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Buying cryptocurrency has never been easier. You just register with an exchange, click “buy” and Bob’s your uncle — you’re a bonafide crypto investor.
But there’s more to investing than just buying your chosen cryptocurrency. As an experienced investor, you probably have many questions about crypto, including what you need to know before investing, how to buy it, and how to safely store (and protect) your investments.
We’ll answer these essential questions, and more, in this guide for how to invest in cryptocurrency.3 Things to Know Before Investing in the Cryptocurrency Market1. Cryptocurrency Is Still a Volatile, High-Risk Investment
Cryptocurrencies are very volatile. Bitcoin is a prime example, as it’s not uncommon for it to drop 30% one week and then skyrocket to record highs the next.
Bitcoin might be doing really well compared to when it first gained popularity, but the returns are neither stable nor guaranteed. Anyone who bought BTCUSD in late 2017 and sold anytime before October 2020 suffered a loss. Bitcoin Price Index from October, 2017 through October, 2020 (Source: Coindesk)
If you do buy crypto, we recommend only allocating a small portion of your portfolio to it to start.2. Cryptocurrency Holdings Are Not FDIC Insured
If your bank fails, your checking and savings accounts will be insured for up to $250,000 each. But if your crypto exchange goes bankrupt, gets hacked or simply closes down with little notice, you’re pretty much out of luck.3. Cryptocurrency Is Taxable
Cryptocurrency gains are taxable. The IRS decided to start taxing crypto gains as capital gains in 2014, and has since issued at least 24,000 warnings to the crypto community. How to Buy CryptocurrencyChoose an Exchange
Your first step when investing in crypto is to choose a reputable exchange. An exchange is where you’ll be buying, selling and, likely, storing your crypto.
Luckily, crypto has been around long enough that the biggest exchanges have become quite robust and user-friendly. There are many that we recommend overall, but here are three of the best exchanges for beginners:
- Coinbase is an excellent first destination for most beginners. They’re a publicly-traded company with over 73 million users, and are known for their superb and intuitive UI and the ability to earn free crypto through Coinbase Learn. Drawbacks are higher-than-average fees and the inability to extract your private key to a cold wallet. Find out more in our Coinbase Review.
- eToro lets you invest in stocks, ETFs, commodities, and over 30 popular cryptocurrencies. You only need $10 to get started, and there’s a simple 1% fee structure for buying or selling cryptocurrencies. Overall, eToro provides a very simple way to add crypto to your portfolio.
- Binance.US competes with Coinbase by offering lower fees, a better selection of cryptocurrencies and more advanced features to grow into. The platform is under intense regulatory scrutiny; while this is not a dealbreaker as it’s common among crypto platforms, it’s something to be mindful of.
- BlockFi offers investors the ability to get crypto-backed loans. And for those wishing to earn even more crypto, you can earn bitcoin back on any purchases made with The BlockFi Rewards Visa® Signature Credit Card. Find out more in our BlockFi Review.
Choose Which Cryptos You’d Like to Invest In
Bitcoin isn’t the only digital currency in town. In fact, there are over 7,500 cryptos in existence.
Luckily, most exchanges only offer a couple of dozen. These are typically the most legitimate and viable coins with a respectable market cap.
Here are some examples of the top-traded cryptos today:
- Bitcoin (BTC USD): The king of cryptos is still around and available to purchase on every popular exchange.
- Ethereum (ETH): The second most popular crypto by market cap achieved success through innovation, allowing for the recording of smart contracts to the blockchain.
- Dogecoin (DOGE): Dogecoin was created in under 2 hours as a joke — a loving satire of cryptocurrency. Despite this, DOGE has reached an $85 billion market cap, highlighting the power of speculation and internet chatter.
- Binance Coin (BNB): BNB is the proprietary coin of Binance, the world’s largest coin exchange (Binance.US is the USA-only version). It’s become popular due to its wide acceptance and ability to reduce Binance’s trade fees.
Which ones should you buy? Well, cryptocurrency is so speculative and volatile that choosing the right cryptos for your portfolio may come down to which ones you believe in. For example, do you think Ethereum has more technical merit and worldly applications than Bitcoin?
While stock traders may read form 10-Ks when vetting companies, crypto investors might consider reading whitepapers — like the original one for Bitcoin.Determine How Much Crypto to Buy
How much crypto should you have in your portfolio? I’ve written an entire feature on the subject, but here’s the TL;DR:
I asked two seasoned wealth advisors for an exact number, and their two answers were:
- “Maybe 10% – so if crypto tanks, you can still retire – but I still wouldn’t recommend it.”
- “Get $100,000 in safe investments first,” because if you secure $100,000 in safe investments by the time you’re 35, and keep depositing another $100 monthly, you’ll retire a millionaire.
Not surprisingly, seasoned wealth managers aren’t big fans of crypto because it doesn’t fit into an asymmetric risk profile. It’s too unpredictable — you can’t build a 99% guaranteed wealthy future around it.
Bottom line? Start small. Stick with 10%, or better yet 5%, of your portfolio.
Find out more >>> How Much Crypto Should You Have in Your Investment Portfolio? Safely Store Your Private Keys in a Wallet
Once you buy some crypto, your next decision is how to store your private keys.
To quickly recap, hot and cold wallets live on and offline, respectively. A hot wallet lets you access and trade your crypto with ease, and security measures protecting them are better than ever.
But hackers are getting bolder, which is why some crypto traders, and especially long-term holders, choose to save their private key to a cold wallet — a USB or hard drive that they keep in a safe.
If you’re dabbling in small amounts, and think you’ll keep buying a bit on the regular, a hot wallet will do for now. You can also look into cryptocurrency savings accounts that pay you interest on your crypto as a storage option.
Find out more >>> The Best Cryptocurrency WalletsMaintain Your Investment
Your final step is to maintain your crypto investment. The only way to do this step incorrectly is to buy crypto and completely forget about it. You avoid crypto investment missteps by:
- Adding your crypto to your main investing dashboard so you can monitor its performance over time.
- Since crypto trading is still the Wild West, check headlines regularly to monitor regulatory scrutiny of your chosen exchange.
- Immerse yourself in crypto communities. Visit the crypto subreddit, then sort by new and hot topics. Consider also joining a crypto community via your preferred social media platform, or even attending in-person crypto conferences or meetups.
- Monitor which governments are banning crypto or, conversely, blessing it as legal tender and building a Bitcoin city on a volcano.
- Continue to self-educate on new cryptos and blockchain implementation — and even get paid in crypto for it on Coinbase Learn.
Find out more >>> What is the Future of Crypto and Bitcoin Regulation? Other Ways to Invest in Cryptocurrency
Buying crypto isn’t the only way to “invest” in it. Here are some other, lower-risk methods to consider. Earn Crypto for “Free” Through Learning and Mining
As mentioned, you can actually earn a free trickle of crypto just by learning about crypto on sites like Coinbase with its Earn program. For example, you can earn $2 in Stellar (XLM) just by watching a two minute video:
If you have a powerful computer with a gaming-capable graphics card, you can also mine crypto for free. Mining is the act of leasing your computer’s processing power to the blockchain and receiving a trickle of crypto in return. I wrote a guide on how how to start mining Bitcoin in 60 seconds. Invest in Cryptocurrency Stocks and ETFs
Want to invest in crypto without having to buy it? You’re in luck! The SEC recently approved the first Bitcoin futures ETF, and you can read all about it in our feature Crypto ETFs: How to Invest in a Bitcoin ETF.