How To Invest In Cryptocurrency: What You Need To Know
If you’re interested in blockchain assets, but you don’t know how to invest in cryptocurrency, don’t be intimidated. It’s a fairly simple process that doesn’t require any technical knowledge or special equipment. But some of it will be unfamiliar when you’re just starting out. Here’s what you need to know about how to invest in cryptocurrency.
How To Invest In Cryptocurrency
There are two steps to start investing in cryptocurrency — picking a place to buy it and selecting a place to store it.
1. Choose an Exchange and Create an Account
Cryptocurrency is not regulated by the SEC and isn’t traded on the same markets where investors buy and sell traditional securities like stocks. To invest in blockchain assets, you’ll need to sign up with a cryptocurrency exchange — and there are many competing for your business. Consider the following to choose the right one.
- Look for large, reputable exchanges with strong security protocols. Among the most popular are Coinbase, Kraken and Bitfinex.
- Signing up is simple and free, but exchanges can charge various fees, so do your research before you join.
- Different exchanges support different coins, so pick one that offers a wide variety of assets to choose from. If you have a specific coin in mind, make sure any exchanges you’re considering list it before you join.
Once you create an account with an exchange, follow the exchange’s prompts to fund your account. After that, buying coins requires just a few clicks — but you’ll need a wallet first.
2. Create a Cryptocurrency Wallet
You must have a crypto wallet to purchase assets, but they don’t actually store your cryptocurrencies the way a physical wallet holds money. Crypto wallets contain private keys. These keys serve as the unique and irreplaceable passwords you must have to access your assets on the blockchain.
- Software wallets, or hot wallets, are software programs you access through apps or web browsers. Coinbase and the other major exchanges offer native software wallets, which are free and easy to set up, or you can download one from a third party like MetaMask.
- Like cloud storage, software wallets are convenient because you can access them anywhere from any device — but the tradeoff is reduced security. Since they exist online, they are only as secure as your internet connection.
- Hardware wallets, or cold storage, store your keys offline on a physical device. Unlike software wallets, they can be expensive, and you must have possession of the device to access your holdings. But the added cost and reduced convenience come with nearly unhackable security, which most veteran crypto traders consider the industry gold standard.
No matter which kind you choose, make sure your exchange supports it. It is also your responsibility to safeguard the private keys your wallet generates — so take it seriously. If you lose them, you won’t be able to access your holdings and if someone else gets them, they can empty your wallet. They can never be recovered or replaced.
How Much Should You Invest In Cryptocurrency as a Beginner?
According to Forbes and many other reputable sources, cryptocurrency should comprise 5% of your investment portfolio at most. Because of the high-risk, high-volatility nature of blockchain investing, this standard holds true for beginners and more seasoned investors alike. When you are just getting started, it would be wise to start small.
Is Cryptocurrency a Good Way To Invest?
Investing in cryptocurrency isn’t for the faint of heart because of its volatility and the technological knowledge required to trade it. Before investing in a cryptocurrency project, consider the following:
- The business proposition and social mission: Does the coin you’re considering solve a practical issue? Is there a viable problem, and does this project offer a solid business case for resolution?
- The supply of crypto: Some coins have supply caps. Bitcoin, for example, has a fixed number of coins — just 21 million — which will affect supply and demand in the future.
- Price history: Cryptocurrencies are historically volatile. But it’s important to weigh price history with these other elements to determine why prices are rising and falling. Some cryptocurrencies have been affected by pump-and-dump schemes, for example. This occurs when large groups of buyers purchase the coin to increase its value and then sell it when it reaches a market high. Those left behind could lose big.
- Community activity: A larger community around a cryptocurrency is a good sign of its health and interest in the project. A strong, active community will put pressure on developers to fix bugs, advance the project to new stages and find new test cases and value for the projects.
Keep In Mind
The IRS classifies crypto investments as capital assets. This means that sales and profits follow the same rules on capital gains. Buying crypto doesn’t trigger a tax event, but selling creates a realized gain or loss, which must be reported to the IRS. A realized loss can lower your taxable income, but if you sell crypto at a profit, you’ll pay long-term capital gains taxes if the holding period was over one year. If you sell within one year of buying, you’ll pay the higher short-term rate.
FAQHere are the answers to some of the most frequently asked questions about investing in cryptocurrency.
- How do beginners invest in cryptocurrency?
- Beginners invest in crypto just like more experienced traders:
- -Sign up with an exchange
- -Choose a cold or hot wallet
- -Secure your private keys
- -Link your wallet to your exchange account
- -Fund your account
- -Research and select your coins
- -Place an order
- Beginners invest in crypto just like more experienced traders:
- Can you invest $100 in crypto?
- Yes, many tokens trade for a few dollars or even less than a dollar. But you can even invest in coins that cost hundreds or thousands of dollars. Bitcoin, ethereum and most of the other big, expensive cryptos let you buy a percentage of a single coin, similar to how many brokerages allow partial-share investing with stocks. For example, each bitcoin is broken down into 100 million units called satoshis. Even if bitcoin hit $100,000, one satoshi would cost just $0.001.
Garrett Baldwin contributed to the reporting for this article.
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