How to invest in cryptocurrency has become a burning question as the popularity of this digital asset class explodes. Fueled by the remarkable ascent of major players like Bitcoin and Ethereum, more individuals are keen to enter the arena. Yet, for those new to the game, the prospect can be daunting. To guide beginners through this complex landscape, here are five essential steps to take when investing in cryptocurrency for the first time.

Types of cryptocurrencies

The term “cryptocurrency” encompasses a broad range of virtual currencies utilizing blockchain technology, with over 26,000 identified as of July 2023, according to CoinMarketCap.com. Bitcoin, a pioneer in the crypto realm, still holds the spotlight as one of the earliest and most recognized cryptocurrencies. All coin-based alternatives to Bitcoin collectively fall under the umbrella term “altcoin.”

In recent years, certain cryptocurrencies have risen to prominence, boasting substantial market values and cultivating extensive user and investor bases. As of November 2023, the top 10 cryptocurrencies by USD market cap include Bitcoin, Ethereum, Tether, XRP, BNB, USDC (US Dollar Coin), Dogecoin, Cardano, Solana, and TRON.

Top 10 Cryptocurrencies by USD Market Cap (As of November 2023)

While these cryptocurrencies boast significant market presence, it remains challenging to predict which ones will emerge as the most successful. The crypto ecosystem is still evolving, and many digital assets are relatively young. Despite their size, these coins carry inherent risks. The potential for substantial investment losses is real, as evidenced by the significant value decline in most cryptocurrencies after strong gains in 2021.

Key Considerations for Investors

1. Diversity of Cryptocurrencies: Explore the vast array of cryptocurrencies beyond Bitcoin, known collectively as altcoins.
2. Top 10 Cryptocurrencies: Delve into the specifics of the top 10 cryptocurrencies by USD market cap as of November 2023.
3. Market Risks: Recognize the inherent risks in cryptocurrency investments, including the potential for significant value fluctuations.
4. Importance of Research: Emphasize the critical role of researching each cryptocurrency thoroughly before making investment decisions.
5. Evolving Crypto Ecosystem: Acknowledge the dynamic and evolving nature of the cryptocurrency ecosystem and the uncertainty surrounding the success of individual coins.

How to Invest in Cryptocurrency in 2024

Step I. Different Types of Cryptocurrency Investing

There are several ways you can invest in the cryptocurrency market beyond just buying coins or tokens directly. Here are some of the main options:

Buy Cryptocurrency Directly

This is the most straightforward option – you directly purchase coins or tokens from an exchange using fiat currency like USD. You then hold onto them in hopes the price increases so you can sell at a profit later. The most common cryptocurrencies bought are Bitcoin, Ethereum, and altcoins like Dogecoin.

Invest in Cryptocurrency Companies

You can invest in stocks of companies operating in the cryptocurrency space. For example, you could buy stocks of crypto exchanges like Coinbase, mining companies like Marathon Digital Holdings, or blockchain developers like Galaxy Digital Holdings.

Invest in a Cryptocurrency Roth IRA

A small number of IRA providers allow you to hold cryptocurrencies like Bitcoin and Ethereum in a Roth IRA account. This allows you to invest for retirement with the tax benefits of a Roth IRA. However, contribution limits and other restrictions apply.

Become a Crypto Miner or Validator

You can generate revenue by mining or validating transactions on proof-of-work and proof-of-stake networks. This requires specialized hardware and/or staking cryptocurrency holdings. It can be complex but generates income from transaction fees and newly created coins.

IDO, IEO and ICOs

You can invest in new cryptocurrency projects before they launch through initial DEX offerings (IDOs), initial exchange offerings (IEOs), or initial coin offerings (ICOs). However, these investments are highly risky.

Invest in Cryptocurrency-Focused Funds

There are index funds, crypto hedge funds, venture capital funds, and more focused on investing in various cryptocurrencies and crypto-related companies. This provides easy exposure to the asset class.

Step II. Buy Cryptocurrency from an Exchange

To directly purchase cryptocurrency, you’ll need to use an online exchange. Here are the steps for buying your first coins:

Choose your Cryptocurrency Exchange

Research different exchanges to find one that’s beginner-friendly, offers the desired coins, has reasonable fees, and strong security practices. Top options include Coinbase, Gemini, Kraken, and Binance.us.

Establish an Account

Go through the exchange’s account creation process. You’ll need to provide info like your name, contact details, proof of ID, and payment method to fund your account.

Fund your Account with Fiat Money

Most exchanges let you deposit money via bank transfer, debit card, wire transfer, or payment services like Apple Pay. Deposit an amount you feel comfortable investing.

Decide which Cryptocurrency to Buy

Exchanges offer many coins and tokens to choose from. Do research to narrow down to ones you feel have potential and fit your risk tolerance. Popular starter coins include Bitcoin and Ethereum.

Place a Buy Order

Navigate to the exchange platform to place your first buy order. Specify the type of cryptocurrency and dollar amount you want to buy. The exchange will charge a small fee for facilitating the transaction.

Store your Cryptocurrency in a Digital Wallet

Once you make a purchase, transfer your coins off the exchange into a secure digital wallet you control. This protects them from being lost if the exchange is hacked. Recommended wallets include Exodus, MetaMask and Ledger.

Step III. Watch that Volatility

Cryptocurrencies are renowned for their volatile nature, showcasing significant daily price fluctuations. Prices may surge or plummet by over 50% within a single day, creating an environment where the use of platforms like TradingView becomes essential for real-time market analysis. It’s imperative not to succumb to panic during these price swings, as volatility is inherent in the crypto market. Adopting a steadfast long-term perspective when navigating your investments is crucial.

Manage your Emotions

Don’t obsessively check coin prices minute-to-minute. Sudden price drops can tempt you to panic sell at a loss. Stay calm and stick to your investing strategy during periods of volatility.

Dollar Cost Average

Implement Dollar Cost Averaging (DCA) as a strategic approach. By consistently making fixed-dollar investments over time, you mitigate the impact of volatility, averting the risk of investing a lump sum at an inopportune moment.

Rebalance Periodically

Periodically reassess and rebalance your portfolio in response to price fluctuations. If a specific coin experiences a surge, leading it to dominate your portfolio, consider divesting some to diversify across other assets. This proactive measure ensures a well-balanced and resilient investment portfolio over time. Utilize tools like TradingView for effective market monitoring during the rebalancing process.

Step IV. Manage your Risk

Cryptocurrency investing carries higher risk than traditional assets like stocks and bonds. Be sure to take steps to lower your risk exposure:

Don’t Invest More than you can Afford to Lose

Only invest money that you would be fine with losing entirely. Cryptocurrencies can potentially go to zero. Never gamble with funds needed to cover emergency savings or living expenses.

Diversify your Investments

Don’t put all your money into one or two coins. Diversify across multiple cryptocurrencies and other assets like stocks to spread out risk.

Use Dollar Cost Averaging

Making regular, equal-sized cryptocurrency buys reduces the risk of investing your entire sum at the peak right before a crash.

Take Security Precautions

Use cold storage wallets, strong passwords, two-factor authentication, and other measures to protect your coins from theft and hacking. Avoid keeping large amounts on exchanges long term.

Pay Cryptocurrency Taxes

In the U.S. and many other countries, you need to pay capital gains taxes on any cryptocurrency investment profits when you sell or trade. Factor this into your investment strategy.

Step V. Don’t Invest More than you can Afford to Lose

It’s easy to get caught up in “FOMO” and invest more money than you should in crypto assets during frenzied bull runs. But cryptocurrency prices can change rapidly, and you should be prepared to lose your entire investment. Only put money you can afford to lose into cryptocurrency, such as 5-10% of your overall portfolio. Invest the majority of your money in less risky assets like equities and bonds.

Define an Investment Policy

Write down and follow a detailed investment policy that outlines your risk tolerance, time horizon, goals, and asset allocation, including crypto holdings. This keeps your investments aligned with your situation so you don’t take excessive risks.

Use Dollar Cost Averaging

Making equal, periodic investments helps avoid investing lump sums at inopportune times. You buy more crypto when prices are down and less when they’re high.

Invest for the Long Term

Don’t invest money you’ll need access to in the near future. Cryptocurrencies tend to reward long-term buy and hold strategies, not short-term trading. Give your investments time to mature.

VI. Other Ways to Invest in Cryptocurrency

Beyond direct crypto purchases, here are some other common ways to gain exposure:

Crypto Futures

Trade futures contracts based on the value of cryptocurrencies. This allows you to speculate on price movements without owning the underlying crypto.

Crypto Funds

Invest in hedge funds, index funds, venture funds and more that hold portfolios of cryptocurrencies and crypto companies. Provides simple access and diversification.

Crypto Exchange or Broker Stocks

Buy stocks of publicly traded crypto exchanges and brokers like Coinbase and Robinhood that benefit from cryptocurrency adoption.

Blockchain ETFs

ETFs like BLOK and BLCN hold stocks of multiple companies involved in blockchain and crypto, allowing diversified exposure.

What to Know Before Investing in Cryptocurrency

Here are some key points to understand before you get started:

Is $100 Enough to Invest in Crypto?

While some exchanges have minimums of $200 or more, many popular options like Coinbase allow starting with as little as a $2 investment. So yes, you can absolutely begin investing with $100 or less.

Which Cryptocurrency is Best for Beginners?

Bitcoin and Ethereum are ideal cryptocurrencies for first-time investors. They have the largest mainstream adoption, offer liquidity for easy trades, and integrate with hardware and software wallets for security.

Can You Make $100 a Day with Crypto?

It’s possible but uncertain. On a highly volatile day, a large $100,000+ crypto portfolio could potentially gain or lose $100 or more in daily swings. But know that cryptocurrencies do not offer guaranteed income like bonds or dividends.

Conclusion

Investing in cryptocurrency offers the potential for significant returns but also carries risks. By carefully choosing crypto assets, using dollar cost averaging, securing your holdings, and managing risk, you can invest successfully as a beginner. Always thoroughly research any asset and seek diverse exposure before investing large sums. With patience and prudence, crypto can play a valuable role in achieving your financial goals.