February 26, 2019

How to Invest in Cryptocurrency

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Investing in cryptocurrencies has never been easier. But how do you get started? Learn everything you need to know, including some beginner's mistakes to avoid, in our guide.

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How to Invest

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Cryptocurrencies can be invested two different ways: directly or indirectly.

Direct investing means purchasing a cryptocurrency on your own. You then decide what to do with it. Choose direct investing if:

  • You want to maximize returns.
  • You want complete control over your investment.
  • You understand investing strategies and/or the market.
  • You want to gain investing experience.
  • You want to invest a small amount.

NOTE: ALL investing is taxable .The IRS' guideline explains exactly how to report cryptocurrency investments on your taxes.

Indirect investing is when you invest in cryptocurrency-related products such as stocks, IRA accounts, or companies. Choose indirect investing if:

  • You're weary of crypto's volatility.
  • You want to invest a large amount.
  • You don't have the time to stay attentive and want to use a broker.
  • You want to support crypto, but not through the currency itself.

Keep reading to learn more about both direct and indirect cryptocurrency investing.

You Should Know: Whichever way you choose to invest, remember these key considerations:
  • Your investment goals.
  • The amount of risk you can afford.
  • How much you want to spend.
  • The length of time you want to invest for.
  • If there's a particular industry or cause you're passionate about.

DIRECT INVESTING

You should follow these steps, in order, to begin directly investing in cryptocurrency.

  • Pick a currency
  • Pick a digital wallet
  • Pick an exchange

PICKING A CRYPTOCURRENCY

You now have over 1,500 cryptocurrencies to choose from. They range in value from a few cents each to thousands of dollars. Most currencies allow you to own just a small fraction of the currency, allowing you to make smaller purchases on large value currencies.

Many currencies were designed to be used in a specific way or for a specific industry. The currency Tron is a currency for musicians and creative artists. Dash is meant to handle traditional purchases of goods and services.

Remember, investing in a currency is different from using that currency—just like buying a Ford truck is different than investing in Ford stock. However, a cryptocurrency's dedicated industry or purpose determines a few key things:

  • How you obtain or purchase the currency.
  • How you will invest the currency.
  • The tools and programs available to you.
  • The currency's popularity and therefore its value and growth potential.

For direct investments, you want a currency that has a large user base and is fairly mature (by cryptocurrency standards, that is).

These currencies offer the most investment opportunities and give access to more platforms and tools (e.g., a wider range of digital wallets and trading exchanges).

OUR RECOMMENDATIONS

  • Bitcoin: The first cryptocurrency created, Bitcoin has the largest user base.

    It also boasts the largest market cap out of all of the other cryptocurrencies—52% of the total market. Bitcoin's value changes wildly, but there are a plethora of trading options and tools available.

  • Ethereum: A popular currency amongst companies because of Ethereum's ability to utilize "smart contracts."

    A business sets up a condition (like a job or task). When a client completes the condition, the client gets paid. Ethereum can be traded and invested between individuals without contracts on a large number of exchanges.

  • LiteCoin: One of the most popular alternatives to Bitcoin, LiteCoin's function is similar to Bitcoin's except it prioritizes speed.

    Bitcoin transactions take around 10 minutes, while LiteCoin takes just over 2. Though a popular currency, LiteCoin doesn't have access to as many exchanges as Ethereum or Bitcoin.

  • Ripple: A currency aimed at facilitating payments on a global scale.

    Ripple is a cheap currency that has a market cap of around $13 billion. It's considered stable and highly secure, having gained support from major international corporations.

Once you've picked a currency, you need to buy it. Most cryptocurrencies can be purchased directly through a digital wallet. Keep reading to learn how to pick the right wallet for your investment goals.

You Should Know: Purchasing is only one method of obtaining currencies.

You can also earn them through mining. Mining occurs when you put your computer to work on complicated problems. When the problem is solved, you earn some currency. This is NOT an option for every cryptocurrency.

DIGITAL WALLETS

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A digital wallet is more than just the place you'll store your cryptocurrency. Most wallets also act as a platform to buy, sell, and invest currencies.

Each wallet offers different features and fees. While most offer access to multiple cryptocurrencies, some can only be used with a specific one. That's why it's important to choose which cryptocurrencies you want first.

Wallets have two key components: an address and a private key.

These features work just like the address and keys for your apartment. Your address is a specific location that has all of your stuff, while the key is how you get access to your stuff. The "stuff" for a digital wallet is your cryptocurrencies.

But unlike an apartment, digital wallet addresses change after every single transaction. This is handled automatically through your wallet—it requires NO action on your part.

Why does your digital wallet address change?
Short answer: to increase security. Tracking transactions and breaking into someone's wallet is much harder when the address constantly changes.

Private keys don't change, so it's good to keep them close. Remember: The best way to steal someone's wallet is to steal their private key. You should NEVER store your private key on a site or program you don't trust.

TIP: Do your research BEFORE opening a new wallet or trading on a new platform. Learn as much as you can to ensure that wallet or trading platform is legitimate.

Types of Wallets:
Wallets can be broken down into four main categories. Each category has its own benefits and restrictions.

  1. Hardware Wallets: Similar to USB data sticks, these are small devices that require you to plug them into a computer to access your Bitcoins.
    • PROS: Offline use. Secure/hard to hack into.
    • CONS: Can be lost, stolen, or destroyed.

  2. Software Wallets: These are the most common digital wallets. They are programs that you can download on your computer, phone, or both.

    • PROS: Easily accessible on multiple devices. Lots of features, including access to multiple currencies.
    • CONS: Transaction fees of around 1.5% for every transaction.

  3. Online Wallets: These are internet browser wallets. They function through a webpage.

    • PROS: No downloading. Accessible through most web browsers.
    • CONS: Some don't play nice on mobile devices

  4. Physical Kiosks: Also known as Crypto ATMs. They are located in many major cities, malls, and airports. Mostly focused on Bitcoin.

    • PROS: Secure and simple. Limited fees.
    • CONS:Location specific. Not a lot of extra features.

Fees
Most fees are associated with transactions. Every time you buy or sell a currency, a small fee is usually attached to the sale. The fee is typically 1.5% of the sale value, but can vary. Wallets may also have minimum purchase requirements and deposits.

You Should Know: You can a find free wallet but you'll lose some useful investment features.

For example, you may not be able to trade your cryptocurrency within the wallet or "cash out" your cryptocurrencies to a desired currency like the US dollar.

OUR RECOMMENDATION

Software wallets are the easiest to use AND offer the most options. You can access them from a computer or mobile device, which adds to their convenience and mobility.

Here are 5 of our favorites that work on both iOS and Android systems.

Once you have a currency and wallet selected, all that's left is picking an exchange. Read on to learn how.

PICKING AN EXCHANGE

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For a direct investment strategy, you will invest through a cryptocurrency exchange. Like a stock market exchange, they are places where you can buy and sell cryptocurrencies with other people.

Most wallets have the dual purpose of acting as an exchange platform. Coinbase and Copay are two of the largest examples.

When picking an exchange, consider these factors:

  • The cryptocurrency you're investing in.
  • The currency you want returns in (e.g., your home currency).
  • The size of the exchange (active population).
  • Exchange fees.

Understand the differences between exchanges.

Some allow you to purchase cryptocurrencies using several different foreign currencies, while others don't. Some allow you to trade multiple cryptocurrencies, while others focus on one or two.

The size of the exchange will determine how many trading opportunities you have. Having more people generally leads to faster transactions.

Here are some popular exchanges:

  • Coinbase: One of the most popular and easiest to use. Computer and mobile-supported.

  • BitQuick: A cash deposit-focused exchange that only works with Bitcoin. They have good customer support and many options. There's a flat 2% fee for all purchases.

  • Kraken: Largest exchange in Europe, though it supports the US and Canada as well. It offers users the ability to customize trade deals and has access to multiple currencies.

  • Gemini: US-based exchange that operates in Canada, the UK, and Asian Pacific regions. Offers trades with Bitcoin and Ethereum. It has low transaction fees and is highly secure.

Remember, the buying and selling of a cryptocurrency (the actual investing part) is completely dependent on the tools you choose.

The actual trading of cryptocurrencies functions very similarly to the trading of stocks. As such, many of the same strategies apply.

You can:

  • Buy a currency and hold onto it for a long time.
  • Trade several times in one day.
  • Jump exchanges and currencies or stick with just one.

With direct investing, you're completely in control of the investing strategies. If you don't want this level of involvement, indirect investing may be a better fit. Keep reading to learn more about this option.

INDIRECT INVESTING

Indirect investing doesn't involve managing a specific currency. Because most of these are more traditional investing options, they can be handled by a broker.

Your indirect investing options are:

  • A crypto company stock
  • The Bitcoin Trust
  • An IRA
  • A future

You Should Know: Even though these options may not involve directly trading a cryptocurrency, their performance depends on how their corresponding currency is performing on an exchange.

A Crypto Company Stock

Many companies invest in either cryptocurrency or in the technology behind cryptocurrencies. By investing in these company stocks, you indirectly support cryptocurrencies.

Most companies that have developed their own cryptocurrency, like Ripple, have only publicly traded stock options. Your best bet is to choose a publicly traded company that might not be exclusively focused on crypto but is making large strides in the industry.

Some major publicly traded companies that support crypto in some way are:*

  • IBM
  • Facebook
  • Intel Corporation
  • Morgan Stanley
  • Daimler AG

*These are to be considered examples only. We aren't recommending these as investing options.

The Bitcoin Trust

This trust is traded on the NASDAQ, and its ticker symbol is GBTC. Each share of the trust is worth a small fraction of a Bitcoin, around .09 of one Bitcoin.

If you own a share of the trust, you don't own your Bitcoin portion per se. The company Xapo, a Hong Kong-based company, is essentially holding the Bitcoin on your behalf.

Because trust shares are tied to Bitcoin, you'd think that the price of Bitcoin should influence the trust share price. But this isn't always the case. The trust price tends to be fairly fickle and follow its own rules.

The trust charges a high premium fee of 2% annually. For a comparison, most trust fees hover around 0.25 to 0.5%.

On the positive side, some brokers will accept it, so there's definitely a convenience factor. It's something where you can spend normal dollars while not having to manage it yourself.

A Crypto IRA

Crypto IRA's are companies that buy and hold cryptocurrencies in an IRA account for you to use towards retirement.

Basically, you tell these companies which cryptocurrency you want them to invest and how much. You give them the money, and they do the investing.

The gains made from their crypto investments go into either a traditional IRA or a Roth IRA. This is a long-term strategy.

There are three big crypto IRA companies:

NOTE: While they are becoming more popular retirement options, the nature of cryptocurrencies generally makes these IRAs riskier than traditional investment options.

Crypto Futures

This is a contract between two parties to buy/sell a certain amount of something at a certain date. Example: "I will buy 100 chickens from you for $500 exactly 5 years from now."

This contract is the thing you are trading, not the actual items listed in it. In other words, a future represents an asset, but it's not the actual asset.

If you agree to buy a future contract, in the end, you own the contract, not the asset listed in the contract.

With cryptocurrency this means a couple things.

  • You're betting on the future price of a cryptocurrency (with the hopes that the future price is greater than the current price).

  • You won't actually be trading the currency itself (this is what makes it an indirect method).

At the moment, this strategy is limited to Bitcoin. You only trade through the Cboe Exchange.

You Should Know: Since cryptocurrencies haven't been around very long, future contracts are short term. They range from a few months to just a couple of years.

FAQ:

Why invest in cryptocurrencies instead of other investments?
Most cryptocurrencies are seen as extremely volatile, meaning their price fluctuates over relatively short periods of time. This provides opportunities to make money faster than other methods. However, the bigger the opportunity, the greater the risk.

For example, Bitcoin peaked in 2017 at around $19,000. The price in early 2019 is roughly $4,000—a 79% drop in value.

Should I invest in multiple currencies or just one?
Multiple currencies would diversify and add security to your portfolio. It's a smart choice in case one currency's price suddenly drops. Trading between two currencies (e.g., trading Bitcoin for Ethereum) is not the same thing.

Can I hire someone else to invest my cryptocurrencies directly? Are there stockbrokers for cryptocurrencies?
Short answer—no. If someone advertises this service, it's best to turn away. There are many, many legal, tax, and security complications that arise from this scenario.

Cryptocurrencies aren't stocks. They aren't regulated like stocks or stockbrokers. Nothing is stopping someone from taking your cryptocurrencies and running for the door.

Someone else handling your currency also really complicates who gets taxed and by how much. Just don't do it.

Is it wise to use multiple wallets and exchanges?
Many people utilize several different wallets and platforms depending on their trading needs. Wallets that offer lots of features and currencies tend to have higher fees.

Having multiple wallets might be the cheapest way to invest, but it certainly will make investing a bit arduous.

How does direct investing maximize returns over indirect?
The fees associated with direct investing are generally smaller than those of indirect investing. In other words, you get to keep more of what you make. But this depends heavily on how much you are trading.

For an indirect trade, online brokers usually charge a flat fee per trade (no matter how many shares). The cheap end is around $5 per trade. A direct trading system for crypto usually charges 1.5% per transaction.

A $50 stock sold indirectly for $55 means you gain $0 since the cost of that trade was $5. A direct method for the same trade would result in a cost of 0.90¢, resulting in a gain of $4.10.

This is a very simple example. There are a lot of fees to consider for both indirect and direct trading, and economies of scale play a huge part.

BOTTOM LINE

As interest in cryptocurrency grows, investing has become easier—even for beginners. Follow our guide to get started.

First, you need to know how you want to invest. If you prefer to be in control, then direct investing is the way to go. But if you want to invest in the crypto industry using more familiar currencies, then indirect investing is probably right for you.

More from CreditDonkey:

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