How to Invest in Crypto, Strategies for Successful Investing

Stocks faced significant volatility in 2023, continuing the trends set in 2022. Factors such as persistent inflation, ongoing adjustments in the U.S. Federal Reserve's monetary policy, and global geopolitical tensions contributed to market fluctuations. Meanwhile, cryptocurrencies experienced a rollercoaster year. After initial rallies, partly due to America's progress in establishing clearer regulations for digital assets, the crypto market faced turbulence. Bitcoin, the most recognized cryptocurrency, saw notable highs and lows, reflecting the market's volatility.
Crypto has quickly established itself as a major asset class, with many investors now open to adding some to their portfolios. While Bitcoin is used as an all-encompassing word for cryptos, it is just one of the thousands in existence. Ethereum, Dogecoin, Litecoin, and Cardano are other major digital currencies. But these are incredibly volatile assets prone to price fluctuations by the hour.
Before you take the plunge, know that there's a likelihood you may lose your money because crypto is a high-risk investment. Before investing, you may also want to educate yourself about blue-chip cryptos, transaction fees, and tax treatment. But cryptos also make a worthy investment; they provide a hedge against inflation, and you may see outsized returns.
In this article, you’ll learn all the different ways you can invest in crypto to pick the types of crypto that work best for your investment portfolio.

What is cryptocurrency?

Cryptocurrencies are digital assets that exist virtually; central banks do not create them. So, how are they created? It involves volunteers from all across the world using specialized computers. And this is the reason cryptos are called "decentralized;" a single entity doesn't control them.
The most common way cryptos are created is through mining, verifying new transactions, and adding them to the blockchain. Bitcoin and Ethereum are some of the cryptos that can be mined. But mining these digital currencies is extremely detrimental to the environment because of their high energy consumption.
Proponents believe crypto will replace traditional financial institutions and disrupt many industries. Critics focus on cryptos' wild price swings and their usage in criminal activities.

Things to consider before investing in crypto

Scams

The crypto industry is rampant with scams. Investments related to digital assets are the top threat to investors in 2024, according to a survey of securities regulators. Ponzi schemes, fake websites, and pump-and-dumps are just ways fraudsters will try to lure you in. As the old adage goes, it probably is if it's too good to be true.

Capital

Crypto prices fluctuate all the time, so it's important that you do not invest the majority of your capital in this asset class. Instead, only invest what you're willing to lose potentially.

Diversification

Never put all your eggs in one basket. Buying only one cryptocurrency means you may lose money if that crypto's price falls. Instead, invest in different coins to limit any losses should prices plummet.

Think long

All investments should be made over a long investment horizon, but that's especially true for crypto. While prices decline, in the long run, they always increase. If you buy and hold, you should be able to maximize your returns.

How to invest in crypto

Cryptocurrency Exchanges

How to Invest in Crypto, Strategies for Successful Investing
Directly buying coins on an exchange is the most common crypto investment method. It is also one of the simplest ones. You pick an exchange you like, create an account there, transfer some money, and buy your favorite coins.
That’s how it works on centralized exchanges. But that’s not the only type of exchange. There are also decentralized and peer-to-peer exchanges. So, let’s go into each of them.

Centralized exchange

A centralized exchange (CEX) works like traditional investment brokers and stock markets. Users transfer money to the exchange, credited to their account so they can trade. The exchange controls all the transactions and the private keys for the hardware wallets where the cryptocurrencies are stored.
The daily volume of transactions on CEXes reaches tens of billions of dollars, and because of the ease of use, it is one of the preferred methods to buy crypto.
A few of the exchanges operating in the United States:

Decentralized exchange

A decentralized exchange (DEX) is one of the big innovations made possible by blockchain technology. It creates a trustless environment where users trade directly with each other. These trades happen on the blockchain with the help of a protocol and smart contracts. This way, a decentralized exchange does not hold a user’s funds, and the user does not have to trust an intermediary. Besides security, privacy is another advantage since there’s no need to provide personal information to create an account.
The traded volume on DEXes is generally lower than on CEXes since a user has to already own cryptocurrency bought somewhere else, and DEXes require higher technological affinity to understand and use them.

Peer-to-peer exchange

A peer-to-peer (P2P) exchange is similar to a DEX because a user trades directly with another user. The difference is that there’s no coded protocol or smart contract on the blockchain. A user gets in contact with another user over a platform or website, and they decide on the terms of the trade. Some P2P exchange trades also occur in person, especially if they don’t want to leave traces on the traditional banking system.
P2P exchanges are more common in countries with less trust in the government or where crypto is banned. People also found a method to keep their savings safe from high inflation.

Over-the-counter

Over-the-counter (OTC) trading takes place off of exchanges. In an OTC trade, the parties involved trade directly with each other. No one else besides the parties involved knows about the price and volume traded. It is mainly used for big orders, which would be too disruptive if placed on normal exchanges.

Investment brokers

Besides offering their traditional financial products, like enabling their clients to purchase stock, bonds, and other securities, investment brokers have recently picked cryptocurrencies as an additional offering.
So, if you already have an account with an investment broker, it is an easy way to purchase crypto directly or invest in crypto futures. Just be aware that most don’t allow you to withdraw your coins. You’d have to sell your crypto or futures and withdraw in dollars. Also, they usually only offer mainstream cryptocurrencies. You won’t find smaller altcoins here.
A few of the investment brokers who offer crypto:

ATMs

Cryptocurrency ATMs are a very convenient way to buy crypto using bank cards or cash. According to Coin ATM Radar, there are over 50,000 ATMs just in the United States alone. They often differ, as they belong to many different operators. You might need a government-issued ID to buy crypto at some ATMs. And while some only allow you to buy crypto, on others, you can buy and sell.

Payment providers

Payment providers like Paypal, Square, and BitPay also jump on the crypto bandwagon. Customers can buy and sell cryptocurrencies on their platforms. Most payment providers don’t let you withdraw them, so you must convert your coins to cash before withdrawing or transferring. Still, it’s one of the simplest and easiest ways to get exposure to crypto if you already have an account with them.

Coin offerings

How to Invest in Crypto, Strategies for Successful Investing
In traditional finance, companies can raise capital through an initial public offering (IPO). Company shares are sold to institutional and retail investors and then listed on an exchange like the New York Stock Exchange or Nasdaq.
Projects can similarly raise funds in the crypto space. They raise money from investors, often in the form of Bitcoin (BTC) or ether (ETH), and then later distribute the coins and tokens. Over the last couple of years, three main methods to do an initial offering have emerged.

Initial Coin Offering

Initial coin offerings (ICOs) were all the craze in 2017, especially on the Ethereum blockchain. Billions of dollars were raised through them. Projects would launch a website where people could register for the ICO with their personal information and wallet address. Then they’d send ETH or BTC to the project’s digital wallet, and the smart contract would, in turn, send them their new tokens. Once they got their tokens, they could deposit them on a CEX or a DEX and trade them there.
Today, the ICO market has cooled off considerably. Nevertheless, some projects still prefer to launch using an ICO, and it is a valid method to invest in crypto.

Initial Exchange Offering

An initial exchange offering (IEO) is very similar to an ICO. The difference lies in who manages the offering. Instead of the project team doing it independently, they partner with an exchange. Then, the exchange makes the offering on its website. It adds trust and ease to the process since buyers often already have an account with funds on the exchange.

Initial DEX Offering

Initial DEX offerings (IDOs) have recently picked up in popularity, and it is becoming the preferred method to raise capital in decentralized finance (DeFi). Instead of paying a fee for a CEX to create the offering and launch the token, it is launched directly on a DEX. And because it is a DEX, there are no restrictions on who, when, and where you can buy the tokens.

Stocks

How to Invest in Crypto, Strategies for Successful Investing
One way to get exposure to Bitcoin and other cryptocurrencies without buying and holding them is to invest in companies that provide services to the crypto space or hold coins themselves. Investing in company stock is much easier and safer than investing in a digital currency.
Tesla and MicroStrategy made headlines and bought billions of dollars worth of Bitcoin. Nvidia and AMD manufacture GPUs used for mining crypto. Visa has recently started settling payments in USDC, a Stablecoin on the Ethereum blockchain. Riot Blockchain is a Bitcoin mining company. Salesforce has created its own blockchain. Companies like Google, IBM, Amazon, Microsoft, and SAP have all invested in blockchain technology. These companies and many others are involved in blockchain and cryptocurrencies. But they’re involved to varying degrees, so the best pick depends on what you’re looking for.
The stock of a company like Microsoft, which has dozens of revenue streams and a market capitalization of over a trillion dollars, will be much more stable than that of a small company where 100% of its revenue comes from mining Bitcoin.

Funds

Investors looking to invest in Bitcoin through the capital markets can do so by investing in funds. Holding a fund with exposure to cryptocurrencies can reduce volatility. You also don’t have to worry about exchanging fiat currencies for cryptocurrency or maintaining a digital wallet.
Right now, a few players are creating Bitcoin trusts, the best known being Grayscale’s Bitcoin Trust (GBTC). GBTC is a fund that does hold Bitcoin. However, GBTC’s 2% management fee is much higher than you'll pay for the typical index fund or an actively managed mutual fund.
And people could also invest in funds exposed to cryptocurrencies and blockchain technology. These funds invest in companies involved in developing and using blockchain technology.
The three largest blockchain ETFs are:
  • Amplify Transformation Data Sharing ETF
  • Bitwise Crypto Industry Innovators ETF
  • Global X Blockchain ETF
ProShares Bitcoin Strategy ETF, Simplify U.S. Equity PLUS GBTC ETF, Valkyrie Bitcoin Strategy ETF, VanEck Bitcoin Strategy ETF, Global X Blockchain & Bitcoin Strategy ETF and Valkyrie Balance Sheet Opportunities ETF are the Bitcoin exchange-traded funds approved for trading by the SEC.

NFTs

In March 2021, Saturday Night Live aired a sketch describing NFTs (non-fundable tokens). A month later, SNL sold the sketch for $365,000. The sketch followed news of Christie's selling an NFT of Beeple's artwork for $69 million. NFTs are all the rage right now. Big chains like Taco Bell have launched their own. Celebrities are partnering with platforms to create NFTs. Tweets and JPEGs are being sold for millions.
If you’re an artist or have other ideas you can sell as NFTs, it could be a way to invest in crypto since you’ll most likely get paid in cryptocurrency. Most NFT platforms and marketplaces are based on top of the Ethereum blockchain, and the sales are settled in ether. You can turn your drawing, song, or meme into crypto.

Mining

How to Invest in Crypto, Strategies for Successful Investing
Mining is how it all started with Bitcoin back in 2009. Bitcoin is a proof-of-work blockchain that takes computational power to secure the network. And as a reward for spending computational resources, miners get Bitcoin. By mining, you can earn cryptocurrency without putting down money for it. Well, besides the cost of the hardware and electricity.
So, if you want to mine cryptocurrencies like BTC, ETH, Monero, and others, you’d first have to buy the necessary hardware, which can differ depending on what you’ll mine. For Bitcoin, you’re looking at specialized processing units called ASICS; for Ethereum, you’ll need GPUs. Unfortunately, both are often sold out worldwide because of the recent rise in Bitcoin prices and other cryptos. Then, the next important factor in determining your profitability will be how much you pay for electricity. Free electricity is ideal. A couple of cents per kWh is acceptable. And over 10 cents per KWh, like in European countries, makes it unprofitable to mine cryptocurrencies.

Lending

Cryptocurrency lending works by connecting borrowers to lenders via an online platform. You can lend your digital assets through crypto exchanges or different lending sites with an interest rate. The interest rate is frequently between 2% and 14% APY, much higher than in traditional banking. The downsides are the volatility and the risk of the platform you’ve put your digital assets having problems like getting hacked.

Liquidity mining

Trading on a centralized exchange is done through order books. On a decentralized exchange, there are no order books. Trading is done through liquidity pools. A liquidity pool is a collection of funds locked in a smart contract and used to facilitate decentralized trading. You’re effectively trading with the liquidity pool when you place an order. And for stocking this liquidity pool with coins on both sides of the trade, users are rewarded with a small percentage of the trading volume as a fee. This is called liquidity mining.
Not clear? Imagine you have ETH, and you want to trade it for some UNI, the token from the decentralized exchange Uniswap. A smart contract on the Ethereum blockchain provides this trading pair. And inside this smart contract, there’s a liquidity pool filled with thousands of ETH and UNI. This ETH and UNI were put there by other users. And as a reward for them doing this, they get to keep a small percentage of the transaction volume. So, essentially, he is passively earning crypto.
This has more implications, especially if the value of the coins in the pool, ETH and UNI, fluctuates. This can lead to impermanent loss, but this is a complex topic for another day.

Staking

We’ve talked about how through mining, proof-of-work blockchains are kept secure using computational power. An alternative to proof-of-work is called proof-of-stake. Instead of using computational resources, those keeping the network secure do so by staking crypto they own to validate the transactions in the blockchain. They lock their crypto with the blockchain to keep it secure by being validators, deciding which transactions are valid and should go through. As a reward, they receive a small amount of crypto.

The bottom line

There are many ways to invest in digital assets. You can buy them directly, invest in funds, or even create and sell your own NFTs. Your chosen path depends on your preferences, goals, and risk tolerance.
Like any other investment, do your homework before investing. Beware of scams and opportunities that look too good to be true. Understand what you are investing in, as well as the risks and returns. This is an asset class with high volatility. And the golden rule is only to invest what you can afford to lose.

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