Cryptocurrency is popular among investors as a way to diversify their portfolios. But it carries significant risk and volatility. It is also less regulated than other investment assets. That could mean if an exchange where you invest gets hacked, you lose your money.
You must be confident enough to ride the wild swings of price if you want to make crypto a part of your portfolio. Here’s how it works.
The Basics
Cryptocurrency is a digital asset that can be bought and sold, much like stocks or other types of investments. Unlike stock ownership, buying cryptocurrency does not give you legal rights or ownership of the company behind it. Rather, you’re betting that its value will rise.
Investing in crypto can be risky. It’s a speculative investment, and its values fluctuate constantly, making it more like gambling than investing in long-term bonds or index funds. Because of this, you should never invest more than you can afford to lose.
One of the most common ways to invest in crypto is via a cryptocurrency exchange or investment platform. These can offer hands-on experience with the process of buying and selling coins, which can be helpful for understanding how the market works. They also provide security and convenience, though trading fees can be high.
Investors buy cryptocurrencies in the hopes that their prices will increase, just like they would purchase shares of a company in the hope that its stock price will go up. However, determining which cryptocurrencies to invest in requires research and careful consideration. You’ll want to consider the value of each coin, how widely it’s being used, and whether or not the people behind it are credible. You can find this information online through the projects’ websites and “white papers.” You may also want to read reviews of other investors who have invested in the project.
Platforms
Investing in crypto involves risk, and you should be sure to understand what you’re buying before making any purchases. There are a variety of platforms that you can use to buy or trade cryptocurrencies, including traditional investment platforms and crypto exchanges. Each platform has its own fees, which can vary widely.
A good cryptocurrency exchange will have a wide selection of currencies to choose from and a user-friendly interface. It should also offer education resources, which can be helpful for beginners. In addition, it should be secure and have a good track record of avoiding hacker attacks.
There are dozens of crypto trading apps available, and many of them have different features. For example, some have low trading minimums — such as $5 or $10 per transaction — while others may charge flat or percentage-based fees. You should also consider whether or not the app you are considering is available in your state or country.
Some of the more popular crypto trading platforms include Coinbase, Kraken and Binance. These platforms allow you to buy and sell a large number of coins, and they tend to be the most competitive on price. However, you can also purchase cryptocurrencies through traditional brokers like Interactive Brokers or TradeStation and financial apps such as Robinhood and tastyworks. Lastly, you can also use your own computer to set up a peer-to-peer crypto exchange called Bisq, which allows you to trade without an intermediary.
Funding
When investing in crypto, you’ll want to make sure you’re doing so on a platform that is regulated and offers security. You’ll also want to research the coin or token you plan on purchasing. Remember, unlike stocks, cryptocurrencies don’t represent ownership in a company and aren’t subject to the same financial reporting requirements. Therefore, discerning which projects are viable can be challenging. If you’re unsure, consult with a financial adviser who’s familiar with cryptocurrency.
Another consideration is that, similar to collectibles, crypto does not offer the same legal protections as traditional investments. You’ll also need to decide how you’ll store your coins. Most newer participants choose to have their investment platform handle this for them; they prefer platforms that are reputable and well-protected against cyber threats and hacking. Typically, they’ll select a platform that high profile investors have worked with.
Finally, as with any investment, you’ll need to understand the market and have a solid strategy for how you’ll make money. For example, like the stock market, cryptocurrencies can rise and fall in value. However, unlike the stock market, they’re not tied to consumer interest and don’t have the same return potential. Instead, a cryptocurrency’s value is based on the amount of people willing to buy it. This is called the demand principle. As demand increases, a cryptocurrency’s value will rise.
Storage
When you invest in a cryptocurrency, you get a digital token that can be transferred from wallet to wallet. Each crypto wallet has public and private keys, a combination of long strings of numbers and letters that allow users to manage their assets. Storing these digital tokens safely is called ‘custody’, and it’s one of the most important aspects of investing in crypto.
Cryptocurrency exchanges, apps and stock brokers all take custody of investors’ crypto when they buy coins on their platforms. While this may offer the least amount of work on the user’s part, it also exposes investors to hacking risks.
Tollo says that the best practice for investors is to store their crypto in a hardware wallet, which is designed to keep private keys offline and immune to online software-based hacking attempts. These wallets are a little clunkier to use than online or app-based wallets, but they can offer the best protection against theft and loss. Ideally, they should be used in conjunction with other self-custody practices like strong passwords and cold storage devices.
