Do you remember that cash stash in Grand Theft Auto (GTA)? Imagine using that stash of cash to purchase something on Amazon. Seems very easy and convenient, right? Cryptocurrencies are a form of digital currency. This is similar to the mentioned hypothetical case but not exactly the same. Cryptocurrency is becoming a prevalent and mainstream form of an investment asset class. Investment in cryptocurrency as an asset class is estimated to skyrocket. This is thanks to new-age platforms offering simplified crypto-transaction and investment options to their user base. Let’s learn more about how to invest in cryptocurrency in this article.
What Is Cryptocurrency?
A cryptocurrency is a digital or virtual currency that can exist without a central or regulatory authority. Cryptocurrencies are based on blockchain technologies that use a decentralized ledger.
Individual units of cryptocurrencies can be referred to as coins or tokens. This depends on how they are created and where they are used. Some are intended to be exchange units for goods and services, while others are value stores. And some are even designed to help run computer networks that carry out more complex financial transactions.
Cryptocurrencies have evolved into an important asset class, like equities and bonds. It should be a part of every investor’s portfolio.
How to Invest in Cryptocurrencies?
You first need to decide what type of investing format you want to adopt — active or passive investing.
In active investing, the buy and sell decisions are made yourself. It would help if you outsourced those decisions to a learned investment manager in passive investing. Firstly, one needs to tap into many things before hitting the buy button. Extreme volatility is the name of the game in the cryptocurrency world.
To earn a good return on your cryptocurrency investment, you need to have conviction in your investment decisions. But if you want, you also can hold on to your investments until the end of your investment horizon. This can help in realizing the expected returns. This conviction can only result from proper research.
There are different types of cryptocurrencies based on their use cases and utility. Here is a list of examples:
- Payment coins
- Security tokens
- Utility tokens
- Governance tokens
- Exchange tokens
- Privacy tokens
- DeFi tokens
- Gaming tokens
- NFT tokens
How to buy cryptocurrencies?
To invest in cryptocurrencies, you need to have an account with an exchange. If you’re new to the crypto world, it can be not very clear at first. To conclude, cryptocurrency investment becomes easier once you take the first step. Here is how you can invest in cryptocurrency.
Step 1: Choose your broker/ crypto exchange
Some new-age brokers like Robinhood, SoFi, and Etoro allow you to trade or invest in cryptocurrency. If you’re an existing user with one of these brokerages, you can use the same interface to invest in cryptocurrencies like bitcoin. Alternatively, you can also open an account with a cryptocurrency exchange.
A cryptocurrency exchange is a platform where buyers and sellers meet to trade cryptocurrencies. Exchanges often have relatively low fees. They tend to have more complex interfaces with multiple trade types and advanced performance charts. It might be a difficult task for a new crypto investor. Having an account with crypto exchanges can unlock a range of benefits – the most notable ones being:
- Low trading fees
- High liquidity
- Access to instruments like futures and options
Binance, Coinbase, FTX, Gemini, and Delta are some of the most well-known crypto exchanges.
Step 2: Create and verify your account
If you decide on a cryptocurrency broker or exchange, you need to sign up to open an account. Nowadays, most platforms have a mandatory KYC (know your customer) verification process.
To complete your KYC procedure, you may have to upload a selfie and submit your ID proof or just upload scanned copies of your ID documents and some other verification steps.
Step 3: Deposit funds to invest
After your account is created, you can add funds to the account in your local currency. Or exchange your local currency for USDT (a cryptocurrency pegged to the US Dollar) via the peer-to-peer exchange.
Step 4: Place your cryptocurrency order
Now you are ready to invest in the cryptocurrency of your choice. There are hundreds of cryptocurrencies to choose from, ranging from well-known names like Bitcoin and Ethereum to more obscure cryptos like Polkadot, Neo, or Holo. Just like you pick stocks, you can type the name of the coin or its symbol to find the crypto that you want to trade. You can purchase fractional shares of cryptocurrency with most exchanges and brokers.
Often, the first cryptocurrency investment of a new entrant is Bitcoin. Bitcoin has a market capitalization of $693 Billion and is often termed the most dominant cryptocurrency, with a market share of 41%. As one learns more about the crypto ecosystem, one tends to invest in other interesting projects and tokens.
The 10 biggest cryptocurrencies based on market capitalization (as of 5th May 2022) are as follows:
Other types of crypto investment methods to consider (Passive income)
Cryptocurrency investing has a steep learning curve. There might be various reasons why you wouldn’t want to make passive investments. In that case, cryptocurrency investment products in the market can help you diversify easily.
1. Invest in crypto-centric stocks or companies
One option is to invest in the financial future of a cryptocurrency exchange. It can drive its revenues from the trading and investing activity of cryptocurrencies or is working on related technologies.
Some of the companies to consider would be:
- Microstrategy – MicroStrategy offers business intelligence and cloud services and invests its assets in Bitcoin.
- RIOT Blockchain (RIOT) – Riot Blockchain is a Bitcoin mining company.
- Bitfarms (BITF) – Bitfarms operates blockchain computing centers.
- PayPal (PYPL) – PayPal is a payment platform where people can purchase cryptocurrency.
- Square (SQ) – Square recently announced that it would be entering the decentralized finance space.
- Coinbase (COIN) – Coinbase is the first public cryptocurrency exchange. It debuted on the Nasdaq in spring 2021.
2. Invest in crypto ETFs
Exchange-traded ETFs operate as a hybrid between mutual funds and stocks. An ETF is essentially a group of stocks, bonds or other assets. If you buy a share of an ETF. You have a stake in the basket of investments the fund owns.
You can choose ETFs (or similar mutual funds) that have a high allocation towards crypto-centric companies or invest in cryptocurrencies directly.
Some of the options to consider are as follows:
- BLOK (Amplify Transformational Data Sharing ETF) – BLOK is the largest blockchain ETF by total assets. Its largest holdings are PayPal, MicroStrategy, and Square.
- BLCN (Siren Nasdaq NexGen Economy ETF) – BLCN’s top holdings are Coinbase, Accenture, and Square.
- LEGR (First Trust Index Innovative Transaction & Process ETF) – LEGR’s top holdings are NVIDIA, Oracle, and Fujitsu.
- BITO – bitcoin-linked ETF that holds Bitcoin futures
3. Invest in crypto investment funds
If you’re a high-net-worth individual, you can invest in hedge funds or venture capital funds specializing in cryptocurrency investments.
Invest in crypto through Coin Sets (Easy & recommended)
Coin Sets is a unique concept that allows you to invest passively in a basket of crypto tokens. Coin Sets are based on themes and ideas that rule the crypto world. Proper research conducted by crypto experts back token and coin selection in a particular crypto Coin Set. You can pick and choose the themes you believe in and start by investing a small sum. If you subscribe to the Coin Set, it will automatically buy all the tokens contained within the Coin Set with ease.
Some of the best-performing Coin Sets are:
- Smart Contract Platforms (75% in 1 year): The Smart Contract Platforms Coin Set invests in the best tokens at the forefront of building the future of smart contracts.
- NFT (52% in 1 year): The NFT Coin Set invests in the top NFT projects in the crypto space.
- Metaverse (43% in 1 year): The Metaverse Coin Set invests in the most promising tokens working in the space of virtual reality & the metaverse.
Things to Consider While Investing in Cryptocurrency
Investing in cryptocurrencies can often test your patience and conviction. Volatility can often hamper your long-term outlook and induce short-sightedness.
Never invest in FOMO
Markets move in cycles. Recently, there have been several rallies — be it Dogecoin‘s 12000% climb or Luna’s 400% swift upturn during the “Solana summer”. They’ve all seen a frenzy amongst retail investors to get a pie of the profits.
Despite the fear of buying near the market top, they joined the rallies anyway as they feared missing out. Most investors who buy based on hype cycles and frenzies invest near the top and book losses. It would help if you considered the upside potential before investing in cryptocurrency.
There is no shortage of self-proclaimed cryptocurrency experts and financial gurus online who all claim to have the secret success formula. They want to sell you access to private Discord servers, Telegram chats and WhatsApp groups.
Some factors in evaluating a cryptocurrency are –
- On-chain activity
- Founding team
- Incentives of the founding team
- Token/coin distribution
- What drives the value of the token/coin
- Traction and future potential
- Revenue model
- User reviews
Cryptocurrencies are highly volatile assets. So, like any other asset — investing more than what you’re willing to completely lose on cryptos is a bad idea. By assessing your risk profile, you can adjust your investment strategy & allocation towards cryptocurrencies as a proportion to your broader portfolio.
Legality & tax implications
Legal and tax implications differ from region to region. One should consult a financial advisor before making any investment choices. It can help you understand the legal and regulatory implications better.
Advantages of Investing in Cryptocurrencies
- The Risk-Reward ratio for investing in cryptocurrencies is high
- Investing in cryptos has a low correlation with traditional asset classes like stocks and bonds
- You can diversify your benefits portfolio by investing in crypto
- It provides an opportunity to invest in futuristic technologies
Disadvantages of Investing in Cryptocurrencies
- The crypto market is highly volatile.
- There is a risk of losing a significant proportion of your investment very quickly
- Regulatory hurdles prevail based on region to region
- Cryptos might take some time to become mainstream
- Information irregularities prevail and can be used to exploit retail investors
Cryptocurrency investment can help you diversify your investment portfolio in a turbulent market environment where your typical mutual funds and stocks are not performing as intended. Cryptocurrency is a distinct asset class with a low correlation to traditional investment options like stocks and bonds.
1. Is cryptocurrency a good investment?
With the emergence of web3.0, cryptocurrency is seen as a good investment option. Provided its infancy and volatility, starting your crypto investments small and after due diligence and diversification is always preferable.
2. How do beginners invest in cryptocurrency?
Investing in cryptocurrencies can be as simple as buying Bitcoin and Ethereum. Building a portfolio of cryptocurrencies needs research. The good news is that you can use platforms like Mudrex, which offers ready-to-invest Coin Sets backed by research conducted by experts.
3. Is it profitable to invest in cryptocurrency?
Any investment done via a secure platform after thorough research will likely be profitable. Cryptocurrencies have proven to be one of the most rewarding asset classes. However, one must be mindful of the risks associated with crypto investments.
4. How do you successfully invest in cryptocurrency?
The first step is to choose the right cryptos to invest in and the platform to use. A successful crypto investor makes the best of the resources and invests at the right time in the right coins. You can even study technical analysis of the market to strategize your investments.