A Beginners Guide To Cryptocurrency Investing
Everything You Need to Know to Start Investing in Cryptocurrencies Like Bitcoin, Ethereum, and Ripple
We explain how to invest in cryptocurrency for beginners. The first thing you need to decide is if you want to invest directly in cryptocurrency or invest indirectly (for example through a stock).
Then, if you want to invest directly, you’ll need to decide if you want to be in direct control of your cryptocurrency, or if you would like to use a custodial service like Coinbase.
To start investing in cryptocurrency directly you’ll need:
- A cryptocurrency wallet (or two). This choice will effect whether you are in direct control of your cryptocurrency or not.
- A method of obtaining cryptocurrency. Generally speaking you would need a cryptocurrency exchange or broker (or two) to buy cryptocurrency from / trade cryptocurrency on. However, you can also choose to mine or preform services for crypto or to sell goods for crypto. This choice only speaks to how you will obtain your cryptocurrency.
- A method for selling cryptocurrency. Part of investing is being able to cash out. To cash out you’ll likely need to convert your cryptocurrency back to a top coin like Bitcoin, Ethereum, or Ripple, and you’ll need access to platform that lets you trade those for dollars like Kraken or Coinbase.
To start investing in cryptocurrency indirectly, for example through a stock, you’ll need to select between a limited set of options. They include:
- The GBTC trust sold on the stock market.
- Bitcoin futures.
- A cryptocurrency IRA (we don’t want to recommend one until we have reviewed them).
- A stock that is related to cryptocurrency (such as AMD, NVIDA, SQ, or RIOT). These offer indirect exposure to cryptocurrency.
- A private fund (you’ll need to be an accredited investor and meet certain capital requirements).
Each method of investing in cryptocurrency has its own considerations and pros and cons. First we will cover direct investing methods, then we will move onto indirect investing options.
NOTE: Trading, selling, or using a cryptocurrency is a taxable event. Essentially if you do anything other than buy and hold it is a taxable event. Learn about the tax implications of cryptocurrency before investing!
The Gist of How to Obtain Cryptocurrency
To invest in cryptocurrency directly, you must obtain cryptocurrency first.
The simplest way to obtain and then invest in cryptocurrency is arguably through an exchange-broker-wallet hybrid like Coinbase/GDAX (which allows customers to buy/sell/store cryptocurrency; i.e. it provides a one-stop-shop for cryptocurrency).
NOTE: Coinbase is technically a custodial wallet service. Despite this you have direct access to your cryptocurrency and can move it to a non-custodial wallet anytime you wish. Meanwhile, GDAX is Coinbase’s trading platform (use this to avoid Coinbase’s fees).
With that said, using Coinbase/GDAX alone results in limited choices for which cryptocurrencies to invest in.
Users who want access to a range of altcoins (coins that aren’t Bitcoin) might want to also sign up for an exchange that allows cryptocurrency-to-cryptocurrency trading like Bittrex. Here you would be buying Bitcoin or Ethereum on Coinbase/GDAX using dollars and then trading that for other cryptocurrencies on an exchange like Bittrex.
Meanwhile, some exchanges like Kraken offer a range of cryptos and allow you to purchase in dollars (meaning you only need to sign up for one exchange).
Each exchange has its pros and cons to consider, and there are a number of reasons to use more than one exchange, none of the above choices are fundamentally right or wrong for a given user.
Learn more about cryptocurrency trading.
How to sell cryptocurrency: As noted above, just getting cryptocurrency really isn’t enough. you need to be able to sell it too. There are only a handful of exchanges that allow you to trade cryptocurrency for dollars, and the choices of coins that trade for dollars are limited. For this reason it is wise to set up Coinbase, Kraken, or another exchange that allows you to trade for dollars, and to take some of your gains to a coin that trade to dollars like Bitcoin, Ripple, Ethereum, Litecoin, and Bitcoin Cash.
TIP: An exchange works just like a stock exchange essentially, you fill out a form and you buy or sell either dollars and a cryptocurrency or a cryptocurrency and a cryptocurrency. See the link above for a detailed explanation and walkthrough of this aspect of the process. See a top 5 list of cryptocurrency exchanges and the Best Bitcoin Exchanges ranked (the ones mentioned on this page are my personal picks).
TIP: There are a few sides to cryptocurrency. 1. you can trade and invest in it, 2. you can use it to trade goods and services, and/or 3. you can break out a graphics processing unit and some software and mine coins (see how to mine coins). Any method of obtaining cryptocurrency is valid. Be aware, if you mine or trade crypto for goods and services you’ll still need a wallet (and likely an exchange to trade it on). See a list of other ways to obtain cryptocurrency.
Choosing Where to Store Your Cryptocurrency
With cryptocurrency just obtaining it isn’t enough, you also need a place to store it.
Coinbase/GDAX, Bittrex, and Kraken all offer online wallets. You can technically store your cryptocurrency on them for as long as they continue to operate.
However, exchanges aren’t meant to be used for long term storage (just for trading).
Thus, unless you use a service built for long term storage, like Coinbase, you’ll likely want to look into other wallet options.
For long term holding one will likely want to choose an offline wallet where they can securely store their cryptocurrency.
Like methods for obtaining cryptocurrency, wallet options all have their pros and cons to consider. Coinbase is a simple solution, but an offline wallet where you control your “private keys” has its own range of benefits despite the complexities.
Learn more about cryptocurrency wallets.
TIP: A cryptocurrency wallet is a place where you store encrypted passwords that represent coins (the equivalent to storing money in a bank account) and a cryptocurrency exchange is like a stock exchange or like a currency exchange in a foreign airport (a place people can trade cryptocurrency for other cryptocurrencies and for fiat currencies like the US dollar). Just like if you want to trade stocks you need a bank account and access to the stock exchange, it is the same deal with cryptocurrency.
TIP: When it comes time to send cryptocurrency from an exchange to exchange or exchange to wallet you’ll need to pay a transaction fee. Litecoin is a good choice for moving from exchange to exchange because it is traded on most exchanges, has low fees, and has quick transaction speeds.
How to Pick the Right Coins, Stocks, and Companies
Now that you know the basics of how to invest, there is still a matter of picking which companies to use and coins to invest in.
- A beginner should start by choosing an company with a good reputation that offers an exchange and wallet (to help keep the process simple).
- A beginner should also start by trading prominent coins (this helps reduce risk).
Since the above is the case, a good start for any American wishing to trade cryptocurrency is starting with Coinbase.com (the most popular cryptocurrency service in the U.S.). Likewise, in general, anyone who is starting out investing you should stick to the top coins and make sure they hold at least some Bitcoin and Ethereum.
After you master coinbase and have a little Bitcoin or Ethereum, then you are ready for say GDAX and other exchanges like Bittrex, Binance, or Kraken (where you can obtain other top coins like Ripple).
Here I’m not trying to tell you what service to use or what to invest in, I’m more so pointing out what a good starting point is. If you try to jump right into some complex exchanges and buy moonshot coins, you are introducing a lot of complex factors.
TIP: Corrections of up to 50% are common in cryptocurrency (meaning losing half your investment on paper). If you can’t stomach a 50% correction, and if you would sell if your investment corrected by 50%, you should question your desire to invest in cryptocurrency. It is literally impossible to hold a given cryptocurrency long term without holding through the occasional correction. This is essentially where the saying “HODL” comes from. A good tactic for crypto investing is to dollar cost average slowly over the course of weeks or months on days when a given coin is down to buy the average price (it helps to avoid mistiming the market).
TIP: A good first foray into cryptocurrency investing is the obvious, buying a major cryptocurrency like Bitcoin. After that you’ll likely want to trade USD for crypto on an exchange like GDAX. After that, you should try trading BTC and ETH for other cryptocurrencies. Trading “crypto pairs” can be rewarding, but it is more complex and often more risky than just buying a single cryptocurrency as an investment. The main trading pairs used in cryptocurrency are BTC and ETH (hence the suggestion that one start there). In the cryptocurrency world, having BTC and ETH is like having dollars in many ways. Many coins can only be obtained using these two coins.
TIP: ICOs and low cost altcoins can offer amazing returns. However, they are much risker than the top coins to invest in. Until you understand how to research cryptocurrencies, consider approaching alternative investments like ICOs and lending schemes (like Bitconnect) with extreme caution. There is a lot of room to go wrong with the more risky crypto investments. Sticking with the top coins and companies is a good starting point.
Choosing the Right Indirect Investment
Above we covered how to invest in cryptocurrency directly, now let’s touch on indirect investing (for example via the GBTC trust).
GBTC is the ticket symbol for a Bitcoin trust that trades on stock exchange (some brokers allow you to trade it, others don’t). Each share represents a little less than 1/10th of a bitcoin. The stock generally trades for a premium to its native asset value (NAV). On a good day it can preform very well, but it can also tend to not do a good job of reflecting movements in Bitcoin’s price on other days. At times investors can miss out on great Bitcoin gains because the trust fails to reflect the actual price movement of Bitcoin. Other days the trust stays put and Bitcoin loses value. There are some quirks to consider, but quirks aside, no one can doubt the returns over time. The main other considerations to note here are that you are limited to Bitcoin investing only and limited to the trading day for trading (where cryptocurrency is a 24 hour market).
Bitcoin futures offer temporary exposure to Bitcoin and allow you to bet on whether the price will go up or down in the short term. Consideration here is that futures don’t offer an opportunity for long term investment and only focus on Bitcoin.
A cryptocurrency IRA essentially allows you to invest directly or indirectly (depending on the service) in Bitcoin (and a few other top cryptos like Litecoin, Ripple, Ethereum, and Bitcoin Cash) through your IRA. You pay a fee for this service, but in some cases the result is you actually get to own the cryptocurrencies. If your only funds available to invest are in in your IRA, this can make a lot of sense on-paper. In practice, I haven’t been able to manually review and use these products like the other products noted. So I am not in a position to recommend this product one way or another.
Cryptocurrency related stocks are great in that you can do a fundamental valuation of them (unlike cryptos) and sometimes enjoy an extra boost when crypto does well. Unfortunately, when crypto becomes bearish (downward price trends), sometimes crypto related stocks can take a hit. Still, you can get indirect exposure this way.
A private crypto fund is an amazing choice. However this choice is limited to institutional investors with capital. Plus, let’s be honest, you can essentially create your own version of a given fund by dollar cost averaging into the top 10 or so cryptocurrencies over time.
With all that covered, the best way to invest in cryptocurrency for you is a personal choice. There is wisdom in any given method. Many prefer investing directly, but the simplicity of indirect investments make a lot of sense too. Remember to do some research and thinking on any method you choose, and also remember you can invest using more than one method.
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