Cryptocurrency Investment Guide: Steps and Strategies for Beginners

How Do You Invest in Cryptocurrency?

You can invest in cryptocurrency in several ways, from buying digital coins directly to investing in companies connected to the crypto industry. Make sure you understand the risks, including high volatility and transaction fees, and don’t invest more than you can afford to lose. If you’re a new investor, you can use this article as a guide to help you navigate the complex world of cryptocurrency with informed strategies.

Key Takeaways

• Cryptocurrency investing involves buying cryptocurrencies directly or investing in crypto funds and companies.
• Buying crypto through exchanges requires account setup and funding with fiat money.
• Crypto prices are volatile, and investors should avoid investing more than they can afford to lose.
• Cryptocurrency-focused funds offer a range of options, including ETFs and crypto investment trusts.
• Investors must consider transaction fees and tax consequences related to crypto investments.

Exploring Cryptocurrency Investment Options

When you think of investing in cryptocurrency, you might think about buying and holding one or more crypto coins. Buying cryptocurrency directly is probably the most common way to add crypto exposure to your portfolio, but when it comes to investing in cryptocurrency, you have a few different options:

• Buy cryptocurrency directly: You can choose to directly purchase and store one or more cryptocurrencies. Your options range from the most established digital currencies like Ethereum and Bitcoin to virtually unknown coins that are newly released.
• Invest in cryptocurrency companies: You can invest in companies with a partial or total focus on cryptocurrency. Your options include cryptocurrency mining companies, mining hardware makers, companies like Robinhood Markets Inc. (HOOD) and PayPal Holdings Inc. (PYPL) that support cryptocurrency, and many others with varying levels of crypto exposure. You also can invest in companies like MicroStrategy Inc. (MSTR), which holds large amounts of cryptocurrency on its balance sheet.
• Invest in cryptocurrency-focused funds: If you don’t want to choose among individual cryptocurrency companies, then you can decide to invest in a cryptocurrency-focused fund instead. You have a choice of exchange-traded funds (ETFs), such as index funds and futures funds, in addition to a range of cryptocurrency investment trusts. In January 2024, the Securities and Exchange Commission approved the first Bitcoin Spot ETFs. These funds hold bitcoin and offer shares to investors based on bitcoin spot prices.1
• Invest in a cryptocurrency Roth IRA: If you want to invest in cryptocurrency and also garner the tax advantages afforded by an individual retirement account (IRA), then you can consider investing in a cryptocurrency Roth IRA. Using the services of a crypto IRA provider can also facilitate more secure storage for your cryptocurrency holdings.
• Become a crypto miner or validator: Perhaps the most direct way to invest in cryptocurrency is to mine it or act as a validator in a crypto network. Cryptocurrency miners and validators can earn rewards in crypto, which they can either hold as investments or exchange for another currency.

Fast Fact

Some crypto-focused funds invest in cryptocurrency directly, while others invest in crypto-focused companies or derivative securities such as futures contracts.

Steps to Purchase Cryptocurrency from an Exchange

If you want to invest in cryptocurrency directly, then you can use a cryptocurrency exchange. Here’s how to buy cryptocurrency through an exchange:

1. Select a reputable exchange. Choose a well-known cryptocurrency exchange with a wide selection of digital currencies.
    
2. Create an account. Register by providing your personal details and verifying your identity.
    
3. Fund your account. Deposit fiat currency like U.S. dollars into your exchange account to prepare for purchases.
    
4. Choose your cryptocurrency. Research and decide which digital currency or currencies you want to invest in.
    
5. Place your buy order. Follow the exchange’s procedure to purchase your selected cryptocurrencies.
    
6. Store in a digital wallet. Securely save your cryptocurrency in a digital wallet, either hosted by the exchange or provided independently.

Important

As an investor in cryptocurrency, you need to decide how much of your portfolio to allocate to digital assets.

A best practice among investors is to periodically review your entire portfolio to assess the need to rebalance your holdings. That might mean increasing or scaling back your crypto exposure, depending on your investment goals and other financial needs.

Essential Considerations Before Investing in Cryptocurrency

Investing in cryptocurrency is risky. The prices of cryptocurrencies, even the most established ones, are much more volatile than the prices of other assets like stocks. The prices of cryptocurrencies in the future could also be affected by regulatory changes, with the worst-case possibility that cryptocurrency becomes illegal and therefore worthless.

Many investors are nonetheless attracted to the potential upside of investing in crypto. If you decide to invest, it’s important to carefully research any digital coin before buying it. Pay attention to transaction fees when making crypto purchases because these fees can vary widely among currencies.

The cryptocurrency space is evolving rapidly, so it’s also important to pay attention to new developments that may affect your crypto holdings. Cryptocurrency investors need to understand the tax consequences of using crypto, especially if they purchase something or sell their crypto investments.2

Given the riskiness of cryptocurrency as an asset class, it’s especially important not to invest more money in crypto than you can afford to lose.

Is Cryptocurrency Actually a Good Investment?

Investing in cryptocurrency is not for everyone. The prices of cryptocurrencies can be volatile, which makes this type of investing a poor choice for conservative investors. If you are willing to assume greater risk as an investor, then investing in one or more cryptocurrencies may be right for you.

How to Invest in Crypto for Beginners?

You can invest in Bitcoin directly by using one of the major cryptocurrency exchanges, such as Coinbase or Binance. Another way to gain investment exposure to Bitcoin is to buy shares in a company with significant Bitcoin exposure, such as a Bitcoin mining company. A third option is to invest in a Bitcoin-focused fund such as an exchange-traded fund (ETF).

Which Crypto Is Best to Invest?

There are thousands of cryptocurrencies to choose from. Some experience wild price swings between trading days and volatile drops or increases, and others make small incremental changes. Your strategy, goals, risk tolerance, and preferences will dictate which is best for your portfolio, if any.

The Bottom Line

Investing in cryptocurrency offers the potential for significant gains, but it comes with high risks and price volatility. Understanding these risks is essential for anyone considering entering the market, as there are no guarantees of profit.

As of the date this article was written, the author does not own cryptocurrency.