Investors are beginning to realize that there’s money to be made in cryptocurrencies. Not only are there countless stories of people who’ve made thousands or even millions of dollars, but every day mainstream media features some new digital asset that is poised to become the next big thing.
Beginning in 2021, investing in cryptocurrencies has begun to move past individual investors and is now gaining traction from institutional capital like UBS and Citigroup. Ric Edelman, financial guru and the founder of Edelman Financial Engines has said, “This is really like the internet back 20 or 30 years ago. We have to recognize that [opportunities like] this only come along once in a generation."
Unfortunately for the uninitiated, cryptos are confusing. An investor might pour their money into one without even knowing what it is or why anyone would want to buy one. Essentially, they’re just buying into the hype and experiencing F.O.M.O. or “fear of missing out”.
This can be problematic, especially for beginners. The crypto market is ripe with thousands of coins that are basically worthless or in some instances outright scams designed only to separate investors from their cold hard cash.
The best way to start investing in cryptocurrency is to treat it the same way they would any other investment. Get to know the asset and why it would be desirable to a buyer. At the same time, understand the pros and cons of investing in it, and then decide whether the risk is worth the potential reward.
In this post, we’ll go through everything a beginner needs to know about how to get started investing in cryptocurrencies. We’ll even explore a few alternative ways to indirectly profit from the crypto market.
How to Start Investing in Cryptocurrency for Beginners
For people who are new to investing or cryptocurrencies in general, it can be somewhat intimidating at first. There’s a lot of new jargon and platforms to become familiar with. To help get started, here are a few guidelines to follow.
Define Your Goals
What is it that you hope to accomplish by investing in cryptocurrency?
- Diversify your portfolio?
- Dabble in a relatively new asset class?
- Make money as fast as possible?
- Achieve long-term financial security?
Its important that an investor is honest with themselves about their intentions because it will ultimately dictate which path they take. For example, someone with short-term aspirations would want to limit how much money they put into a cryptocurrency to mitigate their losses. Someone else who is more risk-averse may want to avoid certain types of coins that demonstrate lots of short-term fluctuations.
Obviously, it will also be extremely important to determine what type of cryptocurrency to invest in. We’ll cover this in more detail in the next section.
Choosing a Brokerage
Choosing which crypto exchange to use is another important consideration. This is where you’ll buy, sell, and most likely store your crypto. As you can imagine, you’ll want it to be secure, not just because it will be connected to your banking information but also because you don’t want your investments to get hacked.
Since most mainstream brokerages don’t offer crypto, you’ll have to use a platform that you may not be entirely familiar with. Thankfully, several cryptocurrency exchanges have proven to be reputable and shown they can be trusted. Here are some of the most popular ones to choose from:
Before making your selection, be sure to check out which cryptos they offer as well as other features the platform has. Also, pay attention to the fees associated with each trade that’s placed.
Choosing A Wallet - Hot or Cold?
In the world of cryptocurrency, security is always a priority. For this reason, you’ll often hear investors talk about the type of wallet they prefer to use.
By default, most popular crypto exchanges offer what’s called a hot wallet. A hot wallet is one that exists online either with the trading platform or your desktop. Many beginners choose to go with a hot wallet because:
- They’re convenient
- They’re free
- They can hold virtually any type of crypto
Even though hot wallets make it easier for an investor to trade their crypto, they also make it harder to protect. If the trading platform or your computer are hacked, then thieves could get your digital keys and steal your crypto.
By contrast, many crypto enthusiasts recommend having a cold wallet - a physical storage device (such as a USB drive) that’s not online. This makes storing their digital keys much safer, but it can also be more inconvenient for trades. Plus, there is even the possibility that an investor might misplace or erase the cold wallet and lose their investment forever.
Most experts recommend that beginners who invest a modest amount of money into crypto start with a hot wallet. However, as their crypto portfolio grows, they may wish to consider moving their assets to a cold wallet instead.
Don’t Forget to Pay Your Taxes
Just like any other financial asset, the IRS sees cryptocurrency transactions as taxable events. Therefore, anytime an asset is sold and money is made, these earnings must be reported on your federal income tax return. Look for a tax form from the crypto exchange in January.
Investing in Crypto – Which One Do I Pick?
Now for the (literally) million-dollar question: Which cryptocurrency should you invest in?I say “literally” because there are thousands of people who became actual millionaires investing in Bitcoin (BTC). Back when it started in 2010, Bitcoin cost just $0.09. Now, priced at just over $38,000 each, that investment would be worth well over $42 million!
And of course, Bitcoin isn’t the only major player in the cryptocurrency space. As of this writing, investors can now choose amongst more than 8,000 cryptos on the market. A few of the biggest names include:
- Ethereum (ETH)
- Litecoin (LTC)
- Cardano (ADA)
- Polkadot (DOT)
- Dogecoin (DOGE)
However, not all cryptos are going to do what Bitcoin has done. In fact, the grand majority of them may not even be around in ten years. Some are blatant scams that were created for no other reason than to steal your money.
In 2021, a group capitalizing off the hit Netflix show Squid Game sold a $SQUID coin that went from being worth pennies to a price of $2,800, and then quickly fell back to being worth just pennies again. This was a classic pump and dump scheme where an investment is hyped up and then sold at the peak. The scammer walks away with millions while investors are left with nothing.
(Fun fact: This is the same type of crime that was committed in the 2013 movie “The Wolf of Wall Street” starring Leonardo DiCaprio.)
That’s why the best approach for any investor, especially beginners, is to exercise extreme caution. Here’s what someone can do to become a savvier cryptocurrency investor.
Researching Cryptocurrency to Invest In
For people new to cryptocurrency, the biggest challenge will be learning about the market and understanding the differences between coins. A good way to become familiar with the different cryptos and what makes them unique is to learn as much about them as possible.
One of the most well-known sources of unbiased educational material is through the popular exchange Coinbase. Under their “Learn” tab, Coinbase has a wealth of articles that give straightforward answers to some of the most commonly asked questions by beginners. They also have a very popular “Earn” feature where users are paid small amounts of crypto to watch videos and take test their knowledge about cryptocurrencies.
CoinDesk is another very popular crypto media site with all of the latest news, prices, and commentary about everything in the cryptocurrency space. Their “Crypto Explainer+” page is full of hundreds of articles about all kinds of crypto terms and specific coins. The information is arranged from beginner up to expert, so there’s something new for everyone to learn.
One more place a beginner can find a ton of great information about cryptocurrency is YouTube. Type in the name of any crypto coin or topic and let the videos roll. However, one caution I would recommend is not to put too much stock into any videos that give price predictions since these would be entirely just one person’s opinion and pure speculation.
Be Prepared for Volatility
Anyone’s who already tried investing in stocks knows all about volatility. Volatility is when an investment fluctuates up and down and can sometimes result in the loss of value for periods at a time. It’s a fairly well-known aspect of the risk-reward relationship process, and generally not much of an issue for those people who invest long-term.
However, cryptocurrencies can sometimes take this to a whole new extreme. Given how new many of them are, there’s very little price stability. It’s somewhat common for many of them to oscillate in value, sometimes by double-digit percentage changes within a single day.
Even well-known crypto like Bitcoin has taken investors for a wild ride over the past decade. Since 2012, the price of Bitcoin has gone up and then down crashing more than 80 percent on at least three different cycles.
For this reason, its often recommended that investors allocate only a small amount of their portfolios to the crypto market overall (i.e., 5 percent or less). They will also need to be comfortable with these price swings and anticipate them so that they don’t panic and sell at the wrong time.
Past Performance is Not a Guarantee of Future Success
While many of the people getting into cryptocurrency right now may be experiencing F.O.M.O., it’s important to realize that what’s happened in the past is the past, and most likely won’t repeat itself in the future.
Bitcoin and cryptocurrencies in general are brand-new types of assets. While they may have produced unprecedented returns during the past few years, it's unreasonable to think that this can go on indefinitely. No asset can have double or even triple-digit returns year over year without eventually reaching its ceiling.
While many experts believe there is still a lot of room for growth, especially amongst the top-performing cryptos, the old saying “time will tell” still holds true. Rather than riding the hype, investors need to use rationale and put their money into assets they can believe in rather than chasing after past returns.
Having an Investor Mindset
A lot of what sets a successful investor apart from the rest is the way they think about an investment. Legendary investor Warren Buffett doesn’t try to predict what the market will do next. Instead, he looks for opportunities to buy assets that are priced below their future potential.
No matter if you’re a beginner or have been investing for several years now, it’s a good idea to reevaluate your strategy and rationale every once in a while. And that’s exactly what the mentors at the Market Insiders program can help with.
Market Insiders is a coaching program designed to help investors refine their strategy when it comes to crypto, stocks, and real estate. The program is a series of live calls with real professionals who have experience in their respective spaces, so they know what they’re talking about. You’ll be able to ask questions, get expert opinions, and learn from what other members are up to.
Click here to find out more about how the Market Insiders program can benefit you.
Alternative Ways to Invest in Cryptocurrency
Some people may really want to invest in cryptocurrency. However, they’re just not sure about the instability or technical aspects. Thankfully, the crypto space has expanded to include plenty of alternative ways that investors can capitalize on this growing industry.
Interest from Stablecoins
A stablecoin is a special type of cryptocurrency that’s designed to be “stable”. Its value is generally pegged to a fiat currency such as the U.S. dollar. Examples include such stablecoins as:
- Tether (USDT)
- USD Coin (USDC)
- Gemini (GUSD)
Back when crypto exchanges were first getting started, there wasn’t a good way to convert physical money into crypto. Before long, stablecoins were developed as a medium to bridge this transaction process.
So you might ask: How does someone make any money on crypto whose price is always one dollar? The answer: Interest.
Some crypto platforms have opened what are known as “interest accounts”. This is essentially where they will pay account holders generously for the use of their cryptos. Rates can be as high as 8 to 10 percent for some stablecoins!
You can check out these rates for yourself at sites like BlockFi and Celcius. However, please be aware that crypto interest accounts have become the target of many state regulators, and so their future may be uncertain.
Invest in Cryptocurrency ETFs
Another relatively new way to invest in cryptocurrency is to purchase an exchange-traded fund or ETF. ETFs are collections of investments (similar to mutual funds) and have been used for a few decades now as a popular way to invest in stocks.
Though the U.S. Securities and Exchange Commission (SEC) has rejected every application thus far that looks to invest in Bitcoin and other cryptos directly, they have approved some which use a strategy to invest in futures – contracts to buy or sell or an asset at a predetermined time and price in the future.
Two popular examples include the ProShares Bitcoin Strategy ETF (BITO) and Valkyrie Bitcoin Strategy ETF (BTF). Though shareholders will not actually own any crypto, they will be able to take advantage of any market appreciation.
Perhaps one of the biggest advancements to emerge from cryptocurrencies will be the blockchain technology that it’s built upon. A wide variety of companies see blockchain as a major revolution in the way that data is stored, and many other applications will adopt it in the future beyond just digital currency.
Two companies that are forecast to make big blockchain advancements are Accenture PLC (ACN) and Nvidia Corp. (NVDA). Companies you already know like IBM (IBM) and PayPal (PYPL) also have plans to integrate their services using blockchain. Again, even though investors won’t actually own any crypto, they will be putting their money into companies that are poised to make good use of this new technology.
Should I Start Investing in Cryptocurrency?
It's not too late for investors to get into the world of cryptocurrency. Many financial experts say that even though Bitcoin and other assets have seen dramatic price surges over the past decade, we're still in our infancy with understanding where this new market will go.
For beginners, the world of cryptocurrency can be intimidating, and it can be confusing to know how to get started. Like any investment, the best thing to do is to get educated and go into it with a plan.
Spend plenty of time reading education materials and becoming familiar with the various types of cryptos. More importantly, try to understand why they're in demand and how that might affect their value in the future.
Once you've determined what to invest in, the next question will be how. There are several reputable crypto exchanges available that let you buy, sell and hold crypto. Take notice of their security features and consider keeping some of your crypto offline if it’s a substantial amount.
If investing in crypto seems too risky, know that there are other options. Collecting interest on stablecoins or buying Bitcoin ETFs are both popular ways to invest indirectly. You might even want to consider investing in the blockchain technology itself by buying the stocks of companies that plan to embrace it as part of their future services.
Most important of all, work on developing the right mindset for being a crypto investor. This is a relatively new type of asset that may not play by many of the same rules as investments you’re used to working with. However, as long as you invest for the same fundamental reasons you would any other asset of value, then there will be money to be made as we see where this market goes next.