Read our Step-by-Step Guide for Investing in Alternative Currency Assets.
In this Cryptocurrency Investing Guide:
- What Is Cryptocurrency?
- How Does Cryptocurrency Work?
- How Should I View Cryptocurrency as an Investment?
- How to Get Started Investing in Cryptocurrency? A Step-By-Step Guide
- Step 1: How Much of My Portfolio Should I Invest in Cryptocurrency? Start with a Small Percentage
- Step 2: How to Choose the Right Cryptocurrency?
- Step 3: How to Invest in Cryptocurrency on an Exchange Platform?
- Step 4: Where do I Store My Crypto?
- Jumping In
If you’re wondering how to invest in cryptocurrency, your first instinct might be to worry that you’ve missed the boat. The good news is that even though its values are higher than, say, five years ago, you still have the opportunity to get in on the action if you choose. In the grand scheme of the crypto journey, we are at the very beginning of where this will go over time. We’ll now look at how cryptocurrency works and what you need to know to get started.
What Is Cryptocurrency?
Cryptocurrency is a type of digital currency that you can use to purchase goods and services. But this definition can be confusing in what is already a fairly virtual world. When cash is becoming less of a thing, you might have a tough time distinguishing how money changes hands.
Cryptocurrency essentially takes our standard digital money (e.g., a credit card) a step further to bring the whole world onto the same system. So instead of converting Euros to dollars and back again, people only deal with a standard value. This can reduce transaction fees and put more control in the hands of the people rather than a central banking institution.
Bitcoin is the leader of all cryptocurrencies and generally considered the gold standard of cryptocurrency. Still, as we’ll explore below, it’s not the end-all that some people might think it is.
How Does Cryptocurrency Work?
Before jumping into specifics of investing in cryptocurrency, you should know that you don’t have to be a software engineer to understand cryptocurrency (even if it helps). What you really need to know is that cryptocurrency relies on blockchain technology to operate. What do you need to know about the blockchain? It’s functional!
When Bitcoin first came out, even the most skeptical skeptics were impressed with it. This technology introduces transparency into how money changes hands and still manages to protect an individual’s identity. It virtually eliminates the odds of fraud because the blockchain records every action in real-time without the possibility of scrubbing out specific details.
The blockchain also skips the middle-man, making for faster transactions and cutting down the need for excess fees. There are hundreds available today, each with its own individual properties. Suppose you’re wondering how to invest in cryptocurrency. In that case, it starts with having the right expectations and understanding the overall landscape of this powerful asset class.
How Should I View Cryptocurrency as an Investment?
Some people have been fanatics of cryptocurrency from the very beginning. Still, most have been attracted by its stunning surge in value. When Bitcoin reached more than $50,000 for a single unit with a $1 Trillion market cap, few people could stop talking about what it meant, both now and 20 years from now as a store of value.
Before jumping into the ins and outs of how to invest in cryptocurrency, you should know that there is some volatility with anything transformative at early adoption stages. What we don’t know is the magnitude and speed that cryptocurrency will have as a disrupter. One thing is sure, and that it is here to stay.
That being said, crypto has withstood a lot of criticism and dismal predictions over the years. Its initial reception was compared to that of the internet. Many people thought that the world wide web was nothing more than a worldwide fad. Cryptocurrency has had a lot of staying power, and its adoption continues to grow over time. The network effects are more significant, and transaction volume is exponentially growing year over year.
Now, let’s talk about how the asset class has evolved since Bitcoin was created in 2009. Back in those days, it wasn’t even an entire diversified cryptocurrency asset class. It was just Bitcoin! People that were techies admired the tech, but ordinary people either did not know about it or did not take it seriously as a store of value.
There have been 2 big bear markets since 2009, one in 2013 and one in 2017. Each time Bitcoin went parabolic and then experienced significant price corrections. This is common in ANY new technology that is at the stages of infancy. Nowadays, there is a level of adoption that is being seen as a game-changer. It is still “early,” but it is not an “infant.” The next level of adoption is happening across retail, corporate treasury, and institutional channels.
What do I mean by that? Well, all the way until mid-2020, all of the investors in these cryptocurrencies were retail investors (Individuals like you and me). Then, Microstrategy and Michael Saylor came along and created “Corporate” level adoption of the asset class. This is HUGE, as he has a public company. There are MANY hoops to jump through regarding due diligence to get Bitcoin approved to be put on the company balance sheet.
What does this mean? Think about us being in the early days of the internet or the first inning of a baseball game. Soon after Microstrategy put Bitcoin on their balance sheet, Elon Musk and Tesla followed suit and put $1.5 Billion of Bitcoin onto their balance sheet. Paypal and Square have adopted it as well. Who is next is not certain, but what is certain is a wall of money coming to Bitcoin over the next 10 years. There is a parallel financial system being built right before our eyes that is decentralized (DEFI) that will rival its centralized (traditional banking) counterparts.
So, you have the retail players, the corporate money at the beginning stages of adoption, AND the institutional money is just starting to make its moves. For retail players, additional avenues such as purchasing cryptocurrency through stock such as Grayscale have opened up. The buying can be done through typical trading platforms such as Schwab, Vanguard, and Etrade.
This channel of institutional money is also in its infancy. Goldman Sachs announced that Bitcoin is now its “own asset class.” Institutional investors like this do not make these types of statements lightly. They are not first movers but are currently entering the party.
At $50,000 a Bitcoin, it is roughly a 1 Trillion dollar asset. So what does that mean? Well, gold is currently around a 10 Trillion asset. Bitcoin has a real shot at dwarfing gold over the long term. When Bitcoin gets to 10 Trillion dollars as an asset class, it will be $500,000 per BTC.
To give you an idea of how small Bitcoin’s market cap is take a look at these other asset classes:
- Gold is about a $10 trillion asset class.
- The capital markets $100 trillion-plus.
- The bond market is $100 trillion-plus.
- The derivatives market is said to be $1 quadrillion.
As you can see, these numbers make even the gold market cap look tiny. So a $1 trillion market cap for Bitcoin shows you that it is still VERY early.
Well, why would any of this capital flow to Bitcoin as an asset class? I am glad you asked. Because it is FAR superior as an asset class vs. the returns of other asset classes. Especially with the FED printing so much money, it is invisibly eroding the dollar’s purchasing power.
Keeping cash at this point is like having someone steal 1-2% of your money every single month out of your bank account. That is like 12-24% a year. If you are an optimist, say 15%. That said, if you earn anything less than 15% on your money, you are going backward. So, what would you invest in year over year that could at least do 15%?
Maybe Bonds, the stock market, commercial real estate? The answer is none of those can do it consistently, and you are left with the most superior asset that has ever been created during our lifetime. The alpha asset, which is Bitcoin!
As I explain this, keep in mind that this is not a trading strategy, and looking at your portfolio 7 times a day, panicking if it goes up or down.
That strategy is for speculators or day traders. This is a strategy of BUY AND HOLD and NEVER sell. In addition, dollar cost average (buying consistently over time) and just hold it. This is like the Warren Buffet strategy of buy, hold and never sell. It is the same concept only in cryptocurrency and with a far superior asset over long periods of time.
The next step in the process is how to get involved in this game-changing technology.
How to Get Started Investing in Cryptocurrency? A Step-By-Step Guide
More and more people are coming around to cryptocurrency, but you still can’t walk into your bank and ask them to change a roll of hundreds into Bitcoin. Also, banks are archaic institutions that move REALLY slow. Nonetheless, they also realize that their customers want it, so the ones that move the quickest with adoption will have an edge.
More firms specialize in crypto today, but in general, financial institutions are still working with dollars and cents (or their equivalent).
This is something of a catch-22 for investors who would prefer to go through an institution they are already comfortable with for cryptocurrency. More regulations for cryptocurrency will come, as it is expected in any strong asset class. This will then bring on a larger scale of banking adoption.
To that end, we break down how to invest in cryptocurrency.
Step 1: How Much of My Portfolio Should I Invest in Cryptocurrency? Start with a Small Percentage
This is an individual decision based on the time period in your life and personal risk tolerance. As a rule of thumb, your portfolio should allocate only a small percentage to cryptocurrency in the beginning. This could mean 2, 3, or 7% based on how much flexibility is built-in, but we would caution going over 10% initially.
Investing in cryptocurrency is like investing in a physical object, like gold. It doesn’t pay standard interest or dividends if you do not stake it.
Remember that crypto was initially designed to be another option for fiat (government-issued) currency. It wasn’t meant to perform like a stock.
Getting used to this new platform has been challenging for investors because it ultimately means putting money into a technology that they don’t fully get in the beginning. The question of how to invest in cryptocurrency means looking at the more significant implications of its impact on the world, which over time will be substantial.
Step 2: How to Choose the Right Cryptocurrency?
Elon Musk made headlines when he tweeted out the word Doge, and it caused Dogecoin price to spike in value. He may have legitimately misspelled the word for dog. Yet, this four-letter post caused severe movement in the markets.
There are hundreds of cryptocurrencies out, and most investors couldn’t explain the differences between them. It is always better to go after the most solid, proven projects vs. chasing every new shiny objects that come along.
For example, I view things like this if I had to do it all over again:
- Taking a long-term view on the asset class, i.e., 10-20 years.
- Buy and hold (HODL).
- Bitcoin is digital gold.
- Ethereum and Cardano are solid projects with solid leaders behind them that provide real value via their own network effects and use cases.
You should know that Bitcoin was the first and continues to be the most reliable in terms of value. It’s so popular that people might use the word Bitcoin when they really mean all crypto (much like someone would say Coke when they really just mean soda).
Yet cryptocurrencies like Ethereum, Cardano, and Polkadot have also seen serious leaps over time — gains that rival or even exceed Bitcoin’s as of late. When you stare at the list of cryptocurrencies, you’ll encounter oddball names like PancakeSwap and SHIBA INU. Some people will choose a smattering at random. Others will choose by performance over time.
As with anything, intelligent, focused diversification will have a lot to do with how your portfolio performs. Suppose you spend the bulk of your investment in Bitcoin (as you should). In that case, you should also consider other cryptocurrencies in the top positions.
If you’re wondering which cryptocurrencies claim to be the most scalable, we’d have to go with Ethereum and Cardano. Their tech is excellent, and their use cases of DEFI (decentralized finance) and NFTs are undeniable.
Step 3: How to Invest in Cryptocurrency Using an Exchange Platform?
Cryptocurrency exchanges are the answer to ‘how to invest in cryptocurrency?’ for most people. We recommend one of the following four, and if you are brand new, Coinbase would be the top recommendation (it also is a public company now):
- Coinbase: An excellent first-timer option, Coinbase is a public company and has an easy to use user interface.
- Bitcoin IRA: Bitcoin IRA helps you put crypto in your retirement account. It’s the first IRA platform in the world.
- Gemini: Secure and seamless buying and selling crypto.
- Block: BlockFi is also publicly traded on the Canadian stock exchange and is giving traditional banks that are stuck in the mud a run for their money.
There are some famous historical examples of unregulated exchanges, ones that wouldn’t inspire you to invest at all. We recommend these exchanges because they’re a good bet if you’re looking for something you can count on. Based on their reputation and user experience on the platforms, you can feel pretty confident about these.
Step 4: Where do I Store My Crypto?
A wallet is a software program that essentially connects you to the blockchain. Cryptocurrency wallets used to be something of a hassle, but the process has improved considerably over the years. There’s both a private key and a public key for your crypto.
You can think of the public key as a physical address that someone could look up in a phone book and the private key as the actual key that fits into your door’s lock. Hardware wallets are recommended if you’re investing because they’re more secure. Trezor is the gold standard for hardware wallets. There are also the Ledger Nano options.
Whenever possible, store your crypto with a cold storage option (hardware wallet).
And there you have it: a fairly quick and easy way to get your feet wet. As you learn more about cryptocurrency, you might start to see it as less of an investment and more of a practical tool for all humankind. But even if you don’t become a true believer, you can still get in on the action.