Cryptocurrencies like Bitcoin and Ethereum have seen enormous volatility since being introduced, but this also creates opportunities for profits if you know how to trade these digital assets properly. While crypto veterans have been speculating for years, crypto investing can seem daunting for beginners.
This guide aims to explain crypto investing in a beginner-friendly way, with a focus on usefulness for readers rather than gaming search rankings.
What is Cryptocurrency?
Before diving into investing, it helps to understand what cryptocurrencies actually are.
Cryptocurrencies are digital assets that use cryptography to secure transactions. Transactions are recorded on a decentralized public ledger called a blockchain, which is maintained by a network of computers.
The most popular cryptocurrencies include:
But there are now over 15,000 different cryptocurrencies in existence.
How to Start Investing in Crypto
Here are 5 key steps for crypto investing beginners:
1. Get Your Finances in Order
As with any investment, it’s wise to get your core finances squared away first:
- Build up an emergency fund
- Pay down high-interest debt
- Start contributing to retirement accounts
Crypto investments can be one part of a diversified portfolio, but make sure your finances are in a healthy place before getting started.
2. Research Different Cryptocurrencies
With over 15,000 cryptocurrencies to choose from, research is crucial. Every crypto functions differently:
- Bitcoin relies purely on supply/demand – no underlying assets or cash flows.
- Ethereum is a blockchain network for decentralized apps. The Ether token powers the network.
- Stablecoins like Tether aim to peg their value to an external asset like the US dollar.
Understand the investment upside/downside and use case for any crypto you buy.
3. Consider Dollar-Cost Averaging
Cryptocurrencies tend to be volatile, with prices fluctuating wildly day-to-day.
Dollar-cost averaging (DCA) can help manage this volatility. With DCA, you invest a fixed dollar amount at regular intervals over time. This helps avoid investing all your capital at a peak.
DCA takes discipline, but helps mitigate risk. Apps like Bitcoin Era offer automated DCA investing.
4. Practice Risk Management
Careful risk management is crucial for crypto investing:
- Long-term investors may choose to „hodl“ and never sell.
- Short-term traders could cut losses quickly if an investment drops 10%.
Consider setting aside a portion of your capital and only investing part of it at first. This reserves capital to trade with if a position drops.
5. Only Invest What You Can Afford to Lose
As a speculative investment, only invest as much as you’re prepared to lose entirely in crypto. Don’t invest money needed for upcoming expenses.
Start small while you learn the ropes. Pay down high interest debt before investing disposable income into crypto.
Investing Directly in Cryptocurrencies
The most direct way to invest in crypto is buying coins themselves through:
- Crypto exchanges like Coinbase and Binance
- Financial apps like PayPal, Robinhood, and Cash App
- Traditional brokers now offering crypto like Interactive Brokers
Focus on minimizing fees and understanding security policies when choosing platforms.
Securing Your Cryptocurrency
Once purchased, many investors transfer coins to a crypto wallet to store privately. Leaving coins on an exchange increases hacking risk.
Hardware wallets like Trezor provide offline storage. Software wallets like Exodus provide free software wallet options.
Getting Started with Your First Trade
If you’re ready to buy your first cryptocurrency, here are some step-by-step tips for making your first trade:
First, sign up for an account with a mainstream exchange like Coinbase or Gemini. Verify your identity by providing information like your name, date of birth, and address.
Next, deposit funds into your exchange account. You can link your bank account or deposit directly from a debit card. Exchanges will also provide you with a BTC or ETH wallet address you can send coins to.
Once funded, browse the exchange markets to find the cryptocurrency you want to buy. Exchanges will show current market prices and volumes. You can place buy orders for your desired crypto amount.
When ready, go to the exchange marketplace and enter the amount of crypto you want to buy along with the market price you’re willing to pay. This will execute your first market buy order.
Finally, move your new coins to your personal crypto wallet for security. Withdraw to a software, hardware, or paper wallet you control rather than leaving coins on the exchange long term.
Celebrate making your first successful crypto purchase! But keep practicing to get comfortable with the exchange interface and order types before making larger trades.
When to Buy and Sell Your Crypto
Timing the markets is notoriously difficult with volatile assets like cryptocurrency. But here are some loose guidelines for when buying or selling may make sense:
Consider buying when:
- The crypto market is in a downtrend after a crash and showing signs of bottoming out
- On significant dips of 10% or more, especially in assets you want to hold long-term
- Your preferred crypto has positive news like a major partnership announcement
Consider taking some profits when:
- Your crypto investment has doubled or tripled in value
- The market is overheated after a vertical parabolic rise over a short period
- Support levels break down indicating a reversal to a downward trend
Of course, no one can predict future price movements with certainty. But having a plan in place helps avoid buying at peaks out of FOMO or panic selling at bottoms.
Managing Your Crypto Investments
Once you begin accumulating cryptocurrency holdings, here are some tips for ongoing management:
- Transfer coins off exchanges into secure personal wallets
- Consider staking coins like Tezos to earn interest on your holdings
- Track your portfolio value with a crypto tracking app like CoinMarketCap
- Don’t check prices obsessively – crypto is extremely volatile short-term
- Rebalance periodically just as with other asset classes
- Take some profits along the way on holdings that have risen tremendously
The crypto market is open 24/7 which can make it enticing to constantly watch prices. But avoid emotional reactions. Stick to your investing strategy and thesis for owning crypto assets.
With sound principles for security, taking profits, and portfolio management, crypto investing can become an integrated part of your overall finances.
Other Ways to Invest in Crypto
Beyond direct crypto ownership, other options include:
- Crypto futures allowing leverage to amplify gains and losses
- Crypto funds like Grayscale Bitcoin Trust that hold crypto assets
- Stocks in crypto exchanges like Coinbase
- Blockchain ETFs for investing in blockchain companies
These provide indirect crypto exposure. Do research to understand exactly what asset each option provides exposure to.
Crypto Investing FAQs
How much money do I need to start?
Exchanges allow starting with as little as $5-10. However, fees eat into profits with small investments. Minimize fees by using a competitive platform.
How does blockchain work?
Blockchain is a decentralized ledger that records all transactions on a cryptocurrency network chronologically. The global network of computers maintains and updates the ledger.
Can I make money mining crypto?
„Mining“ refers to running specialized rigs that solve complex math problems to verify transactions on proof-of-work blockchains like Bitcoin. Miners receive crypto rewards. However, mining now requires large-scale operations and high electricity costs.
What are altcoins?
Altcoins refer to crypto alternatives to Bitcoin. Originally a pejorative term, increased adoption of cryptocurrencies like Ethereum has made „altcoin“ less common.
Should I invest in Bitcoin?
Bitcoin is highly speculative but has potential for gains. Consider dollar-cost averaging and invest only what you can afford to lose. Exchanges like Coinbase and PayPal offer easy Bitcoin purchasing.
The Bottom Line
- Crypto investing can provide big rewards but carries high risk
- Research thoroughly before investing in any cryptocurrency
- Use dollar-cost averaging and only invest disposable income
- Practice careful risk management with any volatile investment
Approach crypto investing as a small part of a diversified portfolio. With proper risk management, crypto can be an exciting – though speculative – addition to an investment strategy.
Frequently Asked Questions
How do I get started investing in crypto?
The easiest way to start is by opening an account with a mainstream crypto exchange like Coinbase. Fund your account with a bank transfer and then trade popular coins like Bitcoin and Ethereum directly on the exchange. Start small with an amount you’re comfortable losing entirely.
What is the minimum I need to invest in crypto?
Most exchanges allow starting with as little as $5-10. However, small investments can get eaten up by fees. Look for an exchange with competitive fees like Gemini ActiveTrader or FTX that will maximize returns on small investments.
What percentage of my portfolio should I allocate to crypto?
Most experts recommend limiting crypto to 1-5% of your overall portfolio at most. Crypto is a high-risk, speculative investment. Never invest money you can’t afford to lose completely.
How do I store my cryptocurrency safely?
Leaving coins on an exchange increases hacking risk. Use a hardware wallet like Trezor or Ledger for offline cold storage. Or opt for a software wallet like Exodus or MetaMask for storing smaller amounts.
Can I make money mining cryptocurrency?
Unless you have access to industrial-scale mining equipment and extremely cheap electricity, mining for a profit is very difficult for individuals today. Alternatives like cloud mining often turn out to be Ponzi schemes. For most investors, buying and trading tends to be more viable than mining.
What is the best platform for investing in crypto?
The best platform depends on your needs. Mainstream exchanges like Coinbase and Gemini offer an easy intro. Advanced platforms like Kraken and Binance.US provide lower fees for high volume traders. Brokerages like Robinhood offer crypto alongside stocks. Overall, look for low fees, security, and features meeting your needs.
Should I invest in Bitcoin or altcoins?
Bitcoin is less risky as the most established cryptocurrency. Only invest in lesser known altcoins after thoroughly understanding that specific asset. Even popular altcoins like Ethereum carry more risk than Bitcoin based on lower market adoption.
Is crypto a good long-term investment?
Crypto has potential for huge gains but historically experiences bubbles and crashes. Consider hedging with a long-term diversified portfolio in addition to any crypto. Stick to investment best practices like avoiding emotional reactions and only investing disposable income.
What will drive future crypto returns?
Future crypto prices will depend on adoption for uses like payments, decentralized finance, NFTs, metaverses, and more. Monitor on-chain activity metrics to gauge real world usage. Ultimately, increased utility and institutional adoption could drive future cryptocurrency returns.