How Do You Invest in Cryptocurrency?
Are you considering investing in cryptocurrency? Although Bitcoin is likely the best-known virtual money, thousands of cryptocurrencies already exist. Cryptocurrency investing can take many forms, ranging from buying cryptocurrency directly to investing in crypto funds and companies. For direct investing in crypto coins, you can buy cryptocurrency using crypto exchanges or apps or through certain broker-dealers. Find out more about how you can invest in one of the newest and most inventive asset classes available.
Key Takeaways
- Cryptocurrency is virtual money that is secured by blockchain technology.
- Cryptocurrency investing can take many forms, from buying cryptocurrency directly to investing in crypto funds and companies.
- You can buy cryptocurrency using a crypto exchange or through certain broker-dealers. Once you own it, you can store, manage, and even buy or sell your crypto in a wallet.
- Pay attention to transaction fees when making crypto purchases because these fees can vary widely among currencies.
- Investing in cryptocurrency is risky, so it’s important not to invest more money than you can afford to lose.
Different Types of Cryptocurrency Investing
When you think of investing in cryptocurrency, you might think about buying and holding one or more crypto coins. Buying cryptocurrency directly is probably the most common way to add crypto exposure to your portfolio, but when it comes to investing in cryptocurrency, you have a few different options:
- Buy cryptocurrency directly: You can choose to directly purchase and store one or more cryptocurrencies. Your options range from the most established digital currencies like Ethereum and Bitcoin to virtually unknown coins that are newly released.
- Invest in cryptocurrency companies: You can invest in companies with a partial or total focus on cryptocurrency. Your options include cryptocurrency mining companies, mining hardware makers, companies like Robinhood Markets Inc. (HOOD) and PayPal Holdings Inc. (PYPL) that support cryptocurrency, and many others with varying levels of crypto exposure. You also can invest in companies like MicroStrategy Inc. (MSTR), which holds large amounts of cryptocurrency on its balance sheets.
- Invest in cryptocurrency-focused funds: If you don’t want to choose among individual cryptocurrency companies, then you can decide to invest in a cryptocurrency-focused fund instead. You have a choice of exchange-traded funds (ETFs), such as index funds and futures funds, in addition to a range of cryptocurrency investment trusts. In January 2024, the Securities and Exchange Commission approved the first Bitcoin Spot ETFs. These funds hold bitcoin and offer shares to investors based on bitcoin spot prices.
- Invest in a cryptocurrency Roth IRA: If you want to invest in cryptocurrency and also garner the tax advantages afforded by an individual retirement account (IRA), then you can consider investing in a cryptocurrency Roth IRA. Using the services of a crypto IRA provider can also facilitate more secure storage for your cryptocurrency holdings.
- Become a crypto miner or validator: Perhaps the most direct way to invest in cryptocurrency is to mine it or act as a validator in a crypto network. Cryptocurrency miners and validators can earn rewards in crypto, which they can either hold as investments or exchange for another currency.
Some crypto-focused funds invest in cryptocurrency directly, while others invest in crypto-focused companies or derivative securities such as futures contracts.
How to Buy Cryptocurrency From an Exchange
If you want to invest in cryptocurrency directly, then you can use a cryptocurrency exchange. Here’s how to buy cryptocurrency through an exchange:
- Choose which cryptocurrency exchange you want to use: Your best bet is a reputable, well-known exchange with a large selection of currencies.
- Establish an account with the cryptocurrency exchange: You will need to provide your personal information and verify your identity to complete the registration process.
- Fund your account with fiat money: Before you can buy any crypto, you need to fund your exchange account with another currency, such as U.S. dollars.
- Decide which cryptocurrency you want to buy: You can choose to invest in one or many cryptocurrencies. Research your options to help you decide.
- Place a buy order for your chosen cryptocurrency: Follow the steps required by the exchange to submit and complete a buy order for one or more cryptocurrencies.
- Store your cryptocurrency in a digital wallet: After your purchase is complete, the information you need to access your cryptocurrency is held in a digital wallet. That crypto wallet can be hosted either by the cryptocurrency exchange or an independent wallet provider.
As an investor in cryptocurrency, you need to decide how much of your portfolio to allocate to digital assets.
A best practice among investors is to periodically review your entire portfolio to assess the need to rebalance your holdings. That might mean increasing or scaling back your crypto exposure, depending on your investment goals and other financial needs.
What to Know Before Investing in Cryptocurrency
Investing in cryptocurrency is risky. The prices of cryptocurrencies, even the most established ones, are much more volatile than the prices of other assets like stocks. The prices of cryptocurrencies in the future could also be affected by regulatory changes, with the worst-case possibility that cryptocurrency becomes illegal and therefore worthless.
Many investors are nonetheless attracted to the potential upside of investing in crypto. If you decide to invest, it’s important to carefully research any digital coin before buying it. Pay attention to transaction fees when making crypto purchases because these fees can vary widely among currencies.
The cryptocurrency space is evolving rapidly, so it’s also important to pay attention to new developments that may affect your crypto holdings. Cryptocurrency investors need to understand the tax consequences of using crypto, especially if they purchase something or sell their crypto investments.
Given the riskiness of cryptocurrency as an asset class, it’s especially important not to invest more money in crypto than you can afford to lose.
Is Cryptocurrency Actually a Good Investment?
Investing in cryptocurrency is not for everyone. The prices of cryptocurrencies can be volatile, which makes this type of investing a poor choice for conservative investors. If you are willing to assume greater risk as an investor, then investing in one or more cryptocurrencies may be right for you.
How to Invest in Crypto for Beginners?
You can invest in Bitcoin directly by using one of the major cryptocurrency exchanges, such as Coinbase or Binance. Another way to gain investment exposure to Bitcoin is to buy shares in a company with significant Bitcoin exposure, such as a Bitcoin mining company. A third option is to invest in a Bitcoin-focused fund such as an exchange-traded fund (ETF).
Which Crypto Is Best to Invest?
There are thousands of cryptocurrencies to choose from. Some experience wild price swings between trading days and volatile drops or increases, and others make small incremental changes. Your strategy, goals, risk tolerance, and preferences will dictate which is best for your portfolio, if any.
The Bottom Line
The are several ways to invest in cryptocurrency. If you’re interested and can accept the risks involved, you have many choices. However, it cannot be stressed enough how volatile crypto prices are because other cryptocurrency investors are afraid of missing out on the next big price movements.
These movements cause large, unpredictable price swings that can take out your investments in a matter of minutes or hours. Conversely, you may be able to double or triple your investment—but there are no guarantees.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.
