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But there’s more to investing than just buying your chosen cryptocurrency. As an experienced investor, you probably have many questions about crypto, including what you need to know before investing, how to buy it, and how to safely store (and protect) your investments.

We'll answer these essential questions, and more, in this guide for how to invest in cryptocurrency.

How to explain cryptocurrency in under 30 seconds

You know how you can't send money to another person online without a third party present (Chase, PayPal, etc.)?

Well, crypto lets you do it.

If I send you crypto right now, it gets logged on a blockchain, which is like a giant read-only Google Doc that the whole world shares. Only complex computers can add to the blockchain, which is how it stays safe! And those computers control inflation by limiting the amount of crypto on the market.

And since no one entity controls the blockchain, many people consider it to be a superior alternative to government-issued currency.

“OK, so why is crypto so valuable?”

Simple economics. When demand outstrips supply, values rise.

Crypto has become so popular that there's not enough Bitcoin to go around so it's becoming way more valuable than paper currency.

“So is crypto a currency or an investment? It can’t really be both, can it?”

Good question!

Actually, a currency can be an investment. It's called forex.

Many individuals and businesses don't accept Bitcoin because its value bounces around too much.

But there are cryptocurrencies out there that are way more stable than Bitcoin.

These are called stablecoins. The precisely tuned code controlling them ensures their value stays tethered to a real-world currency. That gives people more confidence to convert their dollars into stablecoins.

Coincidentally, one of the most popular stablecoins is actually called Tether (symbol USDT) and its value is anchored to US$1.

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Three things to know before investing in the cryptocurrency market

1. Cryptocurrency is still a volatile, high-risk investment

Cryptocurrencies are very volatile. Bitcoin is a prime example, as it’s not uncommon for it to drop 30% one week and then skyrocket to record highs the next.

Bitcoin might be doing really well compared to when it first gained popularity, but the returns are neither stable nor guaranteed.

If you do buy crypto, we recommend only allocating a small portion of your portfolio to it to start.

2. Cryptocurrency holdings are not FDIC insured

If your bank fails, your checking and savings accounts will be insured for up to $250,000 each by the FDIC. But if your crypto exchange goes bankruptgets hacked or simply closes down with little notice, you’re pretty much out of luck.

Additionally, cryptocurrency is not backed by any government or central bank. That means that there is no one to guarantee the value of your investment. The value of cryptocurrency can fluctuate wildly, and you could lose all of your money if you invest in something that suddenly becomes worthless.

3. Cryptocurrency is taxable

Cryptocurrency gains are taxable. The IRS decided to start taxing crypto gains as capital gains in 2014, and has since issued at 10s of thousands of warnings to the crypto community.

For now, cryptocurrency is considered to be “property” and is subject to capital gains taxes. That means people who buy and sell virtual currencies like Bitcoin could owe taxes on their profits. Also, people who mine digital currencies could be subject to self-employment taxes.

More: Our full guide on crypto taxes

How to buy cryptocurrency

Choose an exchange

Your first step when investing in crypto is to choose a reputable exchange. An exchange is where you’ll be buying, selling and, likely, storing your crypto.

Luckily, crypto has been around long enough that the biggest exchanges have become quite robust and user-friendly. There are many that we recommend overall, but here are three of the best exchanges for beginners:

  • Crypto.com is one of the most globally-popular crypto exchange that supports hundreds of cryptos and also has an excellent staking program.
  • Coinbase is an excellent first destination for most beginners. They’re a publicly-traded company with over 73 million users, and are known for their superb and intuitive UI and the ability to earn free crypto through Coinbase Learn. Drawbacks are higher-than-average fees and the inability to extract your private key to a cold wallet. Find out more in our Coinbase Review.
  • eToro lets you invest in stocks, ETFs and over 30 popular cryptocurrencies with a simple 1% fee structure for buying and selling cryptocurrencies. Overall, eToro provides a very simple way to add crypto to your portfolio.
  • Binance.US competes with Coinbase by offering lower fees, a better selection of cryptocurrencies and more advanced features to grow into. The platform is under intense regulatory scrutiny; while this is not a dealbreaker as it’s common among crypto platforms, it's something to be mindful of. Find out more in our Binance.US Review.

Choose which cryptos you’d like to invest in

Bitcoin isn’t the only digital currency in town. In fact, there are just shy of 11,000 cryptos in existence.

Luckily, most exchanges only offer a couple of dozen. These are typically the most legitimate and viable coins with a respectable market cap.

Here are some examples of the top-traded cryptos today:

  • Bitcoin (BTC USD): The king of cryptos is still around and available to purchase on every popular exchange.
  • Ethereum (ETH): The second most popular crypto by market cap achieved success through innovation, allowing for the recording of smart contracts to the blockchain.
  • Dogecoin (DOGE): Dogecoin was created in under 2 hours as a joke — a loving satire of cryptocurrency. Despite this, DOGE reached a $90 billion market cap at its peak (at 11.74B as of January 2024), highlighting the power of speculation and internet chatter, and the roller coaster cryptos enjoy.
  • Binance Coin (BNB): BNB is the proprietary coin of Binance, the world’s largest coin exchange (Binance.US is the USA-only version). It’s become popular due to its wide acceptance and ability to reduce Binance’s trade fees.

Which ones should you buy? Well, cryptocurrency is so speculative and volatile that choosing the right cryptos for your portfolio may come down to which ones you believe in. For example, do you think Ethereum has more technical merit and worldly applications than Bitcoin?

While stock traders may read form 10-Ks when vetting companies, crypto investors might consider reading whitepapers — like the original one for Bitcoin.

Determine how much crypto to buy

How much crypto should you have in your portfolio? I’ve written an entire feature on the subject, but here’s the TL;DR:

I asked two seasoned wealth advisors for an exact number, and their two answers were:

  • Maybe 10% – so if crypto tanks, you can still retire – but I still wouldn’t recommend it.”
  • “Get $100,000 in safe investments first,” because if you secure $100,000 in safe investments by the time you’re 35, and keep depositing another $100 monthly, you’ll retire a millionaire.

Not surprisingly, seasoned wealth managers aren’t big fans of crypto because it doesn’t fit into an asymmetric risk profile. It’s too unpredictable — you can’t build a 99% guaranteed wealthy future around it.

Bottom line? Start small. Stick with 10%, or better yet 5%, of your portfolio.

More: How much crypto should you have in your investment portfolio?

Safely store your private keys in a wallet

Once you buy some crypto, your next decision is how to store your private keys.

To quickly recap, hot and cold wallets live on and offline, respectively. A hot wallet lets you access and trade your crypto with ease, and security measures protecting them are better than ever.

But hackers are getting bolder, which is why some crypto traders, and especially long-term holders, choose to save their private key to a cold wallet — a USB or hard drive that they keep in a safe.

If you’re dabbling in small amounts, and think you’ll keep buying a bit on the regular, a hot wallet will do for now. You can also look into cryptocurrency savings accounts that pay you interest on your crypto as a storage option.

Maintain your investment

Your final step is to maintain your crypto investment. The only way to do this step incorrectly is to buy crypto and completely forget about it. You avoid crypto investment missteps by:

  • Adding your crypto to your main investing dashboard so you can monitor its performance over time.
  • Since crypto trading is still the Wild West, check headlines regularly to monitor regulatory scrutiny of your chosen exchange.
  • Immerse yourself in crypto communities. Visit the crypto subreddit, then sort by new and hot topics. Consider also joining a crypto community via your preferred social media platform, or even attending in-person crypto conferences or meetups.
  • Monitor which governments are banning crypto or, conversely, blessing it as legal tender and building a Bitcoin city on a volcano.
  • Continue to self-educate on new cryptos and blockchain implementation — and even get paid in crypto for it on Coinbase Learn.

More: What is the future of crypto and bitcoin regulation?

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Other ways to invest in cryptocurrency

Buying crypto isn’t the only way to “invest” in it. Here are some other, lower-risk methods to consider.

Earn crypto for “free” through learning and mining

As mentioned, you can actually earn a free trickle of crypto just by learning about crypto on sites like Coinbase with its Earn program. For example, you can earn $2 in Stellar (XLM) just by watching a two minute video:

Stellar
Stellar

I wrote a guide on how to start mining Bitcoin in 60 seconds but here's the gist.

So how does mining work?

Traditionally speaking, mining is the process of dedicating your computer's processing power to validating crypto transactions and etching them to the blockchain. In exchange for your support, the blockchain automatically “mints” new coins and gives you a small share.

In the early days of crypto you almost needed a computer science degree to set up a mining operation, but nowadays you can just add your computer to a pool of miners at the click of a button. NiceHash is a well reputed company that lets you register and start mining within seconds.

If you have a powerful computer, mining is a no-brainer. While it may raise your power bill just a hair, it's still the easiest passive income you'll ever earn.

Invest in cryptocurrency stocks and ETFs

Want to invest in crypto without having to buy it? You’re in luck! The SEC approved the first Bitcoin futures ETF back in 2021, and you can read all about it in our feature Crypto ETFs: How to Invest in a Bitcoin ETF.

You can also invest in the crypto industry by purchasing shares of companies that are heavily focused on or invested in the future of cryptocurrency. For example, you can scoop up shares of Coinbase (COIN), mining companies such as Hut 8 Mining (HUT) or chipmakers that indirectly support crypto by producing chips for mining, such as Nvidia (NVDA).

Investing in crypto companies versus cryptocurrency itself has a few advantages.

First, it's convenient. Scooping up shares of crypto stock is as easy as, well, buying any other stock. There's no learning curve as there is with buying crypto, nor do you need to navigate a new platform. Second, it's more secure. Although the blockchain itself has never been hacked, the cryptocurrency exchanges certainly have. An investment in crypto stocks is worth considering as it's less likely to disappear from your portfolio overnight.

Or maybe you see more upside potential in the industry surrounding crypto than in crypto itself. Maybe you want to specifically invest in mining or a global cryptocurrency exchange. A stock investment lets you do that. It's also more diverse. An investment in, say, seven different crypto stocks lends more diversity to your portfolio than investing in a small handful of cryptos.

Finally — and you probably saw this one coming — most stocks (even crypto stocks) are less volatile day to day than are specific coins.

Now, stability is relative. For better or worse, many crypto stock prices tend to ebb and flow in correlation with the values of crypto — just on a more limited scale. And that's something to keep in mind before you invest in crypto stocks.

In contrast to crypto stocks, crypto exchange-traded funds (ETFs) lend even more stability, diversity and convenience.

As a quick recap, ETFs are like bundles of stock and other assets. In order to be approved by the U.S. Securities and Exchange Commission (SEC), each ETF must have a “theme” to justify its existence and attract investors.

For example, you could have an ETF that represents the performance of an emerging market, an ETF full of top-performing clean energy stocks or even an ETF that tracks companies getting an unusual amount of attention on social media.

Naturally, it wasn't long before the SEC received applications for crypto ETFs. After a handful of rejections, the first few crypto ETFs began passing through the rigorous SEC gauntlets to successfully hit the markets in Q4 2021. However the majority of them are bitcoin futures ETFs.

The Amplify Transformational Data Sharing ETF (BLOK) is one of the more popular crypto ETFs containing actual crypto stocks. BLOK's ingredients range from small mining and fintech companies to household names like Square, PayPal and chipmaker NVIDIA, whose shares skyrocketed during the pandemic due to screaming product demand from gamers and miners.

As mentioned, crypto itself is so speculative, volatile and hard to predict that even tangentially-related assets like individual crypto stocks can suffer from heavy turbulence.

The relative stability and diversity of a crypto ETF help mitigate the risk of cryptos. Not only are ETFs convenient to research and buy, they also help your portfolio benefit from the meteoric performance of crypto without exposing yourself to too much risk. Discover the best stock brokers to buy ETFs in our Stock Broker Guide.

Invest in the blockchain

One final method of investing in crypto without buying crypto is to invest in the technology supporting it: blockchain.

Go to any crypto conference and there'll be at least one keynote on how the real investment isn't crypto, it's blockchain technology.

In fact, in his original 2008 whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System [PDF],” Satoshi Nakamoto never mentions Bitcoin again after the title. The rest of his (her? their?) writing is about blockchain and its potential to replace traditional banking and third-party payment systems.

So why might it be a better idea to invest in blockchain tech than crypto?

What Is blockchain?

Let's quickly recap blockchain first. Put simply, blockchain is the tech that makes crypto possible. It's a complex, impenetrable web of cryptography where data can be stored and read but never overwritten.

The implications for the human race sharing a decentralized, unhackable online ledger are vast and go well beyond managing financial data. Medical records, legal documents and more can be safely stored there, completely revolutionizing how we access and share sensitive data.

For that reason, it's easy to see why many investors are pouring capital into blockchain — not the cryptocurrencies it facilitates.

How to invest in blockchain

The most direct way to invest in blockchain (aside from buying and mining crypto) is to invest in blockchain stocks and ETFs. These can include anything from mid-cap companies entirely focused on blockchain, such as HIVE Blockchain Technologies Ltd. (HIVE), to blue chips that have started voraciously adopting blockchain tech for a competitive advantage.

Perhaps the most notable blockchain-loving blue chip is IBM. The 110-year-old company is keeping things fresh by going all-in on blockchain tech, as clearly evidenced by their blockchain page where they lay out how IBM blockchain solutions will revolutionize clients in every industry (if they haven't already).

Invest in companies that invest in crypto

Last but not least, one of the more subtle ways to invest in crypto (without actually buying any) is to invest in companies that themselves invest in crypto.

So, when I say “companies that invest in crypto,” Tesla often comes to mind. Tesla's relationship with crypto has been checkered, to say the least. It went from accepting bitcoin to not accepting bitcoin within three months, then began accepting DOGE in their merchandise store eight months later.

Tesla's complicated relationship with crypto did something fascinating in the background. It decoupled Tesla's stock performance from the Nasdaq-100 and linked it more closely to the value of bitcoin. In fact, some analysts attribute bitcoin's 2021 bull run and subsequent tumble to the EV maker's wavering support.

Other companies that have bitcoin on their balance sheets include MicroStrategy (MSTR). As of Q3 2021, the analytics platform company held a staggering 108,992 bitcoins bought at an average of $26,769 according to Yahoo! News. Funny enough, one of the very financial titans that Nakamoto intended to topple, Square (SQ), owns over 8,000 bitcoins thanks to CEO Jack Dorsey's famously bullish sentiment.

But will investing money in a company that holds a boatload of crypto make you more money? With such a small sample size, it's hard to say for sure.

How to safely invest in Cryptocurrency

1. Understand the risks

It’s important to understand all of the risks that cryptocurrencies are exposed to. A deeper understanding of these risks will make you more aware, better prepared and better equipped to handle them. Generally speaking, cryptocurrencies are subject to three key risks:

Cybersecurity

Digital assets are prime targets for cybercriminals and hackers. But users should understand that blockchain technology has been developed to be incredibly hack resistant.

Bitcoin’s blockchain network, for example, uses a double SHA-256 hash function — commonly used for digital signatures and authentication — which is incredibly secure. Furthermore, since all transactions are stored on a block that is connected (or chained) to a previous block, a hacker needs to crack all the blocks simultaneously to disrupt the network.

That has never happened to Bitcoin.

Of course, third-party services such as exchanges and wallets are certainly vulnerable to cyberattacks. This is usually how bitcoin is stolen or lost to cybercriminals.

Volatility

Cryptocurrencies are relatively more volatile than mainstream asset classes. That means the price of bitcoin swings more wildly than stocks, bonds, real estate or gold.

According to portfolio optimization specialist MacroAxis, the Dow Jones Industrial Average — a collection of blue-chip names in the U.S. — has a standard deviation of roughly 1.0. By comparision, bitcoin and ethereum have standard deviations of 4.0 and 4.5, respectively.

Put simply, bitcoin’s price can vary greatly from its long-term average.

Fraud

The risk of being scammed by malicious creators or developers is a genuine risk for crypto investors. Projects like Bitconnect are an example of what could go wrong.

2. Follow reputable sources

Now that you’re aware of the big risks, focus on cultivating the right sources of verified information.

Ethereum founder Vitalik Buterin’s Twitter account, for instance, is one of the best source of updates on the ethereum network’s development.

Meanwhile, Bitcoin.org, Binance Academy and Cointelegraph are great sources for general crypto news and technical information.

3. Focus on mainstream assets

Newer cryptocurrencies and digital assets are at higher risk of fraud and relatively more volatile. On the other hand, the biggest cryptocurrencies with long track records are relatively safe options. Bitcoin, for instance, has been active for over 12 years. The chances of it being a fraud scheme are relatively slim. It’s also less volatile than smaller cryptocurrencies. Other mainstream crypto plays, such as Ether, Solana and USD Coin, are also less risky, generally speaking, than new niche cryptos with anonymous developers.

4. Use the right tools and best practices

Over the past decade, the crypto community has adopted safety practices and developed new tools to protect their assets.

Beginners should consider adopting these tools and practices too. Taking your crypto off exchanges and storing it offline on a device like Ledger is probably a good idea.

You should also be wary of any links in suspicious emails or text messages to avoid phishing scams. Securely storing your private key is another critical step that can help you invest in crypto safely.

5. Start small

Security becomes more complicated when there’s a large amount of capital and a wide range of digital assets on the line.

Consider starting with a small amount of money and relatively few digital assets in order to make your crypto portfolio more manageable. You can always scale up as you get better at following all of the security protocols and best practices outlined above.

If you’ve followed all the steps mentioned thus far, your digital assets are relatively well-protected.

But these steps cannot fully mitigate the risk of loss. Crypto remains an emerging asset class and is highly volatile. That’s why it’s important to invest only a tiny fraction of your total wealth. Cap your exposure to an amount of money you can comfortably lose.

Pros and cons of investing in cryptocurrency

Pros

  • Possibility of massive gains: Cryptocurrency, specifically Bitcoin, is the best-performing investable asset of the last decade. It may tank, or it may continue its skyward trajectory.
  • Support an emerging technology: Blockchain technology is touching nearly every sector — public, fintech, medical— and your investment in crypto is supporting those sectors.
  • You can earn some for “free”: You can’t “mine” stocks, nor can you watch short videos to earn free real estate — but you can do either to earn free crypto!
  • Buying crypto isn’t the only way to invest: Crypto and blockchain ETFs are convenient ways for stock traders to add crypto to their portfolio without exposing themselves to the high risk of holding actual crypto.

Cons

  • High risk and volatility: Crypto is still too unpredictable to bet the farm on, which is why traditional wealth advisors recommend limiting your portfolio allocation to 10% at max — if at all.
  • Vulnerable to theft, fraud, and scams: Squid is just the latest cryptocurrency scam where its developers made off with $3.38 million of investors' money. Most victims of the 2014 Mt. Gox hack, where 850,000 Bitcoin were stolen, has yet to see a single coin returned.

More: How to spot a cryptocurrency scam

Do you have to pay taxes on cryptocurrency?

Yes. Crypto gains are taxed at a regular capital gains rate: 10 to 37% for short-term gains and 0 to 20% for long-term gains.

According to the IRS, these three are non-taxable and don’t need reporting:

  • Buying crypto with cash and holding it (affectionately known as HODLing)
  • Donating crypto to a qualified tax-exempt charity or non-profit
  • Transferring crypto between wallets

Whereas the following do need to be reported and will be taxed as capital gains:

  • Selling crypto for cash (even if you lost money on your initial investment)
  • Using crypto to pay for goods or services
  • Exchanging one crypto for another
  • Mined crypto.
  • Being paid in crypto or by airdrop.
  • Receiving crypto as a bonus or a reward

If you don’t declare your holdings you can get penalized. It’s the same penalties for unpaid taxes – and as the IRS themselves say, “they can add up fast”:

  • A late filing fee
  • A late payment fee
  • Interest on top of both penalties

Your total penalty could amount to 25% or more of your unpaid tax amount.

More: Tax guide to cryptocurrency investments

Should you invest in cryptocurrency?

You might consider investing in crypto if:

  • You’d like to add very high-risk to your portfolio: If you’ve already assessed your risk tolerance and are actively looking to add higher risk into your portfolio, crypto certainly fits the bill.
  • You believe in the mission of crypto and blockchain: Maybe you believe in the positive aspects of crypto and blockchain technology, and perceive it as a form of ESG investing.

You may want to pass on crypto if:

  • You’re risk-averse: Cryptocurrency is extremely risky, volatile and unpredictable. If that gives you more anxiety than excitement, it may not be a fit for your portfolio.
  • It’s your first form of investing: To echo Varun Marneni, a certified financial planner with Atlanta’s CPC Advisors, it’s best to have $100,000 in safe investments first before you invest in crypto. Check out our article Safe Investments With High Returns.
  • You’re feeling FOMO: Fear is not an investment strategy. FOMO shouldn’t be a motivator for buying crypto, or any investable asset for that matter. Besides, you don’t need crypto to get rich.

More: The best crypto sign-up bonuses

The bottom line

Cryptocurrency has never been easier to buy and invest in. Crypto is still the Wild West in many ways. It's a frenetic gold rush with a lack of regulatory oversight — although President Biden's crypto executive order could soon change that.

If you do choose to invest in crypto, be sure to self-educate on the risks, best practices and keep an eye on the industry. And don’t forget to pay Uncle Sam his dues!

Securities trading is offered to customers by eToro USA Securities Inc (“eToro”), a broker dealer registered with the Securities and Exchange Commission (SEC). Investments are subject to market risk, including the possible loss of principal. Crypto Trading is offered via eToro USA LLC; Investments are subject to market risk, including the possible loss of principal.

With files from Vishesh Raisinghani

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Chris Butsch Freelance Contributor

Chris helps young people prosper - both mentally and financially. In addition to publishing personal finance advice for Investor Junkie (now Moneywise) and Money Under 30, Chris speaks on the topics of positive psychology and leadership through CAMPUSPEAK and sits on the advisory board of the Blockchain Chamber of Commerce.

Disclaimer

The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.