Over the last decade, cryptocurrency evolved from an obscure market into a skyrocketing investment. This beginner’s guide will shed light on the concept and teach you how crypto works, whether it’s right for you, and how to invest in it.
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What is Cryptocurrency?
Crypto is a digital, decentralized currency that doesn’t use a central authority to create more units or verify transactions. Instead, as the name suggests, it prevents counterfeiting via cryptography.
How it Works
Blockchain technology is crypto’s backbone, consisting of individual data “blocks” that can contain information about anything, such as transactions someone makes. Each block includes a reference to the one before it, creating a chain of blocks in a row. The connection to the previous block relies on cryptography to make the chain immutable, preventing hackers from altering the info.
Although Bitcoin (BTC) is the most well-known cryptocurrency, thousands are in existence now. After all, new coins can piggyback onto an already well-established network of verifying blocks, using smart contracts to create a new currency at the drop of a hat.
Cryptocurrencies for Beginners
Again, BTC is arguably the grandfather of all crypto coins, having generated a market capitalization of $128 billion over its 10-plus years. But it’s not the only digital currency first-time investors should consider:
- Bitcoin: As the most popular coin, Bitcoin is an excellent starting place for beginners. All currency exchanges support Bitcoin, so you always know what you’re buying into; it’s essentially as good as digital cash these days, giving it a competitive advantage over most other coins.
- Ethereum: Another cryptocurrency, but its main focus is to help people purchase applications without an intermediary. For example, you could buy an Apple Mac computer without needing its store.
- Cardano: This coin primarily stores private data, and it’s more energy-efficient and less expensive than Ethereum.
Overview of Investing
Investing in crypto takes on many forms, such as buying it directly or investing in companies that deal in it. To invest directly, you can use a crypto exchange or certain broker-dealers to make the purchase.
Different Types of Crypto Investing
Your first thought of investing in crypto may conjure images of buying and holding a coin or more. Buying crypto directly on the exchange, such as through XRP, is certainly the most common way to include exposure in your portfolio, but it is far from your only option:
- Buy coins directly: You can choose to purchase a cryptocurrency directly and store it for later value. Your options range from established digital currencies like Bitcoin and BNB, stablecoins like Tether and USD Coin, or more niche options.
- Invest in crypto companies: You can invest in companies that focus on crypto as part of their dealings. For example, there are crypto mining companies, companies that support crypto like PayPal Holdings Inc. and Robinhood Markets Inc., and several other companies with some degree of crypto exposure. Some companies, like MicroStrategy Inc., hold substantial amounts of crypto in their balance.
- Crypto-focused funds: Instead of investing in a particular company, you can decide to invest in a cryptocurrency-based fund instead. Your choices include ETFs, such as futures funds and index funds, or a range of relevant investment trusts.
How to Invest in Crypto
If you’re willing to take the risk on cryptocurrency, starting with your first coin is a relatively straightforward process:
- Choose a crypto exchange
- Buy crypto
- Store crypto in a “wallet”
1. Choose a Crypto Exchange
First, like choosing a broker for stocks, you need to find an exchange to buy your crypto on. After choosing an exchange to begin your crypto investment journey, you can create an account with them. There are seemingly countless options, but the most common exchanges are:
- Coinbase
- Binance
- Kraken
- Gemini
- XRP
- GDAx
2. Buy Crypto
With an approved account, you can purchase crypto on these exchanges using your debit card. Most allow you to choose between different coins, such as BNB or Bitcoin. Depending on your choice, one coin could be valued at thousands of dollars, but you don’t have to buy an entire coin; first-time investors often get a fraction of a coin. However, keep in mind that, like stockbrokers, exchanges will charge fees per transaction.
3. Store Crypto in a “Wallet”
After buying a unit, it’ll go into your digital “wallet.” This virtual container is yours when you create your account, holding all the codes for your crypto.
To get into more detail, there are two types of wallets: software and hardware. Software wallets are merely programs that store your coins; you need them to trade, and you’ll get one when you create your account on an exchange.
On the other hand, a hardware wallet is a physical device that stores your crypto. It looks and functions similarly to a USB drive, but you only want this if you’re buying massive amounts.
Is Investing in Crypto Risky?
here’s no way around it: It is considered risky to invest in crypto.
Even the most established digital currency is more volatile than any stock. Additionally, regulatory changes could impact future prices; in the worst-case scenario, crypto becomes illegal and worthless overnight. This risk is possible even with stablecoins like Tether and USD Coin.
Still, many investors are attracted to the potential upsides. So if you decide to invest, be sure to research the coin you’re interested in before buying a unit. Moreover, consider the transaction fees as these vary between currencies and exchanges.
The crypto space continues to evolve every day, so be mindful of new developments that could impact your holdings. And, of course, invest only what you’re willing to lose, especially in a volatile asset.
Protecting Yourself While Investing
Take extra caution in protecting yourself and your investment capital. Crypto comes with a few common concerns, raising skepticism in those who aren’t sure of exposure.
As you learn more about investing in crypto, read the fine print and take the initiative before creating an account. The prospectus will inform you about the company’s inner workings, which can provide peace of mind regarding your security.
Thorough research is a great way to alleviate these concerns and understand what’s behind the platform. Consider who owns the marketplace and learn more about the company, what stage of development it’s in, and how old it is.
Unfortunately, crypto is susceptible to technical issues and hackers unlike other investments, further emphasizing the need to research and understand the details.
Still, at the end of the day, investing in crypto has plenty of potential that makes it worth considering the opportunity.
Conclusion
Cryptocurrency uses blockchain to assign ownership, so its value is entirely based on market demand; these decentralized coins have no intrinsic value. As a result, investors should proceed with caution with this volatile asset, but it’s easy to start; just open an account at an exchange, which functions like a broker.