How to Invest in Cryptocurrency 101

Wondering how to invest in cryptocurrency? Before you start, take look at some key risks and make sure you are in a good place to dive in!

How to Invest in Cryptocurrency

Before we begin discussing how to invest in cryptocurrency, I’d like to recommend those who are considering investing in any asset should first have a solid budget, emergency fund, life insurance, retirement plan (401(k), and/ or something like a Roth IRA), and primary responsibilities are taken care of. I also think it is worth giving your high-interest credit card debt a serious reduction (or even elimination) before getting started. 

Additionally, and as a general rule, only invest what you can afford to lose; consult with a trusted professional who is familiar with your financial situation as well. It is also a very good idea to have an overall strategy or stated purpose for what you are trying to accomplish. Make sure you have a plan and strategy in place before jumping in.

What is Cryptocurrency?

Cryptocurrency can be used to generally define digital money, existing in and supported across a decentralized network (e.g. based on blockchain). It is different from fiat currency (e.g. the US dollar) and comes in many different forms (e.g. Bitcoin, Ether, etc.).

Popular Types of Cryptocurrency

Popular forms include Bitcoin (BTC), Ether (Ethereum) (ETH), Litecoin (LTC), and many others; these are only a few names. Each cryptocurrency advertises a benefit, attempts to fill a specific need, or something better than another cryptocurrency. This is where things get really interesting! It is also where research comes into play.

Risks

As I said previously, it is a good idea to engage in investing only after you have addressed key responsibilities and obligations. Worst case scenario, even if you lose everything in the investment you still have your main portfolio intact.

Additionally, because cryptocurrency comes in multiple variations and attributes there may also be unique risks associated with that particular digital currency. Read up, do your homework, and make sure the risks are acceptable.

Systemic risk is always there, and perhaps it is a different animal for cryptocurrency than for the rest of the stock market. Due to its decentralized nature, cryptocurrency might be well-positioned as a hedge for your portfolio.

Systematically, another risk to keep in mind is the regulatory risk. Politics could play a role, and so does celebrity influence (e.g. Elon Musk). All that said, these are things to keep in mind, and ties-in with the important message of doing homework before you start investing. 

Resources

There is a lot to consume on this topic. In my opinion, not all resources are created equally. A great resource, specifically for Bitcoin, has been Matthew Kratter’s book. I also like his website, Trader University.

Beyond that, Coinbase also offers some basics to help you get started as well. I am sure there are also many others! 

One point of caution: make sure to corroborate your information and if you choose to sign-up for any subscriptions, make sure to guard your private keys; NEVER SHARE THEM! Unfortunately, as many good and value-add resources as there are, there is always at least one trouble-maker. 

Getting Started, and Learning How to Invest in Cryptocurrency

Ready to get started? Here are some observations for your consideration; they will help you align cryptocurrency investments with your overall strategy.

How to Invest in Cryptocurrency and Support your Portfolio

As we established previously, there are risks associated with any investment and the same is true for cryptocurrency (perhaps, even more so). Systemic and systematic risks could affect your portfolio at one point or another.

One approach for investing is to consider your asset allocation and use cryptocurrency as a way to diversify and protect your overall investment portfolio. While this isn’t an exhaustive list, we hope it provides a few different roles this asset could play in your overall investment strategy.

Additionally, consider using cryptocurrency such as Bitcoin as a way to hedge against inflation. 

Finally, cryptocurrency could also serve you as a speculative investment, representing a portion of funds that are intentionally allocated in riskier investments.

Cryptocurrency Exchanges

This post does not include an exhaustive list of every place to purchase cryptocurrency. As a suggestion, take a look at Coinbase, Coinbase Pro, Binance, and Kraken to start.

Take a look at fees, and make sure you are comfortable with what you are signing up for. I also recommend reviewing and implementing their recommended security steps as well. For example, enabling two-factor authentication provides additional security for your investments.

Free Cryptocurrency

I will say that I have been very impressed with the array of opportunities to earn a few crypto coins via Coinbase. You certainly won’t retire young, but it is nice to get them as part of an effort to learn more about the way cryptocurrency works.

Beyond that, I have also found the Brave and BAT combination to work pretty well. I find that I’m online… a lot… (aren’t we all?) and like the ability to earn a few BAT for my time viewing various advertisements (as they say, why give away my time for free?).

I have seen quite a few other opportunities for “free” cryptocurrency but I have not tried them myself and as such, I cannot recommend them in good faith. Have you had success? Let us know in the comments!

In general, when trying to find free cryptocurrency, it is a good idea to find out who holds the private keys and if you can transfer them to your possession. Remember the phrase: “not your keys? not your crypto coins.”

Know Thyself

As with any investment, we are all prone to certain psychological tendencies. Take a moment, learn about investment biases, and guard yourself against emotional investing choices. This extends beyond knowing “thyself” and will help you be prepared to strike when a good opportunity presents itself.

How to Secure and Protect your Cryptocurrency

Investing in cryptocurrency is exciting, but don’t forget to safely store your investment. The “right” approach is different for everyone. Factors include personal preferences and additional costs. Also, remember from our section above, regarding your keys! 

As you make up your mind on what works best for your situation, here are a few components to consider.

Public Keys

Public keys (or addresses) are ok to share – this is how you transfer your cryptocurrency. For example, friends could exchange cryptocurrency this way and there would be no inherent security risk to either party. Private and Public keys have a relationship; they are linked but serve two different roles. In a decentralized network where all transactions are verified, it is these keys that send or receive. I think of these as an address or an email.

Private Keys

Private Keys are yours, and the public key is derived via mathematics from them. We did touch on this a couple of times already, and I wanted to say it again because it is very important. You absolutely need to guard your Private Keys. If you have them already written down, make sure you have them safely secured. I think it is a good idea to avoid storing them electronically (e.g. do not text them to yourself, don’t take a picture of them, etc.). This is the key that “unlocks” your cryptocurrency.

Hot Wallets

Hot wallets give users the option to store their cryptocurrency private keys online. However, they are still connected to the internet which could give some cause for concern.

As an example, the exchange you purchase cryptocurrency on is a form of a hot wallet. When you transfer cryptocurrency from the exchange to a third-party hot wallet, it allows you to maintain better control over your private keys.

Cold Wallets

These wallets are “offline” and allow users to secure their investment. Some options are Trezor and Ledger. Regardless of which you pick, make sure you pick from a proven company with a solid performance record. Absolutely do your homework!

If you transfer cryptocurrency from the exchange, then you are effectively taking it offline. By taking it offline, the thought is that doing so helps keep your investment safe from hackers. However, beware of phishing and other attempts to scam investors by getting ahold of their private keys. Don’t share your private keys!

As we learned more about how to invest in cryptocurrency and before we wrap up this post, I would like to mention that I am not sponsored by any of the products mentioned above. My friend, I hope this helps frame up an idea of how you’d like to start investing in cryptocurrency! Best of luck to you and your family. (And please, be careful with your private keys!)