How To Invest in Cryptocurrency: Everything That You Need to Know
The financial industry is one of the oldest. It has undergone numerous transformations over the years. However, the latest change has been its most profound to date: the invention of digital currency or cryptocurrency. You can gauge the rise of the cryptocurrency market because it has gradually attracted a large section of traders into its fold. This text shares insight into specific questions you may have around ‘how to invest in cryptocurrency?’.
What is Cryptocurrency? A quick guide.
Before you begin to dive into how to invest in cryptocurrency, you must get to know what a cryptocurrency is and all it stands for. As the name suggests, a cryptocurrency is a digital currency that does not have a physical form and can be circulated without the need of a central authority. A central authority such as banks and financial institutions runs based on rules and regulations and is controlled by an appointed bureaucracy.
A cryptocurrency works the same way a physical currency, also known as fiat, does. It can be exchanged instead of goods and services and used as an investment vehicle. The network and platform on which digital assets, namely cryptocurrencies are traded, is called a cryptocurrency exchange. These trades and transactions are possible with the help of blockchain’s decentralized ledger networks for recording information in cryptographically secured blocks designed to put cheating, hacking, and frauds at bay.
If you want to trade or use some blockchain applications, you must first know how to buy cryptocurrency, as discussed below. A cryptocurrency serves as a digital currency on a blockchain platform for trading, finances, and payments on the blockchain and its applications. One of the immediate beneficiaries of cryptocurrency is the DeFi or Decentralized Finance network, which is the extension of the digital asset ecosystem. This environment offers investment options to traders and enthusiasts with no intermediary and within a secure place.
How to Invest in Cryptocurrency?
That brings us to the most pertinent question: How to Invest in Cryptocurrency? With the traditional financial system becoming rigid by the day, it is imperative that investors gradually start discovering newer methods and engines to grow wealth. With digital currencies, you have an alternative that promises a better tomorrow.
Now the question arises, where to invest in cryptocurrency? The first step towards investing in cryptocurrency begins by registering on an exchange. By having an account on a centralized exchange, one will access a wallet. It is the digital substitute for a physical bag. A wallet holds all the cryptocurrencies and comes with a unique key making it a safe place to store digital currency. Once the account is created and the wallet assigned, you can use real money to buy the numerous cryptocurrencies each exchange has on its marketplace. The most popular remains Bitcoin though a few others managed to garner immense popularity too, namely Ethereum, Binance Coin, et al. Cryptocurrency investments are not limited to exchanges. You can invest in cryptocurrency in many ways, as discussed below.
However, it is essential to know that researching the various possibilities and understanding the risks is necessary before one delves into cryptocurrency. Bitcoin, despite its popularity, remains a volatile cryptocurrency whose wild swings are part of the market lore. However, the traditional financial market also has its fair share of swings. For a relatively safe investment, you may opt for platforms like Pokket, and earn 6.25% APY (annual percentage yield) on Bitcoin with their crypto savings account without extra fees.
How Many Cryptocurrencies are there?
The rise of digital currency has been phenomenal. The first one was Bitcoin which came into being in 2008. It is said to have been invented by a person or group of people named Satoshi Nakamoto. Bitcoin’s first block began in 2009. It is the most popular cryptocurrency today and also has stocks and ETFs. The total market valuation of the cryptocurrency ecosystem was $2.05 trillion as of 17 Jan 2022, after hitting an all-time high of $3.01 trillion in 2021.
Top cryptocurrencies by market capitalization as of 17 Jan 2022 are:
- Bitcoin: $810 billion
- Ethereum: $389.4 billion
- Binance Coin: $80.7 billion
- Tether: $78.4 billion
- ADA (Cardano): $50.9 billion
- USD Coin: $45.5 billion
What Are the Best Cryptocurrency Exchanges and Brokers?
The cryptocurrency trade is made through Cryptocurrency Exchanges that are of two types — Centralized Exchanges (CEX) and Decentralized Exchanges (DEX). A CEX is run by a centralized entity or organization acting as a third party to store cryptocurrency assets and charges exchange fees for any transaction via order book. A DEX, on the other hand, is not controlled by any central authority, instead, every transaction on a DEX is controlled and governed by ‘smart contracts’ (kind of automated computer program code). A DEX enables direct peer-to-peer (P2P) transactions, thereby removing unnecessary brokerages and fees. There are online brokers available who offer cryptocurrencies along with traditional options.
Some of the best CEXes currently are:
- Coinbase
- Binance
- Kraken
- Bitfinex
- CEX.io
Some of the best DEXes currently are:
- Uniswap
- Sushiswap
- Dex (TRON)
- Newdex (EOS and TRON)
And, some of the best online brokers are:
- Robinhood
- TradeStation
- WeBull
It is worth mentioning that while choosing a CEX or DEX, a few points need to be looked at to find out the best cryptocurrency exchange to trade on, including:
- Exchange Fees: Every exchange charges various fees. It ranges from network fees to transaction fees, withdrawal fees, trading fees, etc. The transaction fee may also vary according to the cryptocurrency and fiat. A comparative study between exchanges will be necessary before deciding where to invest in cryptocurrency by choosing an exchange with the best fee structure for your investing plan.
- Security Offered: An exchange’s security is of prime importance since the entire trade is made through the internet. Network security is a primary focus for all exchanges, and everyone invests most of their resources in safeguarding their customers. With digital payment services and online banking, exchanges have begun to use these tools and devices to prevent illegal network intrusions.
- Cryptocurrency Liquidity: An exchange with a large customer base will have more significant liquidity and vice versa. Having high liquidity helps in quicker payouts and low risks.
- Token Options: Some exchanges offer a wide variety of cryptocurrencies and fiat currencies, while a few have limited offerings. Both have their pros and cons, and the ideal way to trade is to go for multiple exchanges and thereby create a broader basket. Portfolio management is essential for digital currencies, and it is quite like that to the traditional market. There should be more comprehensive options for payment methods too.
- Customer Service: Finally, effective customer service makes or breaks an exchange, which is valid for most institutions. For an exchange to be successful, it must quickly respond to customer feedback and queries.
The Difference Between Investing in Traditional Methods and Cryptocurrency
Another important question that comes to the mind of the curious investor after searching how to buy cryptocurrency is the difference between traditional and cryptocurrency investing. The key differences include:
- Decentralized: Decentralization is the central premise of cryptocurrency. It means no government, institution, committee, dictatorship, etc., will have any right over individual investment. This form of direct ownership is what is attracting the new-age trader. Traders invest in cryptocurrency as it has no central authority with a particular plan.
- Accessibility: The entire concept of digital currency is based on blockchain as it is accessible on any device with an internet connection. The principal aim of cryptocurrency was the democratization of the financial market.
- Banking: The definition of banking gets transformed once cryptocurrencies come into play. An investor’s need for a bank is eliminated because the entire ecosystem is decentralized. For example, Pokket provides high yield savings with their crypto savings account and some of the best interest rates in the market.
- Digital Assets sans Border: Another excellent advantage of trading in crypto is the removal of geographical limitations. Physical boundaries are no more relevant for cross-border trade since the internet is omnipresent.
Best Ways to Invest in Cryptocurrency
While the seasoned trader will not have much aversion to risk, the newbie might not have the stomach for it. Here is a quick guide highlighting how to invest in cryptocurrency in the best way for those who wish to swim but not sink.
- Cryptocurrency stocks: Cryptocurrency stocks are an ideal way to understand the dynamics of the cryptocurrency ecosystem. A cryptocurrency stock is the share of any organization that has investments in any primary cryptocurrency. But how to invest in cryptocurrency-related stock? Organizations like MicroStrategy, Tesla and NVidia have investments in digital currency and are a good bet if you wish to invest in cryptocurrency stocks.
- Cryptocurrency exchanges: Cryptocurrency exchanges are the best and most popular way of investing in cryptocurrency. Exchanges may require some trading experience, so it is recommended to start small. If you are confused on how to buy cryptocurrency, small investments allow one to have a bailout anytime the going gets rocky. The initial investment phase is all about learning, which is true for the cryptocurrency trade. Moreover, starting small is also applicable for those interested in traditional finance. Invest a small amount of money on a well-known cryptocurrency, and once well-read about the mechanism, go in for a bit more risk.
- Bitcoin ETF: The Bitcoin-linked Exchange Traded Fund debuted recently, and this has come as a boon to traders who wish to gain exposure to Bitcoin without directly buying it. However, given the volatility of Bitcoin, there is a need for caution and patience.
Final Words
This article provides a deep insight into the world of cryptocurrencies and how to invest in cryptocurrency. Cryptocurrency is indeed the rising star of the financial world and will continue to compete with the traditional market in the years to come. However, inevitable glitches need to be ironed out before the crypto ecosystem finds widespread acceptance. One of them is legality and ownership in individual wallets getting hacked, which unfortunately is a hard reality. Despite such shortcomings, the rise of Bitcoin and its affiliates is imminent, and the early investor will reap its benefits if invested wisely. Find out more about Bitcoin and other articles related to cryptocurrency on our blog.
FAQs
A quick cryptocurrency FAQ with common questions and things you need to know.
Where to buy Bitcoin besides cryptocurrency exchanges? How to invest in a Bitcoin-related stock?
- Bitcoin ATMs
- P2P Exchanges
- Brokerages
What’s the relationship between Bitcoin and Blockchain?
Bitcoin is a decentralized digital currency, while a blockchain is a distributed database. Bitcoin is powered by blockchain though there are many other uses of blockchain.
Is Bitcoin the only cryptocurrency?
As mentioned in the article, there are 16,600 cryptocurrencies available currently.
How much should I expect to pay for Bitcoin?
On the Bitcoin network, the average daily transaction fees this year has ranged from $1.78 to $62. The volatility of the cryptocurrency has to be factored in, while trading in it.
Does SIPC protect my Bitcoin purchase?
SIPC (Securities Investor Protection Corporation) protects brokerage accounts but only for traditional stocks and not cryptocurrencies.
References
- Royal J., Voigt K. (Jan 10, 2022, What is Cryptocurrency? Here’s what you should know.)
https://www.nerdwallet.com/article/investing/cryptocurrency-7-things-to-know
- Voigt K. (Jan 4, 2022; 10 Best Crypto Exchanges and Platforms of January 2022)
https://www.nerdwallet.com/best/investing/crypto-exchanges-platforms
- Sen Chanda, N. (June 23, 2021; Six Things Investors Need to Know Before Investing in Cryptocurrencies)
https://www.fool.com/investing/2021/06/23/six-things-investors-must-know-before-investing-in/
- Yahoo! Finance
https://finance.yahoo.com/news/fdic-spic-protecting-assets-150000618.html
- Vigna P. (Dec 18, 2021; Crypto and Its Many Fees: What to Know About the Hidden Costs of Digital Currency)
- Brockman, K. (Nov 11, 2021; 3 Ways to Invest in Cryptocurrency If You’re a Risk-Averse Investor)
https://www.fool.com/investing/2021/11/11/invest-in-cryptocurrency-if-youre-risk-averse/
- Bitcoin
