Beginner’s Guide To Investing In Cryptocurrency

Cryptocurrency has been a trending topic in investment circles for quite some time, especially after the recent U.S. Presidential elections and the victory of Republican candidate Donald Trump. While many investors view it as a risk investment alternative, mainly because of its speculative nature, others see it as a legitimate option for inclusion in any investor’s portfolio.

If you’re a beginner in the crypto segment, remember that buying cryptocurrency involves inherent risks, just like any other investment. Before making any investment decisions, conducting thorough research and understanding how each type of cryptocurrency functions is essential.

What Is Cryptocurrency?

Cryptocurrencies are digital currencies that generally operate outside the regulation of any individual company or government. In contrast to traditional currencies like the Indian rupee, cryptocurrencies are not backed by a central authority, such as the Indian government.

Instead, cryptos are supervised by an online, decentralized network of users and are often envisioned and referred to as digital coins or tokens. They are secured by encryption through blockchain technology.

You can use these “coins” to buy things online, just like you would with regular money. However, the options of merchants who accept crypto are more limited than those who accept traditional currencies.

Many computers use blockchain software to check whether the payment is valid when you conduct a cryptocurrency transaction. If everything is in order, the transaction is processed.

The blockchain system acts as a digital public ledger, recording all transactions. Miners or validators check these transactions and get paid for their work. After a transaction is checked and confirmed, the person receiving the money can access it using their secret code, often called a private key.

Even more common than using cryptocurrencies as digital currency, some people invest in it, hoping its value will increase over time, similar to investing in stocks or gold.

Types of Cryptocurrencies

In 2009, Satoshi Nakamoto introduced the first cryptocurrency, bitcoin. With a market cap of over $1 trillion, bitcoin holds the world’s most significant cryptocurrency title.

Today, there are nearly 10,000 cryptocurrencies, with a collective market capitalization of more than $3.60 trillion as of Dec. 13, 2024.

Some of the biggest cryptocurrencies include:

Bitcoin (BTC)

Market capitalization: $1.98 trillion

Like many other cryptocurrencies, bitcoin operates on a blockchain, or a shared public ledger. To ensure security and prevent fraud, transactions must be verified through proof of work, in which miners solve cryptographic puzzles.

Bitcoin’s value has experienced a substantial surge over the past decade, garnering widespread recognition. In May 2016, one BTC cost approximately $500. However, as of Dec. 13, 2024, it is trading at $100,130, an increase of approximately 19,926%. 

Ethereum (ETH)

Market capitalization: $468.92 billion

It wasn’t until 2011 that alternative cryptocurrencies, later dubbed “altcoins,” entered the scene. However, Ethereum’s launch in 2015 truly brought altcoins into the limelight, marking the start of their surge in popularity. However, Ethereum stands out as the foremost altcoin, with a market capitalization trumped only by bitcoin.

Ethereum is more like a computer network, unlike BTC, which aims to function as a decentralized currency. ETH lets people run special decentralized applications, or DApps, and set up smart contracts on its system.

Also Read: How to Buy Ethereum

Tether (USDT)

Market capitalization: $140.09 billion

Tether, and other tokens like it, stands out from most other cryptocurrencies due to its categorization as a stablecoin. The value of a stablecoin is usually pegged to another store of value. This is often a government-issued currency, such as the U.S. dollar in the case of USDT, but it could be gold or some other commodity.

In theory, stablecoin will have a system to maintain its value equivalent to its peg, whether the U.S. dollar, the Indian rupee, the euro, or something else entirely. In the case of Tether, the token’s value is maintained by reserves of U.S. dollars equivalent to USDT’s total value.

In this way, Tether and other stablecoins are expected to exhibit more excellent stability than other cryptocurrencies, making them a preferred choice among investors concerned about the volatility of digital assets.

Also Read: How to Buy Tether (USDT)

Solana (SOL)

Market capitalization: $108.03 billion

Solana was designed to support decentralized finance, DeFi applications, DApps, and smart contracts. It uses a unique method combining proof of stake and proof of history to process transactions quickly and securely. The platform’s native token, SOL, powers its operations.

Also Read: How to Buy Solana (SOL)

Binance Coin (BNB)

Market capitalization: $102.26 billion

Binance Coin is a cryptocurrency used for trading and fees on Binance, a top global crypto exchange. Introduced in 2017, BNB now serves multiple functions, including trading, payments, and travel bookings.

Also Read: How to Buy Binance Coin (BNB)

Note: The market capitalization is as of Dec. 13, 2024 from CoinMarketCap.

Pros and Cons of Investing in Cryptocurrency

While advocates of cryptocurrency investing may cite several benefits, such as decentralization, accessibility, and diversification, many investors view the potential returns as the biggest pro of investing in crypto.

“The most significant advantage is the potential for high returns. In its short existence, crypto assets like BTC and ETH have historically delivered some of the most substantial gains in history,” says R.J. Weiss, CFP, CEO of personal finance site The Ways to Wealth.

It is also crucial to acknowledge the risks attached to crypto investing. Cryptocurrencies often encounter dramatic price swings, and with government regulations evolving, volatility is likely to continue. Security has always been a concern. Many investors have been subjected to scams or fraud in the crypto space, and not all crypto projects are created equally. 

“Cryptocurrencies are volatile; you have to be able to stomach price swings up and down. Only invest up to an amount you are willing to lose,” says Stephen Rischall, CFP, partner at wealth management firm Navalign.

Additionally, while cryptocurrency has yielded substantial profits for confident investors, others have incurred significant losses.

“There’s no guaranteed ‘free lunch.’ The risk of substantial losses balances the possibility of high returns in crypto. The value of your investment could plummet, and with the current size and visibility of the crypto market, it’s uncertain whether future returns will resemble the more stable, albeit less dramatic, returns of gold,” says Weiss.

What To Consider Before Investing in Cryptocurrency

Before diving into any investment, including crypto, you must do your due diligence. When evaluating if a crypto investment is suitable for you, be sure to consider the following:

• Project Depth: Each cryptocurrency has its investment thesis, use cases, and consensus mechanism. Understanding each cryptocurrency’s details and unique investment proposition is important before you invest.
• Risk: Be true to yourself while evaluating your risk profile and the volatility of any crypto. Any investor should be prepared for a significant drop in prices.
• Investment goals. Ask yourself how a crypto investment would fit into your larger financial goals. It is vital to ensure you rely on something other than your crypto investment for essential life goals like retirement. Diversification and planning are key.

If you discover you’re not ready to commit to a crypto investment, there are other ways to add crypto to your portfolio.

“There are additional options to invest in crypto indirectly. Recently, the SEC approved several spot bitcoin ETFs, which you can purchase in a brokerage account,” says Rischall. “You can also invest in publicly traded stocks of companies related to crypto, such as major crypto exchanges, hardware manufacturers, and service providers.”

How To Invest in Cryptocurrency

For beginners entering the realm of cryptocurrency, purchasing digital currencies may seem daunting. However, you can kickstart your cryptocurrency investment journey by following these simple steps.

1. Pick a Broker or Cryptocurrency Exchange

There are two ways you can purchase bitcoin and other cryptocurrencies—either through a broker or a cryptocurrency exchange.

• Cryptocurrency brokers simplify buying crypto but may charge higher fees or restrict moving holdings off-platform. Examples include Robinhood and SoFi. Some investors prefer holding coins in crypto wallets offered by these platforms for added security.
• Cryptocurrency exchanges such as CoinDCX, CoinSwitch, and Mudrex offer platforms for buying and selling digital currencies. Choose an exchange that is FIU-IND registered. However, these platforms can be overwhelming for new investors. While user-friendly options make buying more manageable, they usually have higher fees than standard trading platforms. Consider mastering standard trading platforms before or shortly after your first cryptocurrency purchase to minimize expenses.

2. Set Up an Account

After selecting a cryptocurrency broker or exchange, you must create an account. Generally, this requires signing up and providing personal information to prove who you are, often known as know your customer (KYC) protocols. This may involve entering information from your driver’s license or passport. Sometimes, you may need to provide a photo of yourself or a form of identification.

3. Add Funds to Invest

Before investing in crypto, you must ensure funds are available in your account. You can add money to your account through various methods, including connecting it to your bank, initiating a wire transfer or using a debit or credit card. The time it takes for funds to become available in your account varies depending on the deposit method and the cryptocurrency broker or exchange chosen.

While some exchanges allow credit card deposits, these come with risks and additional costs. Credit card companies often categorize crypto purchases as cash advances, leading to higher interest rates and extra fees. Coupled with fees from both the credit card and the exchange, you could lose up to 10% of your crypto purchase.

4. Initiate Your Cryptocurrency Transaction

You can begin buying crypto of your choice once your account is funded. Once you have decided on the cryptocurrency you want to buy, you can enter its symbol—for example, BTC for Bitcoin or ETH for Ethereum—and specify the number of coins you wish to purchase.

Many exchange platforms and brokers permit purchasing fractional shares of high-value cryptocurrencies, such as Bitcoin or Ethereum. This accessibility ensures that those without significant capital can still invest.

How To Keep Your Cryptocurrency Secure

Cryptocurrency exchanges are often vulnerable to theft or hacking. Losing or forgetting the access codes to your account could result in the loss of your investment. That’s why keeping your cryptocurrencies in a safe storage place is crucial.

“In crypto, taking additional steps to secure your investments is key. Adding two-factor authentication gives you an additional security layer, making it harder for unauthorized users to access your funds,” says Jeff Rose, CFP, founder of GoodFinancialCents.com.

If you’re buying cryptocurrency through a broker, crypto is usually held in a crypto wallet linked to the exchange. If you are dissatisfied with the exchange’s service provider or prefer a more secure storage option, you may transfer your assets to a separate hot or cold wallet.

• Hot wallets. Hot wallets are cryptocurrency wallets operated on internet-connected devices like tablets, computers or phones. While convenient, they pose a higher theft risk due to their continuous internet connection.
• Cold wallets. Cold wallets, such as USBs or hard drives, provide top-tier security for storing cryptocurrency because they’re offline and disconnected from the internet. However, there are risks involved. You could permanently lose access to your cryptocurrency if you lose the associated keycode or experience device failure.

Depending on the exchange and the transfer amount, a nominal fee may be required to transfer your crypto off of the exchange.