Increasing interest, adoption, and investment in cryptocurrencies, also called cryptocurrencies for short, have many investors curious to get in the game. This beginner’s guide will define cryptocurrency as an asset class and walk you through the basics of investing in it. Learn what crypto is, the different types, what to consider before investing, and details to help you determine if it has a place in your portfolio. And if you decide you’re ready to explore cryptocurrency investing, you’ll find a step-by-step guide on how to invest in cryptocurrency.
what is cryptocurrency?
cryptocurrency is a virtual currency that, like cash, is a source of purchasing power. it is also an avenue for investment and, like other investment assets, can be purchased for a financial return. “Long-term investment in cryptocurrencies, and not speculative trading, is a way to participate in this transformative technology and its developing applications. it is impossible to predict the future, but it seems clear that cryptocurrencies and the underlying technologies will become more ubiquitous,” says stash chief investment officer douglas feldman. Unlike most forms of currency, cryptocurrencies are decentralized, meaning they are not issued, backed, or regulated by a central authority like the US. uu. government. Feldman notes that “this idea of decentralization is an important feature of their design.” Cryptocurrency units, known as coins or tokens, are created digitally through a validation process that is based on blockchain, a powerful technology that can be used in a wide range of processes, not just crypto. Blockchain, also known as distributed ledger technology, produces a secure encrypted record of the value of each virtual currency and its associated transactions. those records are distributed and linked through the network of parties or computers that access the blockchain; In theory, anyone with an internet connection can access the blockchain. this system was designed with security, transparency, speed, and accuracy in mind.
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types of cryptocurrencies
While the word cryptocurrency itself is a generic term for virtual currencies that use blockchain technology, there are many different types: more than 5,000 as of early 2021. bitcoin was one of the first cryptocurrencies created and continues to being the best known. Collectively, all other coin-based cryptocurrencies are referred to as an “altcoin” or alternative to bitcoin.
Several cryptocurrencies have garnered high profiles, amassed huge market value, and developed broad user and investor bases in recent years.
top 10 cryptocurrencies by market capitalization in usd
as of February 2022
- bitcoin
- ethereum
- tether
- binance coin
- usdc (US dollar coin)
- cardano
- solana
- xrp
- terra
- polkadot
what to consider before investing in cryptocurrencies
Cryptocurrencies can be volatile, with large swings in value over short periods of time, which can give you pause if you are risk averse. Keep in mind that anyone can launch a cryptocurrency, and the way it is regulated changes, so it is vital to thoroughly screen any potential investment to avoid scams.
You may also find it helpful to consider why you want to invest in crypto. Are you looking to capitalize on a trend or do you have a strategy in mind? Feldman notes that, “Because cryptocurrencies are relatively new to mainstream investors, the risks of investing are difficult to analyze.”
Another factor that Feldman suggests investors consider is that, “While cryptocurrencies can be a powerful long-term investment opportunity, it may be wise to be careful and clear about your intentions and expectations before diving in. Investing, it is vitally important to take a long-term perspective.This is especially true for assets that can go up or down quickly like cryptocurrencies.When investing in highly volatile assets, it is easy to make the mistake of making emotional decisions, such as buy when the price goes up for fear of losing or sell when the price goes down. These are generally not good investment strategies.”
Are cryptocurrencies a good investment?
Whether cryptocurrencies are a good investment for you depends on many factors. As with all investments, the answer comes down to things like your tolerance for risk, both financially and psychologically, and your time horizon, as well as how diversified your portfolio is. The volatility of cryptocurrencies means that the value of your coins can rise or fall quickly and sometimes dramatically.
Just because an asset is available for trading doesn’t necessarily mean it’s the right investment for your situation. And as discussed above, every investment carries the risk of losing money.
How much should I invest in cryptocurrencies?
Some experts recommend investing no more than 1% to 5% of your net worth. Looking at how much of your portfolio to invest in crypto, Feldman suggests that “limiting your overall exposure to crypto is crucial and it’s important to never invest more than you could afford to lose. While having a little exposure to cryptocurrencies can dramatically improve the risk-adjusted return profile of a diversified portfolio, the total amount one should invest in cryptocurrencies should be dictated by their overall investment portfolio and risk tolerance. “With that in mind, diversification within crypto is another aspect to consider. The specific crypto assets you hold are very important,” explains Feldman. “For example, certain large-cap coins like bitcoin are likely to be bigger, more liquid and potentially less volatile than some of the smaller-cap and more speculative cryptocurrencies, so you should consider the mix of cryptocurrencies you own in addition to the total number of cryptocurrencies in your portfolio.”
advantages of investing in cryptocurrencies
- Some experts compare cryptocurrencies to gold: both are fungible and durable because they are difficult to destroy, scarce due to finite supply, and their purchasing power is not defined by any central authority.
- Thanks to the characteristics that drive the “digital gold” analogy, bitcoin is often discussed as a possible hedge against inflation.
- Thanks to the decentralization and transparency of the distributed ledger, it is difficult to compromise the integrity of the network behind cryptocurrencies.
disadvantages of investing in cryptocurrencies
- The cryptocurrency market is highly volatile; It can be difficult to predict when values will rise or fall, and the drivers of large swings in value may not always be clear.
- Although cryptographic blockchains are very difficult to hack, people can be susceptible to hacking, due to the same risks inherent in any online activity.
- Cryptocurrencies are not currently subject to much government regulation, so transactions are not legally protected.
how to invest in cryptocurrencies in 2022
crypto investment is becoming more accessible every day. Various exchanges are available, similar to those used for traditional investments. you can set up an account in minutes. But, just like investing in any asset, it can be wise to research a particular currency before investing. If you’re wondering how to invest in cryptocurrency for the first time, the following five steps can help you get started.
step 1: choose which cryptocurrency to invest in
In the same way that you would assess the potential risks and financial health of a company before buying its stock, you will want to carefully understand and evaluate the different and unique characteristics of each cryptocurrency you are considering investing in. you can choose to invest in one or several different cryptocurrencies.
Examining cryptocurrencies can be more difficult because they have become a popular vehicle for fraud, such as pump-and-dump schemes. Those risks may have you wondering how to invest in cryptocurrencies without falling victim to a scam. Feldman notes that “to avoid pump and dump schemes, you should not invest in smaller/newer cryptos that are heavily promoted on social media platforms. Remember that it is your responsibility to analyze the investment risk of a given cryptocurrency and that social media experts may not have your best interests in mind. In addition, you may be able to minimize your exposure to fraud risk and cybersecurity risk by investing through a large and reputable platform.”
step 2: select a cryptocurrency exchange
You must buy crypto through an exchange such as coinbase.com, binance.us, crypto.com, or kraken.com. Some factors you may want to consider when selecting an exchange are security, fees, trading volume, minimum investment requirements, and the types of cryptocurrencies available for purchase on a given exchange.
Step 3: Consider digital wallet and storage options
crypto is completely digital, so you need a digital place to store the coins you owe. One option, according to Feldman, is his investment platform. “As the cryptocurrency market has developed, most of the newer entrants choose to store their cryptocurrency investments with the investment platform they are using,” explains Feldman. “if you invest with coinbase, for example, the platform will take care of the safekeeping and custody of your assets; that kind of platform will be regulated, well protected against hacking and cyber threats, and have a lot of financial insurance,” says feldman. if you choose not to invest through the most popular platforms, you will need a digital wallet; these contain the private keys that allow you to access your crypto by unlocking the digital identity associated with your property, recorded on the blockchain. you can choose a “hot” or “cold” digital wallet. a hot wallet can be accessed over the internet and is generally more convenient. A cold wallet is a physical storage device, much like a USB drive, that keeps your cryptocurrency keys completely offline and generally more secure.
step 4: decide how much to invest
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As with any investment, the amount you choose to invest in cryptocurrency will depend on many factors, including your budget, risk tolerance, and investment strategy. You’ll also want to consider the minimum investment requirements and transaction costs, which vary across crypto exchanges.
if you want to invest in a cryptocurrency with a high value per coin, feldman notes, “most exchanges let you invest in dollars, rather than buying a whole coin, so you don’t have to come up with tens of thousands of dollars to invest in bitcoin, for example. focus on the total dollars you want to invest and not the number of coins you want to buy. also, always remember, never invest more than you can afford to lose”
Step 5: Manage your investments
cryptocurrency is a unique investment, because it can be used to buy things and can also be held as a long-term investment; How you manage your cryptocurrency holdings depends on your investment strategy and goals. You may want to consider applying the hidden way, a philosophy focused on regular investing, diversification, and long-term investing. stash can help you manage your crypto investments with automated investment portfolios that include cryptocurrencies.
How to keep your cryptocurrency secure
Taking precautions to keep your crypto investment safe is one of the unique concerns that come with this type of investment. some tips that may help:
- Deal only with reputable exchanges and digital wallet providers.
- Protect access with strong passwords, two-factor verification, and secure internet connections.
- Watch out for phishing scams targeting cryptocurrency users.
- do not share your password or password with anyone.
related investments to explore
If you’re not ready to dive into crypto yet, there are a few related investments to consider. For example, some exchange-traded funds (ETFs) offer “ways to play” in the cryptocurrency market, but do not hold cryptocurrencies or their derivatives directly. Generally, these ETFs hold shares in companies with exposure to or participation in processes that interact with or support the crypto markets by engaging in mining or simply holding large balance sheet positions in cryptocurrencies. these investments allow you to enter this emerging landscape without taking the step of cryptocurrencies.
invest in cryptocurrencies with stash
Whether you’re charmed or intimidated by cryptocurrencies, understanding how to invest in cryptocurrencies opens up your options if you decide to explore this type of security. With Stash, you can gain exposure to select cryptocurrencies through the Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Trust (Ethe), which are now components of Stash Smart Wallets.
frequently asked questions about investing in cryptocurrencies
what should I know before buying cryptocurrencies?
Cryptocurrencies can be a risky investment, so approach them with your eyes open for possible dangers. digital currency can be volatile, is largely unregulated, and there are many unknowns about how this new form of currency will develop in the future.
what to look for in a cryptocurrency to invest
Each cryptocurrency is different, so the best option depends on your individual circumstances. That said, beginning investors may want to explore more established coins as there is a lot of information out there on how they work and how they perform over time. Feldman notes that “Bitcoin may be a very natural place to start, thanks to its size, its unique store-of-value characteristics, the lower technical complexity that supports the investment case, and the mature institutional market that supports it.”
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