How to Invest in Cryptocurrency for Beginners
Written by  Daisie Team
Published on 8 min read

It is believed that one out of every 12 Americans invests in cryptocurrency. Once considered a fringe fad, cryptocurrencies — digital monies based on mathematics instead of a physical commodity or faith — have increasingly been seen as a potential investment option. While some are just chasing the latest “get rich scheme,” most investors are impressed by cryptocurrency’s historic performance as a commodity or the fact that many banks and financial institutions are offering crypto options.

Investing in cryptocurrency may seem intimidating, but there are easy steps you can take to get started.

Jump to:

Easy Steps for Beginning to Invest in Cryptocurrency

Step 1: Understanding the Investment Opportunities

When the first cryptocurrency was introduced in 2009, the idea of investing in something so new was antagonistic. In the text of the first Bitcoin transaction, dated to January 3, 2009, was “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” The transaction was minted during the aftermath of the Global Financial Crisis, which was triggered by the sell-off of mortgage-backed securities derivatives. The text is believed — besides being a timestamp of the transaction — to be a commentary on fractional-reserve banking by Bitcoin’s anonymous founder, Satoshi Nakamoto.

Cryptocurrencies were always meant to be a parallel monetary system to fiat or faith-based currencies. However, with Bitcoin’s historical return on investment making it the best-performing security for several years, the temptation for non-casual and investment users to buy in is high. In the last three years, the number of investment options available for non-institutional investors has grown exponentially. Besides mining — participating in the coins’ virtual creation process through contributing computing power to the coin network’s transaction processing — investors can buy minted coins through the various exchanges, buy shares in managed cryptocurrency portfolios, invest in cryptocurrency derivatives or futures, purchase shares of cryptocurrency-related stocks, or trade in cryptocurrency-backed trusts or funds.

Like investing in stocks, different cryptocurrency trading options differ in risk and in the amount of control the investor has in managing. Higher risk options, such as direct trading cryptocurrency, offer higher profit potentials, but also a higher risk of loss and more need for research. Lower risk options, coin trusts, are more “hands-off,” at the cost of being able to aggressively play the market.

Indirect investment options, like investing in cryptocurrency-related stocks like PayPal and Square, avoid questions on the legality or taxation of cryptocurrencies, as well as the risk involved in the coin market, while allowing tangential investing. These stocks tend to rise during a bull run on the cryptocurrency market, while being insulated from the volatility of the cryptocurrency market.

Step 2: Choosing a Cryptocurrency Exchange

Once you understand your risk tolerance, you can start to build your portfolio. This would mean trading with the various exchanges. Like stock trades, not every stock exchange handles every stock transaction. A certain level of due diligence is needed in purchasing cryptocurrency.

Cryptocurrency markets list cryptocurrencies like stocks, with trades done through buy and sell orders. Various exchanges list coins based on their maturity and relative stability, with coins likely to lose most or all its value being delisted or ignored for listing. As of March 2022, there were 18,465 cryptocurrencies in existence—with over 8,000 being “dead” or having no appreciable or active value — and with the creation of new cryptocurrencies being processed through the modification of open-source programming, this consent process is meant to protect the consumer from fraud. This process, however, means that different exchanges with different consent criteria will have different coin portfolios.

One of the largest coin exchanges, Coinbase, for example, has 96 cryptocurrencies listed on its consumer-side exchange as of May 2022, with over 130 coins listed on its “Pro” services. These tend to be among the oldest and most highly-traded coins currently on the market. Coinbase, however, has higher transaction and convenience fees than other exchanges, like Binance. Coinbase is U.S.-based (Binance is based in China), so there are fewer complications regarding taxation and anti-money laundering (AML) regulations.

Beyond the cryptocurrency exchanges, there are other places to buy cryptocurrency options. Cryptocurrency trusts and funds are typically traded either through decentralized exchanges (DeX) or Over-the-Counter (OTC) — which allows direct trading without the securities needing to be formally listed. Cryptocurrency futures are traded on the Chicago Mercantile Exchange or through various cryptocurrency exchanges, while cryptocurrency derivatives are traded through the cryptocurrency derivative exchanges. Cryptocurrency-related stocks are regularly traded securities that are traded through brokers on the major stock exchanges. Many bank products also offer cryptocurrency options.

It is important that you choose the right exchange. Important considerations are the transaction fees, if the exchange is authorized to trade in your country and state, and the security of the exchange. In December 2021, the cryptocurrency exchange Bitmart lost almost $200 million in a hack involving the theft of over 20 different coins.

Step 3: Diversify your Investment

While it may be tempting to focus only on Bitcoin, it is worth considering that the oldest coin is not beyond collapse. In May 2022, triggered by runaway inflation on the U.S. dollar, Bitcoin lost over half of its November 2021 value. The increased interconnectivity between cryptocurrency and fiat currency markets — due in part to the increase in institutional cryptocurrency investors — has eroded the crypto market’s insulation from inflation. This affected even pegged stablecoins like USDT, which is backed by real-world commodities like gold and is supposed to keep its value of one dollar per coin.

This loss, however, affected each coin differently. Some coins crashed at the same rate as Bitcoin; others crashed faster. Some, conversely, increased in value during the crash. A diverse portfolio would have mitigated the effect of the price drop.

In a market as volatile as the cryptocurrency market, a diversified portfolio is one of the few hedges available against sudden loss. It is important to choose a wide range of commodities to invest in with an average risk at or below your tolerance level. It might be okay, for example, to invest in a new coin if you are also invested long-term in a managed trust.

Step 4: Forget the Past

Speaking of the past, it is important not to be bound to it. As a commodity, cryptocurrency’s current value is not necessarily linked to its past performance. A cryptocurrency is more like gold than stocks in this way.

Gold

An expel of this is Ethereum. Ethereum is a utility coin in which programs can be embedded into transactions and can be run to allow autonomous smart contracts to be created and enforced. In 2016, one of these programs, which ran a venture capital fund in the form of a decentralized autonomous organization (DAO), had 3.6 million ETH hacked from it. The decision to return the stolen coins led to the splintering of the old Ethereum blockchain into Ethereum and Ethereum Classic. Despite this, Ethereum remains the second most valuable coin currently traded.

While it might be tempting to “game out” a crypto price by reading current sentiment, it’s a failing proposition. Bitcoin, for example, has been declared dead over 400 times since its creation. Trying to predict where a coin is heading pricewise is folly, as any quick search of cryptocurrency blogs will tell you. When investing, invest because you feel the coin is a good buy right now, instead of trying to calculate any significance from past performances.

Step 5: A Word About Volatility and Risk

Cryptocurrencies are volatile by nature. Without the volume of a stock exchange to absorb the effects of frequent trading, small fluctuations in trade traffic can cause large shifts in pricing. This could be advantageous for traders interested in “buying the dips.” It also introduces significant risk, as gains made previously can be wiped out overnight.

About Volatility and Risk

As a rule, you should invest no more than you are willing to lose. With most cryptocurrencies having no physical basis, it is possible for a coin to lose all its value. This is particularly true if the organization or major investor behind a coin fails in some way. One way to mitigate the risk is by coming to peace with it; it will likely not go away soon. Another way is to diversify your portfolio with low-risk options.

Step 6: Invest an Amount That Will Not Bankrupt You

Cryptocurrencies are high-risk investments. While the potential for higher-than-usual ROIs is there, so is the potential for losing everything. The more diversified a crypto portfolio is, the lower the chance an investor will lose everything. That chance, however, never reaches zero, though.

Amount That Will Not Bankrupt
Amount That Will Not Bankrupt

A good rule of thumb is to invest no more than 10% of your total investment portfolio in high-risk investments. Interested in learning how to make the most of your crypto investment? Daisie.com offers the best experts to help creators and innovators learn what they need to know to succeed.

Step 7: Choosing the Right Wallet

Cryptocurrencies are stored in files that stores the private half of a coin’s keys pair, referred to as wallets. Coins are secured on a blockchain using two keys — one that is public and on the blockchain and a second that is only shared with the coin’s owner. Losing the private key prevents the public key from being used, permanently making the coin unspendable.

The coin holders’ private keys are automatically loaded to a wallet, which can be privately managed or managed by a company. Company-managed wallets are password-protected, typically offering the coin holder the security that the wallet can be recovered. However, this would depend on the wallet company staying in business and not being hacked. Private wallets can be stored on any drive and even printed. The holder, however, is ultimately responsible for a privately held wallet, like an actual wallet.

Other Ways to Invest in Cryptocurrency

Besides investing in cryptocurrencies directly, there are ways to other ways to get involved financially. One way is to invest in the underlying technology. Most cryptocurrencies use a blockchain, a distributed digital ledger that allows for transaction verification without having to rely on a single person or body. Many companies, such as IBM, Walmart, and Visa, have worked on blockchain implementations.

Ways to Invest in Cryptocurrency

Another way to invest in cryptocurrencies is to use smart contracts. An investor, for example, can be matched to a loan seeker using a lending decentralized application, where the investor can make the loan while collecting interest. An investor, similarly, can invest in a DAO, which would invest in other companies — sharing the proceeds with its members.

Investing in the Future

As the technology matures, the number of ways one can invest in cryptocurrencies will only increase. Cryptocurrency will remain one of the best-yielding commodities currently on the market. As it is full of pitfalls, however, caution must be taken to ensure the health and prosperity of the investment.

Want to master all things crypto? The experts at Daisie are ready to show you the ins and outs of the Blockchain-powered world.