Crypto
How to Invest in Cryptocurrency for Beginners
Key Points
- Cryptocurrencies are digital assets bought and sold through peer-to-peer networks and exchanges.
- The blockchain is a digital ledger that keeps track of various transactions performed on each cryptocurrency network.
- Cryptocurrencies have limited practical use and are highly volatile, but risk-seeking investors might find appeal in these assets.
- 5 stocks we like better than Coinbase Global
Interested in learning the best way to invest in crypto for beginners? Crypto’s reputation has suffered from countless scandals since the market receded from all-time highs in the fall of 2021. But despite the negative headlines and questionable regulatory status, crypto market caps remain substantial and interest from individuals and institutions continues to bubble under the surface.
There’s no better time to learn about how to invest in cryptocurrency for beginners. We’ll explain how to get started in crypto, the risks involved in trading and owning these assets and how to keep yourself safe from volatility and scams.
What is Cryptocurrency and How Does it Work?
How do you invest in crypto for beginners? Let’s start with the basics —most cryptocurrencies aren’t currencies. Instead, they’re assets on a digital ledger known as the blockchain, which can be bought and sold without a third-party facilitator like a bank or brokerage. Since transactions are made peer to peer, cryptocurrencies are called decentralized assets.
To understand the crypto marketplace, you need to grasp the basics of the blockchain. Think of the blockchain as pieces of a massive puzzle, each with unique characteristics that differentiate individual blocks. Transaction data is imprinted into these blocks and added to the chain, creating an irreversible ledger. Network participants must use their computational power to solve math problems to confirm these transactions. The first entrant to correctly confirm the new block receives cryptocurrency tokens. By rewarding these “miners” with tokens, the blockchain network incentivizes participants to act cooperatively.
Bitcoin was the first cryptocurrency (even though the idea of digital assets has been around for decades) and remains the largest by market cap. Other widely used cryptocurrencies include Ethereum, Solana, Uniswap and Dogecoin.
Why Consider Investing in Cryptocurrency?
In light of recent scandals like FTX, BlockFi, Three Arrows Capital and various scams and money-laundering operations, cryptocurrency doesn’t have a sterling reputation. If you’re a risk-averse investor, it may be in your best interest to avoid cryptocurrencies, which are likely to remain volatile amidst high rates and a murky regulatory environment.
But cryptocurrency continues to interest individual and institutional investors, who see massive amounts of capital entering the space and want to get in on the action. Plus, the potential gains and lack of correlation to traditional assets like stocks, bonds and commodities make cryptocurrency an intriguing opportunity for those willing to take on the risk.
Understanding Different Types of Cryptocurrencies
If you want to learn how to invest in cryptocurrency, you’ll need to understand the market as a whole. The cryptocurrency ecosystem has tens of thousands of different assets, ranging from tokens like Bitcoin and Ethereum with market caps rivaling large-cap public companies to microcap altcoins with shakier foundations than most penny stocks. Cryptocurrencies don’t all follow the same protocol either: Bitcoin and Ethereum have two different authentication methods.
Bitcoin (Proof of Work)
The original digital currency is Bitcoin, developed in 2009 by the anonymous Satoshi Nakamoto, who may be an individual or a group. Bitcoin is notable because it’s the first digital asset to solve the “double-spending” problem. Most computer programs are infinitely copyable. Companies like Microsoft Corp. NASDAQ: MSFT lock their programs with a keycode to prevent copying.
Bitcoin uses the blockchain to create an unalterable ledger, which shows exactly how many Bitcoins have been spent in each transaction. Bitcoin miners must verify these transactions using increasingly more computational power. The confirmation process is known as a consensus algorithm, and Bitcoin uses this “proof of work” system to confirm transactions.
Ethereum (Proof of Stake)
Bitcoin’s main competition is Ethereum, which operates an entire virtual platform where participants can create applications known as Dapps. Ethereum is more like digital oil if Bitcoin is considered digital gold — a valuable commodity that can run different processes and protocols.
The actual token is ETH, used in peer-to-peer transactions. Ethereum uses a “proof of stake” consensus mechanism where transactions become verified by validators who hold significant amounts of ETH on the network. Proof of stake proponents claim it reduces the energy required to process transactions while retaining the decentralized nature of the network.
Decentralized Finance (DeFi)
DeFi is a vast ecosystem of market participants who buy, sell, lend and borrow with each other directly over cryptocurrency networks. For example, if you wanted to take out a traditional loan, you’d request money from the bank, which would lend it to you at a specific rate based on your credit history.
DeFi makes these loans on a peer-to-peer basis using networks like Uniswap, Chainlink or Polkadot. DeFi eliminates the need for central banks and institutions, which should cut transaction costs. Still, this area is completely unregulated and not recommended for crypto investing for beginners.
Stablecoins
One of the more plausible cryptocurrency uses cases is the stablecoin, an asset that seeks to maintain a peg to a traditional currency like the U.S. dollar. For example, the collateralized stablecoin seeks to maintain its $1 peg by buying or selling its reserve assets. Another form is the algorithmic stablecoin, which uses a formula to produce or eliminate tokens. Algorithmic stablecoins do not have collateralized backing and have suffered speculator blowups.
Non Fungible Tokens (NFTs)
Non fungible tokens (NFTs) became a popular way to invest in crypto for beginners in 2021 when projects like NBA TopShot, CryptoKitties and the Bored Ape Yacht Club rose to prominence. An NFT is a unique code (like a link) pointing to a digital asset, like an NBA dunk highlight or cartoon picture. This link is the thing traders buy and sell, not the actual digital asset itself. NFTs are highly speculative projects, and you should approach them cautiously, especially if you’re a new investor.
Key Factors to Consider Before Investing in Cryptocurrency
How much to invest in cryptocurrency for beginners? Before putting any capital onto a crypto exchange, you’ll need to consider the following questions:
- What type of crypto investment are you making? Are you just adding a small position of Bitcoin or Ethereum to your overall portfolio, or are you trying to strike it rich with smaller altcoins or NFTs?
- What is your time horizon? Are you holding cryptocurrency for years or decades or simply trying to quickly catch the next wave of volatility and sell for profit?
- What is your risk tolerance? Are you prepared to potentially lose your entire investment? Many investors believed their money was safe on the FTX exchange; now, that cash is gone and unrecoverable. Always keep crypto investments small in proportion to your other position.
Managing Risk in Cryptocurrency Investment
Managing risk is always the first step in a cryptocurrency investment plan. Here are a few pointers for crypto newbies:
- Keep position sizes small.
- Be able to handle volatility.
- Keep your tokens secure.
- Watch out for scams.
How to Keep Cryptocurrency Secure
The third point in the previous list is the most poignant, but how is it done? For example, if a beginner wants to learn how to invest in Bitcoin securely, they should start by researching various exchanges.
Who has the best safety protocols and track record? Many exchanges have sunk into insolvency without returning client funds, so always choose a reputable exchange. You can also keep your cryptocurrency holdings secure on a cold wallet — more on those below.
How to Buy Cryptocurrency
Want to learn how to buy cryptocurrency? Here’s your five-step plan:
Step 1: Select your cryptocurrency trading platform.
Selecting a safe cryptocurrency trading platform is the first crucial step to take, and in the wake of the FTX fiasco, you’ll want to learn as much as you can about each exchange or platform before making any deposits. The safest options are likely the large firms trading on public exchanges like Coinbase Global Inc. NASDAQ: COIN or Robinhood Markets Inc. NASDAQ: HOOD.
Step 2: Set up your cryptocurrency wallet.
Transferring crypto investments into a digital wallet is one way to keep them safe. Investors have two options here: hot wallets and cold wallets. A hot wallet is an app or online platform protected by a personal passcode called a key. Hot wallets often come from exchanges (i.e., Coinbase Wallet), or you can download them from third-party sources.
Another option is the cold wallet, disconnected from exchanges and cryptocurrency networks. Much like a flash drive, cold wallets can be connected to computers for trading but also have storage limitations. Cold wallets are a safer but less convenient option for investors who want self-custody of their tokens.
Step 3: Develop a cryptocurrency investment plan.
You must develop a plan once you’ve set up your trading operation. Are you simply looking to add Bitcoin or Ethereum to your portfolio, or do you want a wide range of digital assets? How much capital are you willing to put in? And how long is your intended holding period? Thoroughly answer all these questions before investing in crypto.
Step 4: Research individual tokens and purchase assets.
After developing your plan, you’ll want to research the different digital assets available. Every new cryptocurrency token has a whitepaper and thesis behind it; you don’t need to read every single one, but at least have an idea of why each token was created and what it purports to do to improve the cryptocurrency marketplace.
Once you’ve completed your research and selected assets, purchase them and closely monitor your account. Remember, crypto trading is 24/7, and you’ll need to monitor assets closely when prices are this volatile. You can burn a well-laid plan in a matter of hours in cryptocurrency, so always err on safety.
Pros and Cons of Investing in Cryptocurrency
Here are some of the basic benefits and drawbacks of cryptocurrency investing:
Pros
The benefits may include:
- Disconnected from traditional financial markets: Cryptocurrency may offer true diversification away from stocks and bonds that often move in lockstep.
- Potential for massive returns: No reward without risk, and many of crypto’s earliest adopters have made unbelievable sums of money on their investments.
- Increasing availability for retail investors: With an ETF approaching and trading available on apps like Robinhood and Webull, cryptocurrency has never been more accessible to the public.
Cons
The downsides include:
- Extreme volatility: You think 20% down is a bear market? Many crypto tokens rise or fall 20% in a single day. If you can embrace volatility, cryptocurrency might not appeal to you.
- High transaction costs: Not only do crypto exchanges charge commissions, but the transaction costs on these assets can be high when the network is congested.
- Scams and rug pulls: Cryptocurrency has questionable regulatory status and remains a Wild West financial frontier. And like the old west, there are plenty of con men, scammers and fakes looking to pull the rug out from unsuspecting investors (the term rug pull was literally coined for these scams!).
Cryptocurrency: Do the Rewards Justify the Risks?
Cryptocurrency returns can be eye-popping, but are the risks justified? You must absorb extra risk to achieve above-average returns, but how much is too much? Cryptocurrency advocates claim the technology behind these assets has too much potential to ignore. A lack of regulation, proliferation of scams, and flat-out fraud are huge turnoffs for traditional investors. If you want to buy into cryptocurrency, understand the massive risks in the space and approach your investments appropriately.
FAQs
Can anyone invest in crypto? Now that digital assets have gained mainstream attention, here are a few frequently asked questions about how to get into crypto.
How much money do I need to start investing in crypto?
You don’t need a fortune when investing in cryptocurrency. Once you deposit into your crypto exchange account or digital wallet, you can buy as little or as much cryptocurrency as you want.
Can I start buying crypto with $100?
Yes, with $100, you can buy any listed cryptocurrency minus commissions and transaction fees. The only minimum is the deposit minimum set by individual exchanges and brokers.
How do I know what crypto to invest in?
You’ll need to research different cryptocurrencies and their mechanisms to buy the assets that fit your goals and risk profile. Larger coins like Bitcoin and Ethereum tend to be safer than smaller tokens, meme coins and NFT projects, but returns can vary based on the level of risk you’re willing to take.
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