Investing in Cryptocurrency

What is cryptocurrency?

Cryptocurrency is digital money. This type of currency uses blockchain technology, which is considered secure because it is able to create distributed consensus even among untrustworthy parties. A cryptocurrency blockchain is similar to legacy ledgers, except that the ledger is electronic, and anyone with access to the ledger can also be the bookkeeper.

Investors all over the world have invested and started investing in cryptocurrency. While Bitcoin is probably the most popular digital currency, thousands of cryptocurrencies already exist. Cryptocurrency can be considered as one of the newest and most exciting asset classes available to investors.

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  • Cryptocurrency is digital money that is secured by blockchain technology.
  • Investing in cryptocurrency can take many forms, from buying cryptocurrencies directly to investing in crypto funds and companies.
  • You can buy cryptocurrencies using a cryptocurrency exchange or through some brokers.
  • Investing in cryptocurrency is very risky, so it is important not to invest more money than you can afford to lose.

Understand investing in cryptocurrency

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

  • Buy cryptocurrency directly: You can choose to buy and store one or more cryptocurrencies directly. Your options range from more established cryptocurrencies like Ethereum and Bitcoin to almost unknown coins newly released in the Initial Coin Offering (ICO).
  • Invest in cryptocurrency companies: You can invest in companies that are partially or completely focused on cryptocurrency. Your options include crypto-mining companies, mining hardware makers, and companies like Robinhood Markets, Inc. (HOOD) and PayPal Holdings, Inc. (PYPL) that supports cryptocurrency and many other companies with different levels of exposure to cryptocurrencies. You can also invest in companies like MicroStrategy Incorporated (MSTR) that hold large amounts of cryptocurrency on their balance sheets.
  • Invest in funds focused on cryptocurrency: If you do not want to choose among individual cryptocurrency companies, you can decide to invest in a crypto-focused fund instead. You have a choice of exchange-traded funds (ETFs), such as index funds and futures funds, as well as a range of cryptocurrency mutual funds. Some crypto-focused funds invest directly in cryptocurrencies, while others invest in crypto-focused companies or derivative securities such as futures.
  • Invest in a cryptocurrency IRA: If you want to invest in cryptocurrency and at the same time get the tax benefits of an Individual Retirement Account (IRA), you can consider investing in a cryptocurrency IRA. Using the services of an IRA crypto provider can also facilitate more secure storage of your crypto holdings.
  • Become a miner or crypto checker: Perhaps the most direct way to invest in cryptocurrency is to mine it or work as a validator in a crypto network. Cryptocurrency miners and checkers earn rewards in cryptocurrencies, which they can hold as investments or exchange for another currency.

How does cryptocurrency investing work?

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

  1. Choose which cryptocurrency exchange you want to use. Your best bet is a reputable and well-known exchange with a large selection of currencies.
  2. Create an account on the cryptocurrency exchange. You will need to provide your personal information and verify your identity to complete the registration process.
  3. Fund your account with paper money. Before you can buy any cryptocurrency, you need to fund your exchange account with another currency like US dollars.
  4. Select the cryptocurrency you want to buy. You can choose to invest in one or more cryptocurrencies. Research your options to help you decide.
  5. Place an order for your chosen cryptocurrency. Follow the steps required by the exchange to submit and complete a purchase order for one or more cryptocurrencies.
  6. Store your cryptocurrency in a digital wallet. After the purchase is completed, the information you need to access your cryptocurrency is kept in the digital wallet. This crypto wallet can be hosted either by a cryptocurrency exchange or an independent wallet provider.

As a cryptocurrency investor, you decide how much to allocate your portfolio to digital assets.

It is a best practice among investors to review your entire portfolio periodically to rebalance your holdings. This could mean increasing or decreasing your exposure to cryptocurrencies, depending on your investment goals and other financial needs.

What you need to know before investing in cryptocurrency

Investing in cryptocurrency is very risky. The prices of cryptocurrencies, even the most established cryptocurrencies, are more volatile than those of other assets such as stocks. Future cryptocurrency prices could also be affected by regulatory changes, with the potential for cryptocurrency to become illegal and therefore worthless.

However, many investors are attracted to the potential upside of investing in cryptocurrencies. If you decide to invest in cryptocurrency, it is important to carefully research any digital currency before purchasing it. Pay attention to transaction fees when purchasing cryptocurrencies, as these fees can vary greatly between currencies.

The cryptocurrency space is rapidly evolving, so it is also important to be aware of new developments that may affect your crypto holdings. Cryptocurrency investors need to understand the tax consequences of using cryptocurrencies, especially if they buy something or sell their crypto holdings.

Given the risks of cryptocurrency as an asset class, it is especially important not to invest in cryptocurrencies with more money than you can afford to lose.