A Guide on How to Get Started Investing in Cryptocurrency
Even if you’re not a crypto investor, you’re probably aware of how fast this currency has grown. This past February, Bitcoin hit $1 trillion in market value for the first time, with 90% of its supply mined so far.
Of course, it’s worth remembering that investing is a volatile business, and cryptocurrency is no exception. That’s why it pays to use smart strategies as you dive in!
If you’re wondering how to get started investing in cryptocurrency, especially as a beginner, we’ve got you covered. Here’s what you should know about adding crypto to your existing portfolio.
What Is Cryptocurrency?
Before you jump straight into investing, it’s important to understand what you’re getting yourself into. Just as you’d do your homework before investing in stocks and bonds, it’s important to get to know what cryptocurrency is and how it works.
The Basics of Cryptocurrency
Cryptocurrencies are a form of virtual online currency.
Because they’re decentralized, no single company or country is in charge of the currency. Anyone can use it, making it a bank-free way of building wealth. This makes cryptocurrency portable and private.
While you invest in cryptocurrency as part of a larger portfolio, you can also use crypto as a peer-to-peer transfer system.
The “crypto” in “cryptocurrency” comes from “encryption.” This currency provides enhanced security whenever money transfers ownership. In other words, all transfers are secure, with little risk of compromising your financial details.
What’s more, all crypto transfers are stored in a digital database called “blockchain.” This ensures complete transparency, making it impossible to manipulate any type of cryptocurrency.
Though all of this might sound simple, the truth is that blockchain technology is a recent innovation. Only after decades of computer science breakthroughs has cryptocurrency become possible!
Advantages of Investing in Cryptocurrency
Given the facts above, you may already be able to see why investing in crypto can be a smart idea. If you’re hoping to broaden your portfolio, it offers a few key advantages:
- Diversity: Crypto fluctuates like stocks and bonds, but there’s no correlation between them
- Strong returns: In most cases, your returns for a smart crypto investment will be equal to or greater than a stock investment
- Liquidity: While crypto can be treated like an investment, you can also use it to pay for goods and services
It’s important to keep in mind, of course, that these advantages only hold true for the right investment.
Because there’s limited regulation within the crypto industry, you’ll have to be careful about making smart purchases.
Different Types of Cryptocurrency to Consider
If you’re like most people, the type of cryptocurrency you’re most familiar with will be Bitcoin. Since its launch in 2008, Bitcoin has risen in influence and popularity to become a household name.
However, there are many other digital currencies worth considering as well. Many cryptocurrencies are similar to Bitcoin, but some of them have additional features that add value to your investment.
Here are a few forms of cryptocurrencies that investors should consider:
- Bitcoin (BTC): Popular, expensive, and first on the market
- Ethereum (ETH): Thanks to its “smart contracts,” it’s ideal for complex financial transfers
- Cardano (ADA): A competitor with Ethereum created by a co-founder of Ethereum
- Solana (SOL): A competitor with Ethereum that emphasizes its speedy transactions
- Dogecoin (DOGE): Started as a “joke” currency that is now touted by fans like Elon Musk
- Litecoin (LTC): An adapted version of Bitcoin designed to facilitate easy transfers
- Monero (XMR): Focuses on security, privacy, and total anonymity
- Polkadot (DOT): A cryptocurrency that unifies different blockchains
While you can expect volatility from any of these choices, all of the options above are well worth considering for your portfolio.
Choosing the Right Cryptocurrency for Your Portfolio
Even a small amount of research will show you that there are thousands upon thousands of cryptocurrencies. In addition, that number is growing all the time! It may be tempting to throw up your hands and start buying Bitcoin instead of dealing with the decision fatigue.
However, it’s important to do your homework before jumping into any investment. Here are a few key ways to decide which cryptocurrency is right for you.
A cryptocurrency’s market capitalization is its current market value. Cryptocurrencies with larger market capitalizations (“large cap”) are often, but not always, more stable. Alternatively, cryptocurrencies with smaller market capitalizations (“small-cap”) may be more prone to volatility.
A cryptocurrency’s past price gains can also help you understand how stable it is. Checking the details on past gains—and losses—can help you decide whether you can withstand its volatility.
Time in the Market
Cryptocurrencies that have been around for a while—like Bitcoin and Ethereum—tend to be more stable. Newer cryptocurrencies, on the other hand, may be more prone to major fluctuations as traders buy and sell.
Jumping on board the hype around trending cryptocurrencies isn’t for everyone. However, day traders looking for new investments might use analyst comments to inform their decisions.
How to Get Started Investing in Cryptocurrency
Once you’ve chosen the right crypto and you’re ready to invest, you’ll need to know how to make the purchase.
Set Up a Crypto Wallet
Crypto wallets allow you to store your new currency. You can either use a cold wallet, which is a hardware-based storage device, or a hot wallet, which is a digital wallet you’ll access online. For beginners, Coinbase—a popular hot wallet—is a good place to start.
Decide Where to Buy
You’ll need to choose a platform to buy your cryptocurrency from. There are two options: a cryptocurrency exchange or a traditional broker.
Cryptocurrency exchanges are platforms designed to help people trade crypto. The best of these will have simple apps and online interfaces to help you get started.
An online brokerage can be the right choice if you’re looking for an option more in line with traditional finance. However, keep in mind that many brokerages won’t offer as many types of crypto as a cryptocurrency exchange will.
Whatever you decide, you’ll need to have some important personal documents and information on hand. Plan on entering details about your bank account or your credit or debit card, and have a photo ID and your social security number on hand.
You can also buy crypto at a specialized ATM. Check out this welcome page for more details.
Purchase and Manage Your Cryptocurrency
Once you have everything set up, you’ll want to decide how much cryptocurrency you want to buy and make the purchase!
Just like traditional investment methods, your job won’t stop there. You’ll also need to manage your cryptocurrency investment going forward by monitoring its value and deciding when to sell or buy more.
Investing Tips for Beginners
The actual mechanics of purchasing cryptocurrency are fairly straightforward, but that doesn’t mean you shouldn’t consider your investing strategy. When it comes to crypto for beginners, here are a few quick tips worth knowing.
Prepare for Volatility and Risk
No matter what type of crypto you’re investing in, you’ll need to prepare for risk—with some options carrying more risk than others.
You’ll need to sit down and calculate your own personal risk tolerance to understand how much volatility you can withstand. Some experts recommend allocating no more than 10% of your portfolio to high-risk investments, but this figure will vary according to your situation.
For investors looking for a wild ride with fast-paced trades, crypto will be a welcome addition to their portfolio. For those looking for steady gains with less volatility, it may be better to find a stable crypto investment to stick with for the long-term, regardless of value fluctuations.
Whatever you decide, consider your cryptocurrency investment to be a part of a wider portfolio, in which safer, more moderate investments carry a significant amount of weight as well.
Invest Only What You Can Afford to Lose
As with any investment, if you can’t afford to lose the money you’re sinking into crypto, now isn’t the right time! Given the volatility we’ve discussed above, crypto is better for those who don’t need the certainty of a good return. Be sure to follow best practices for investing—like paying off your debts and starting an emergency fund first—before throwing money into crypto.
Add Crypto to Your Portfolio Today
Though cryptocurrency is a new and sometimes volatile investment, it’s well worth adding to your portfolio. Whether you’re hoping for short-term trading or a long-term investment, take some time to find the right crypto for your needs. After a few minutes to set up your online wallet, you’ll be ready to start earning returns as a crypto investor!
Want more tech and finance tips to help you make crucial decisions? Be sure to check out our other posts for additional insights.