Cryptocurrency, or crypto, is a digital or virtual currency that uses cryptography to secure transactions and control the creation of new units. Cryptocurrencies are decentralized and not subject to government or financial institution control. As such, cryptocurrencies can be used to buy goods and services securely, store value, or send money across borders quickly and easily.
How to Buy Crypto
The most popular way to invest in cryptocurrency is direct. When investing in equities, you would typically go through a broker or use a brokerage account. However, because crypto trading is decentralized, there’s no need to go through a third party. You can begin buying crypto right now. All you need to do is exchange fiat currencies (USD, EUR, etc.) for cryptocurrencies.
Open an account on a crypto exchange. These function like regular online stock exchanges but trades cryptocurrencies instead of stocks and bonds. Most crypto exchanges have apps you can download to your mobile devices for quick access to your account anywhere, anytime. Coinbase is a U.S.-based crypto exchange that allows you to buy and sell Bitcoin, Ethereum, Litecoin, Bitcoin Cash, and more. You can also work with Binance.
Cryptocurrency investing is a straightforward process. Once you’ve made an account on a crypto platform, you can begin purchasing or trading digital assets.
The Risks of Investing in Cryptocurrency
There are some risks associated with investing in cryptocurrency. As with all investments, there is always the risk of losing your money, but when you invest in cryptocurrency, you take on a different level of risk.
It’s Highly Volatile
Crypto is a volatile asset, which means its value can fluctuate significantly over time. While Bitcoin and other top cryptocurrencies have soared in recent years, they also inevitably crash. This can make it difficult for investors to earn a stable return on their digital assets.
Historically Unstable and Unpredictable
Crypto is a notoriously unstable investment. While its volatility is what leads to the insane gains, it’s also led to massive market crashes in its short history. A great example of a crypto crash was the FTX scandal – Fall of 2022 saw the downfall of one of the biggest crypto exchanges. The result? Crypto was devalued by millions of dollars, and investors who didn’t cash out were left out in the cold.
Because crypto is exclusively digital and completely decentralized, you are subject to market manipulation like pump-and-dump schemes that can negatively impact your investments. A great example of this is Dogecoin, a currency worth fractions of pennies. When Elon Musk promoted it, his followers flocked to purchase, only to lose out big when the people holding large numbers in their wallets sold.
Lack of Security
There is also the issue of security. Because many cryptocurrency investments are traded on a public blockchain network that is not regulated by a central authority, there is a risk of theft or hacking that can lead to the loss of your investments.
Legal Gray Area
It’s also in a legal gray area, and if crypto becomes illegal or more regulated in the future, investors could lose on their initial investments.
Crypto Risk Management Strategies
It’s essential to be selective about the cryptocurrency exchange you incorporate into your personalized investment strategy. Typically, crypto investors will hold digital currencies on crypto platforms like Coinbase. Only invest with a secure, transparent platform with the crypto virtual currencies you want available.
If you don’t want to store your digital currency on the crypto exchange, you will need to create a crypto wallet. Crypto wallets are private keys used to access your cryptocurrency holdings. There are hot wallets and cold wallets -- a hot wallet is accessible via the internet and can be used quickly to exchange funds. A cold wallet, like a USB drive, holds your coins offline in a physical storage device. Using a digital wallet is a great way to protect crypto funds from hacks or malfunctions.
It’s also important to be wary of scams. Hackers have become increasingly bold and will try to phish people with misleading emails regarding their crypto holdings. It’s also possible that the crypto wallet is malware and used to track your information. Never open suspicious emails and always make your crypto purchases on trusted sites.
The Benefits of Investing in Crypto
Despite some of these risks, crypto-assets offer a number of benefits that make them an attractive investment.
It’s Highly Profitable
Cryptocurrency can be a highly profitable investment, and it has the potential to appreciate significantly. In addition, the blockchain technology behind crypto provides many opportunities for innovative applications and solutions across many industries.
It’s incredibly versatile and can function as a means of payment as well as an asset to store value. It can also be easily transferred and held between users without third parties getting involved.
A New Level of Privacy
Blockchain technology also offers a new level of privacy, making the cryptocurrency market attractive to those interested in a decentralized commerce system.
Different Ways to Invest In Crypto
If you want to diversify your crypto assets, there are numerous ways to do so. The crypto industry is new but vast, and many forms of investing in cryptocurrency exist.
You can buy cryptocurrency stocks, so to speak, or token projects by acquiring shares in the company through an Initial Coin Offering (ICO) or through the purchase of existing shares.
Crypto ETFs are another way to diversify your portfolio. They provide an easy method of risk management when investing in cryptocurrency, allowing you to dive into the crypto market without purchasing digital assets individually.
There are also multiple ways to buy fractional amounts of cryptocurrency if you don’t have a significant amount to invest. For example, you can open a separate margin account to trade on leverage, allowing you to buy a fraction of a coin without purchasing the whole coin outright.
The Best Crypto Investment Strategy
Because crypto is highly volatile, it has the potential to destabilize your portfolio significantly. When you invest in cryptocurrency, you risk losing the entirety of your investment. Cryptocurrency investing is a trendy money-making opportunity now, but the past few years have demonstrated that it’s unstable, and often inflated, and cryptocurrency investing has left many investors vulnerable.
In order to safely invest in cryptocurrency, investors must ensure that they have a risk-balanced and diversified portfolio, enough emergency funds to help them survive if their investment fails, and a secure, offline crypto wallet.
While each investor is unique, it’s best to avoid holding significant portions of your portfolio in crypto-assets due to the risk involved. Some investments that could potentially risk-balance a portfolio that includes crypto are gold or art. To create a risk-adjusted portfolio, it’s advisable to speak with a financial expert.
Hedgeful is an app that translates institutional investment advice for the average retail investor. Our insight will help you create a balanced, risk-adjusted portfolio that’s curated to meet your financial goals.
Taxation and Regulations
Crypto is taxed differently in many countries around the world. In some cases, such as the United States, the income from crypto is treated as capital gains and subject to the same tax rates as other capital gains investments, like stocks.
The US does not have a comprehensive regulatory structure in place for crypto. Because it’s such a new and innovative currency, the government has been slow to implement anything salient. Still, there are a few regulations investors should be aware of.
The first thing to note is that cryptocurrency is not considered legal tender. It’s actually classified as a money transmitter or a business entity that exchanges fiat currency for virtual currency or vice versa.
Who Regulates Crypto in the USA?
In the US, the status of cryptocurrencies as financial instruments is pretty recent. The tax implications of trading crypto are still uncertain as well. Crypto Exchanges are regulated by the Bank Secrecy Act (BSA), meaning crypto exchanges must register with FinCEN and hold them to the same standards as banking institutions.
The SEC and Crypto
The US Securities and Exchange Commission has also noted that they consider crypto-assets to be securities and, therefore, subject to federal securities laws. On the other hand, the Commodities Futures Trading Commission has taken a laissez-faire approach to crypto-assets and allowed them to be traded publicly. As of now, there is yet to be clear guidance as to which agency will regulate crypto businesses in the future, but the US Treasury has expressed an urgent need.
Crypto is a volatile yet very popular asset class that retail investors should actively include in their portfolios. However, it's important to choose innovative ways to invest in cryptocurrency such as Crypto ETFs or fractional cryptocurrencies. If you're unsure how to do that, using an investment app like Hedgeful is the best way to go about it.