Cryptocurrencies run on a rather enigmatic concept. Several people don’t exactly understand how the technology behind cryptocurrency works, wrapping heads around crypto as an investment, is a whole other thing. In the last few years, cryptocurrencies have witnessed jaw-dropping growth much to the surprise of investors. Read more
This guide includes all the details you need to start your crypto investment journey.
What is crypto?
Essentially, cryptocurrency is a digital currency. It is the type of currency that works on blockchain technology that is known to be secure as it is able to establish a consensus among various parties. Cryptocurrency blockchains can be equated to traditional bookkeeping ledgers. The only differences are that these e-ledgers and there is no single bookkeeper. Anyone with access could be a bookkeeper.
Investors are getting more and more interested in investing in cryptocurrencies with each passing day. While Bitcoin is synonymous with cryptocurrencies, there is plenty of other fish in the sea of crypto. It is safe to say that cryptocurrencies are the latest and one of the most exciting asset classes in the market right now.
Ways to invest in crypto
The general notion of investing in cryptocurrency is that you have to buy and sell digital tokens. While this is the most obvious and direct way to invest, you can explore several options:
Invest in cryptocurrency companies: You can choose to put your money in companies that focus partially or entirely on cryptocurrencies. These could be mining companies, mining hardware-making firms, and other such firms that back cryptocurrencies in one way or the other.
Invest in cryptocurrency-focused funds: If you choose to not opt for a single cryptocurrency company, you could go for a cryptocurrency-focused fund. You may invest in exchange-traded funds (ETFs), like index funds and futures funds or explore some of the options of cryptocurrency investment trusts.
Invest in a cryptocurrency IRA: How can you invest in cryptocurrencies and also avail the tax benefits that come through an individual retirement account (IRA)? The answer is an investment in a cryptocurrency IRA. With the services that a crypto IRA provider gives you access to, you could get more secure storage for digital assets.
Become a crypto miner or validator: Being a miner or a validator on the crypto network is one of the most direct methods to invest in crypto. You could earn rewards in crypto that can be held onto as investments or exchanged for another profitable option such as another crypto or money.
Steps to crypto investment
To make a direct investment in cryptocurrencies, you will have to use a cryptocurrency exchange:
Identify the cryptocurrency exchange you want to go with. Opt for a renowned exchange that offers a good and wide selection of currencies.
Open a trading account with the cryptocurrency exchange. The registration process will require personal information details for identity verification.
Add funds to your account using the currency of your choice. This is an important step before buying a cryptocurrency.
Pick the cryptocurrency you want to invest in. Conduct a thorough research before coming to a conclusion. You can also invest in multiple cryptocurrencies simultaneously.
Place a buy order. Your exchange will have a set of steps outlined to do so. Follow these steps to complete your order.
Keep your cryptocurrencies safe in a digital wallet. Once your order is processed, the details required to access the asset are stored in your own unique digital wallet. The wallet may be hosted by the exchange itself or by an independent wallet provider.
Things to know before investing
It would be wiser to keep cryptocurrencies as a small part of your investment portfolio. Reach out to a financial advisor to understand how you can allocate your assets and maintain a diverse portfolio.
Your investment size is directly related to your appetite for risk and the time you have at hand.
Cryptocurrencies are categorized as assets like a stock or a property for taxation. Every time you make a profit on your crypto holdings, you will be liable to pay capital gains tax on your earnings. Make a note of these when you are budgeting your expenses and planning for taxes.
Given the volatile nature of cryptocurrencies, several investors look at thema as short-term investments. It may be likely in the future that cryptocurrencies stabilize and offer greater returns in the long run.
Advantages of crypto investing
Investing in cryptocurrencies comes with many benefits like diversification, return potential, and utility. Diversifying portfolios not only spreads the risks but also increases the probability of earning more. Cryptocurrencies are becoming popular portfolio diversification investments as they offer great returns. Also, it is soon becoming an investment you can use as it can be a mode of payment.
You should never lose sight of the drawbacks of cryptocurrencies in order to be a smart investor. First and foremost is the fact that they are extremely volatile. There is a lack of any regulation and thus it is best to enter the market at your own risk.
Cryptocurrencies have some common pain points like credibility, security, and privacy. There’s a reluctance among investors who remain skeptical about the crypto platforms. A smart move to address this concern is to do your own research, know which cryptocurrency you want to invest in, and understand what went on behind the platform. Learning about the company and its founding team can help you know how secure the platform is.
Unlike traditional investments, cryptocurrencies are more prone to cyber-attacks and hacking. There is a possibility of facing technical issues as well. It is thus important that you have a proper understanding of the marketplace you work in.
If you are just getting started, you could play it safe by trading on a platform where the high-profile investors are. When this is backed by a great company structure, you can expect some stability in the marketplace. Since the cryptocurrency market is new and evolving, learning about this space is an ongoing task. As you do your research to understand how to invest in crypto and earn a profit, get into the practice of reading in between the lines. Before you open a trading account, thoroughly read the company’s prospectus and get the hang of its inner workings. These details will help you get a clearer picture of how secure your investments would be.