchain technology enables anyone with an internet connection to participate, which is part of why many people look at cryptocurrencies as investments that can grow in value over time.

If you want to invest in cryptocurrency, it’s essential to understand how cryptocurrencies work, where to buy cryptocurrencies, and how to invest safely. Keep reading to learn more about how to invest in cryptocurrencies and if investing in cryptocurrency makes sense for you.

How To Invest in Cryptocurrency in 4 Steps

You can invest in crypto without being technologically savvy. Advanced cryptocurrency users often use decentralized exchanges, enabled by blockchain technology, and physical hardware cryptocurrency wallets, but you can take a simpler approach. 

These steps offer the simplest method of buying cryptocurrency through a centralized exchange (like Coinbase) or retail brokerage with cryptocurrency support (like Robinhood):

  1. Open a cryptocurrency investment account: Start by opening a cryptocurrency account at your chosen exchange or brokerage. You’ll need your personal contact information, Social Security number, and photo ID, but signing up typically takes just a few minutes.
  2. Fund the account: You’ll need dollars (or your local currency) in your new account to purchase cryptocurrency. Connect to your bank to fund your cryptocurrency account.
  3. Research cryptocurrencies for investments: Don’t just buy a cryptocurrency because you’ve heard of it. Spend time researching each crypto asset to understand its potential upside and risks.
  4. Place your first cryptocurrency trade: Once you’ve done your homework, input the necessary order form information and click the buy button. When you see a trade confirmation, you’re officially a cryptocurrency investor.

What You Need To Know Before Investing in Cryptocurrency

Cryptocurrencies are a relatively new type of investment or asset class, and are not without controversy. Some detractors argue that cryptocurrencies don’t hold any intrinsic value and will ultimately become worthless. Proponents say that digital money is well positioned to gain value over time.

It’s a good idea to become knowledgeable enough about cryptocurrency before investing to make informed investment decisions. As with any investment, consider both the potential upside and risks when deciding if or how much to invest.

Understand the Risks of Investing in Cryptocurrency

Cryptocurrency is considered a very risky asset. Keep in mind that cryptocurrencies are not backed by any government or central bank. They don’t represent ownership in a company like shares of stock. 

Cryptocurrencies derive their value from the security of the underlying technology and adoption by communities that use and support a cryptocurrency.

Even the largest and most valuable cryptocurrency, Bitcoin, is highly volatile in price. It’s not uncommon for cryptocurrency prices to change by more than 10% in a single day. More than once in the past, cryptocurrency prices have plunged by more than 50% in a short time period. Because of the risks, it’s wise to avoid investing more money in crypto than you can afford to lose.

Cryptocurrencies are also ripe targets for scammers. It’s vital to follow strong online security practices to keep your cryptocurrency safe. If your account or crypto wallet is hacked or you accidentally send cryptocurrency to the wrong address, it’s unlikely that you’ll recover the loss. 

Pros and Cons

Like investing in any asset class, investing in cryptocurrency has both pros and cons.

Pros
  • Investment upside potential

  • Easy to transfer worldwide

  • Anonymity and privacy

Cons
  • Investment risk

  • Potential for errors and losses

  • Scams and fraud

Pros Explained

  • Upside investment potential: Some investors believe cryptocurrency prices could increase significantly over time.
  • Easy to transfer worldwide: You can send cryptocurrencies to any compatible account or crypto wallet worldwide without an intermediary. 
  • Anonymity and privacy: Using decentralized crypto exchanges and your own cryptocurrency wallet can enable you to use cryptocurrency with enhanced privacy and semi-anonymity.

Cons Explained

  • Investment risk: Some investment veterans believe Bitcoin and other cryptocurrencies have no value as assets because they have no income or utility
  • Potential for errors and losses: Cryptocurrencies are investment assets enabled by technology but also limited by technology. Sending crypto to the wrong wallet or making another mistake could lead to significant irreversible losses.
  • Scams and fraud: Cybercriminals exploit the newness of cryptocurrency to carry out fraudulent schemes aimed at uninformed investors.

How To Start Investing in Cryptocurrency

If you’ve weighed the advantages and disadvantages and want to start investing in cryptocurrency, then follow these steps to make your first purchase:

Open an Account

The easiest way to buy cryptocurrency is with an account at a centralized exchange or brokerage. You don’t have to worry about creating and maintaining a cryptocurrency wallet when you use a centralized platform. 

Plan to enter your contact information, Social Security number, and other personal information to open a new account. Some exchanges or brokerages may require a certain minimum balance for new accounts. Also, pay attention to fees when shopping around for the best cryptocurrency account for your needs.

Decide Which Cryptocurrency To Buy

Are you planning to buy the crypto market leaders Bitcoin or Ethereum? Or do you want to diversify by owning other cryptocurrencies like Dogecoin, Stellar Lumens, Cardano, or Solana? There are thousands of cryptocurrencies from which to choose.

Don’t rush to click the buy button. Spend time researching each cryptocurrency you’re considering so you can make informed investment decisions.

Make Your First Transaction

When your account is funded and you’ve researched which cryptocurrency you want to buy first, it’s time to initiate a transaction and buy your first cryptocurrency. This is typically a straightforward process. If you’ve ever purchased a stock using a major brokerage website or mobile app, you will likely have a familiar experience.

What To Watch Out for After You Invest in Cryptocurrency

While you can buy certain investments and not spend much time tracking them, it’s a good idea to stay tuned into the crypto markets, so you know what’s happening with your portfolio.

As mentioned above, it’s critical to keep your cryptocurrency accounts and wallet information secure. Losses are likely not recoverable, so be extremely careful with your accounts. Also, be sure not to lose access yourself, as funds are not always recoverable.

Remember that capital gains on crypto are taxable. Even if your cryptocurrency gains are not reported to the IRS, you are required by law to report and pay taxes on those crypto gains. Failure to pay taxes can lead to severe penalties.

Should I Invest in Cryptocurrency?

Only you can decide if cryptocurrency investing makes sense for you. If you’re excited by the idea of a high-risk investment that could lead to a huge payoff, and understand that crypto comes with a lot of volatility and downside potential, then cryptocurrency investing could be a good fit.

Cryptocurrency investors need to understand how cryptocurrency works and the costs and fees associated. Investing in crypto has both short and long-term risks, which can affect how cryptocurrency aligns with your overall portfolio and investment goals.

Advanced Strategies for Investing in Cryptocurrency

If you want to get more hands-on with the blockchain technology powering your cryptocurrency portfolio, consider upgrading to an external hardware wallet, like a Trezor or Keystone wallet.

Other ways to invest in cryptocurrency include: 

  • Investing in NFTs 
  • Using a decentralized exchange like PancakeSwap to trade crypto 
  • Opening a cryptocurrency individual retirement account (IRA) 
  • Investing in the stock of a public company with significant exposure to cryptocurrency, such as a crypto mining company or mining hardware maker
  • Invest in cryptocurrency derivatives such as Bitcoin futures.

For those looking to get literally hands-on with crypto, you can also buy crypto mining equipment to earn newly minted cryptocurrency.

Frequently Asked Questions (FAQs)

How can beginners invest in cryptocurrency?

The easiest way for most people to start investing in cryptocurrency is using a beginner-friendly cryptocurrency exchange or brokerage. Apps from companies like Coinbase and Robinhood make it very easy to buy and hold cryptocurrency. When getting started and choosing where to open an account, pay close attention to fees and the exchange’s reputation.

Do I need a lot of money to invest in cryptocurrency?

You don’t need to be wealthy to invest in cryptocurrency. Many cryptocurrency apps don’t have any minimum balance requirement and allow you to start investing with very little money. You don’t have to buy whole coins at once, since fractional purchases of coins are available for less than $10. Storing your cryptocurrency can be free. 

What is the best way to invest in cryptocurrency?

The best way to invest in cryptocurrency varies depending on your investment goals and risk tolerance. Some crypto investors focus on the long term and are willing to HODL (hold on for dear life) as cryptocurrency prices ebb and flow. Others like to take a more hands-on, active trading approach. The best approach is to not invest more than you can afford to lose.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.


Article Sources

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  2. William J. Luther. "Is Bitcoin Intrinsically Worthless?" AIER Sound Money Project Working Paper No. 2018-07 via SSRN.

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  4. CoinMarketCap. "Bitcoin." Accessed Nov. 24, 2021.

  5. Goldman Sachs. "Crypto: A New Asset Class?"

  6. Consumer Financial Protection Bureau. "Consumer Advisory: Risks to consumers posedby virtual currencies."

  7. IRS. "Internal Revenue Bulletin: 2014-16." Accessed Nov. 24, 2021.

  8. Keystone. "Keystone Design Principles." Accessed Nov. 24, 2021.

  9. Trezor. "Home." Accessed Nov. 24, 2021.

  10. PancakeSwap. "Connect Your Wallet to PancakeSwap." Accessed Nov. 24, 2021.

  11. Coinbase. "What is the minimum amount of cryptocurrency that I can purchase?" Accessed Nov. 24, 2021.