How To Invest In Cryptocurrency - Step-by-Step Guide
Investing in cryptocurrency digital assets has now shifted from the fringes of society populated by cyberpunks and into the mainstream where institutional investors hang out. But what is it, in a nutshell? Well you can't talk about cryptocurrency without talking about Blockchain.
Blockchain technology is based on a peer-to-peer verification system, where the computer involved plays the role of clients and servers at the same time. This means that the information contained in the chain produced is multiplied and distributed worldwide. This is what makes them difficult to counterfeit and also safer than regular currencies.
In the following article, we will discuss how to invest in cryptocurrency and the different strategies you can use to grow your earnings.
Invest in Cryptocurrency in 3 Steps
Get a cryptocurrency wallet
The first step to start trading cryptocurrency is finding a wallet under an app, a token, or a platform suitable for your needs. The choice you can make in this case is to opt either for hardware or a wallet that has access to an internet connection.
This choice should be based on the usage you plan to do with your investment. If you plan to go with long-term strategies, you will probably need some kind of cold wallet at some point. In the opposite case, probably the best option is to have your investment in an easy-access app.
Join a cryptocurrency exchange
To start buying/selling cryptocurrency, it is fundamental to join a market where you will be able to exchange cryptocurrency with fiat currencies. Many apps and websites are integrated with both a wallet and a marketplace.
Some of the most famous exchanges are Coinbase, Binance, Coinmama and Poloniex. There you will be able to exchange your investment with both fiat currencies or other cryptocurrencies.
Invest in cryptocurrency
Now you will be able to invest in cryptocurrency. At this point, you will probably need to do the verification necessary for the platform to ensure you are a real person. After this process and inserting your payment method, you can start buying/selling cryptocurrency.
Investing in Cryptocurrency Explained
Before you start investing in cryptocurrency, you should learn a bit more about the whole process and all the instruments you will be using.
One of the main tools of an investor is a crypto wallet. As mentioned before, it is crucial to choose the right one that suits your needs.
A hot wallet has an internet connection and, as such, is easily reachable from the devices. In this category fall the apps we talked about, and also desktop wallets and wallets on various cryptocurrency exchanges.
Cold wallets refer to those that keep your investment away from the internet. This option may be significant for users looking for a very safe place to store cryptocurrency, maybe because they plan to adopt long-term strategies or invest considerable amounts of money.
If you are a beginner, a tempting option may be starting with a smartphone app, which will allow you to have easy access to your funds and keep an eye on what is going on. This is also particularly useful if you are not planning to invest a considerable amount of money, especially in the first phases of your experience.
When it comes to security, various protocols are put in place by platforms trading cryptocurrency to ensure the platform's protection.
To begin with, multifactor authentication is the most widely used form of identification among the world's major financial institutions. During the registration process, the user is required to share several communication channels. This is because the app will first ask you for your chosen password, then give you a message, an email, or a phone call to confirm that you are the person attempting to enter your account.
This is necessary because if someone with malicious intentions wants to take your money, you can block them from having access to your account.
Another protection protocol is the Know Your Customer (KYC) procedure. It is used to deter fraudulent organisations or persons from illegally accessing financial resources. Anti-Money Laundering (AML) laws require this method of authentication, which extends to banks as well as other financial service providers.
KYC and AML procedures are widely used to ensure a secure environment for users. They are a part of:
- Customer acceptance policy
- Customer identification procedures
- Monitoring of transactions
- Risk management
Now that you have a better understanding of how the instruments that will help you to invest in cryptocurrency, you will be able to dig deeper into more specific details, such as which platforms are the easiest to use and which tactics are best for you.
When it comes to investing strategies, you will have to decide if you want to be active on the market and trade in response to minor market fluctuations, or whether you want a long-term approach that does not require you to spend a lot of time on these channels.
In the following sections, we will go through various strategies and how to use them.
Where Can You Invest in Cryptocurrency
Our priority is to give readers a meticulous analysis of the market options; this is why we carefully reviewed the best options available on the market. You will find here a shortlist of our best choices for you to start investing in cryptocurrency, based on the reputation of the platform, their reliability and their attention to the users' needs.
Cryptocurrency investment platforms usually make available a broad set of payments. Credit/Debit cards and bank accounts are valid options on these systems, even if different providers may offer personalised conditions.
You will be asked to select your preferred payment method during the registration process so that the platform can verify your credentials. This is needed especially for the users' security, to avoid possible scams and misuse of the service.
The verification process usually consists of the provider charging you a small amount to your preferred payment method and then asking you to reveal the number charged. As an alternative, you will be asked to upload a small amount to your account on the platform.
You will be free to make your first deposit after this process is completed.
Cryptocurrency Investment Strategies
To help you gain the most from your investments, we will analyse below some strategies you may find helpful to start your cryptocurrency investment. These are the most recognised and used strategies in the trading environment.
Buy and 'Hodl'
What is it?
The name of this strategy started with a joke. In 2013, due to the Chinese recession, cryptocurrency prices fell. It was an exasperating situation for traders, but some users did not want to play this game. GameKyuubi, who was intoxicated at that moment, posted "I AM HODLING". He explained how he was a bad trader, and for this reason, it did not make sense for him to be subject to the oscillations of the market. At the end of the day, big sharks can only take your money if you decide to sell.
This strategy, in fact, starts from the perspective that cryptocurrencies are supposed to keep growing in the future. Even if the market is living a down period, this does not mean that it will not recover after and go above its latest peak.
Losses are mainly due to FOMO (Fear of Missing Out) and FUD (fear, uncertainty, doubt). Hodling strategy aims for long term gains and ignores minor price fluctuations.
How to use this strategy
This strategy is probably one of the easiest to implement. The only thing you will need to do is invest the desired amount and then relax. Your pay-off will not come in at least one year, so you may as well forget about it. This will help you avoid the temptation of selling when the trend is not going for the best.
When to use this strategy
The best moment to use this strategy is during a downward trend. This will allow you to maximise your possible profit in the long-run. Depending on the cryptocurrency you invest in, a low point may vary from cents to thousands of dollars.
For this reason, you should carefully evaluate the right time to implement this strategy based on what cryptocurrency you want to invest in.
Buy Fractional Cryptocurrency
What is it?
Buying fractional means not buying an integer number of cryptocurrencies, but only a small amount. Nowadays, it is possible to purchase infinite small parts of cryptocurrencies, especially those that have reached incredibly high prices.
How to use this strategy
Buying fractional cryptocurrency may be an exciting option for those users who do not plan to invest a great amount of money. This can provide an opportunity even to smaller users to participate in the market.
Using this strategy, you can also plan to invest small quantities of your earnings each month. This will allow you to grow your assets slowly and without the need of investing significant amounts all at once.
When to use this strategy
This strategy can be used at any time, but our advice is to wait for a favourable period where the market is not at its peak. Furthermore, it is not convenient to buy fractional shares with all cryptocurrencies. Many of them may have accessible prices that do not require splitting the coin.
Long Position on Cryptocurrency
What is it?
One of the most common strategies in cryptocurrency trading is a long position. Adopting this strategy you will purchase an asset and wait for its value to grow in the future. The opposite case is a short position, where you sell your asset intending to make the price go down and then re-buying the asset at a lower price. Of course, it takes either a large investment or leverage to use this strategy efficiently.
Margin trading, which includes investing loan money, makes extensive use of these techniques. Investing without possessing the funds, of course, necessitates a certain level of expertise. You might lose a lot of money if you make a mistake, so make sure you can afford to make a mistake before you start selling.
Another type of long position strategy is “going long” with CFDs (contract for differences). A contract for differences is a type of derivative financial product that derives its value from the underlying asset, in this case, a cryptocurrency investment. It's important to remember that you never own rights to an asset when trading CFDs; it's just a way to value your contract.
Going long is a strategy in which you hope to profit from an asset's price increase thanks to your CDF. This is the same position you'd be in if you actually bought the financial product, where the profit or loss is determined by the difference between the entry and exit prices.
How to use this strategy
This strategy is used in a bull market and can be implemented on trading platforms. A bull market is a rising market, in opposition to a bear market, where the trend goes in the opposite direction.
When to use this strategy
You will have your payback with this strategy when the market is rising. Many factors can determine this trend: worldwide news, some particular movement that happened between traders, or even special political events.
Benefits of Investing in Cryptocurrency
- Peer-to-Peer- This technology allows the system to ensure maximum safety while working in a decentralised way.
- User autonomy- Because of its structure, cryptocurrency allows much freedom to its users. This is due to the decentralised system, which does not recognise any central authority.
- Discretion- Cryptocurrency was first invented to allow anonymous payments online. Thanks to its system, it will enable its users to have a high degree of privacy in the transactions unless they desire to share their information.
Disadvantages of Investing in Cryptocurrency
- Price volatility- As you may know, prices of cryptocurrency can change quickly, minute by minute. If you are not ready to spend the right amount of time on a platform you may not see the earnings you expected.
- Associated with dark web- Some bad actors use cryptocurrencies for dark web payments.
Other Ways of Investing in Cryptocurrency
We talked about different ways to trade cryptocurrency, but the strategies mentioned before are not the only ones.
Face-to-face, for example, is still an option if you are surrounded by people that invest as well in this type of asset. It may be a comfortable option for you if you are new to trading to enter this environment together with people you trust.
Still, you should always pay attention to who you trade with if you do not know the person well, and make sure to meet in safe public spaces. Many peer-to-peer platforms provide escrow services and help users connect to buy/sell cryptocurrencies.
Trade Cryptocurrency on Leverage
If you have never heard about leverage, it may be because this trading option is not available to every trader. Most platforms pay particular attention to the users they allow to invest with leverage. This is because using this method can be quite risky if you are not fully aware of what you are doing.
The platform provides users with loans or leverage which the user can then invest in purchasing assets. Once the trade is closed, the user keeps his profit/loss and returns the borrowed amount. You can understand why this can be dangerous: the more you invest, the more you can lose, but if you invest money that you do not actually own, you should be very careful.
Invest in a Cryptocurrency ETF
A great alternative when investing in cryptocurrency can be Exchange Traded Funds (ETF). In this case, you can decide to invest in one or more cryptocurrencies combined.
These funds are really helpful, especially for beginners who do not have a significant amount of time to spend on the trading platform but still want to gain some profit from cryptocurrencies.
As you may already know, cryptocurrencies can be mined as well. Mining is the process that involves the verification of the blocks that need to be added to the chain, which then constitutes the cryptocurrency. Different cryptocurrencies can be mined in very different ways, and need an initial investment to set up all the process of mining.
This option is not particularly suited for beginners and requires extensive knowledge to be implemented. IF you would like to own some cryptocurrency our advice is to first get to know them better through regular trading and then, maybe, start considering mining as an option.
Stake Cryptocurrency to Get Passive Income
Staking is a common way to receive passive income from a cryptocurrency. Staking involves locking or holding funds in a designated wallet to support the Proof of Stake mechanism. To stake your cryptocurrency, you just need to keep it in your wallet and not sell it. Many platforms allow users to stake currency directly from their platforms. You can stake coins such as Cardano, Ethereum and Chainlink. This process can either be done by yourself or can be delegated.
Frequently Asked Questions
No, but for long term storage of crypto assets, a wallet is a safe and secure option. Leaving assets on an exchange is risky.
Yes. Most reputed platforms will insist on identity verification to reduce the risk of fraud.
By using reputed and regulated platforms. Users can also use additional security measures such as 2FA to secure their accounts.
It depends on the tax laws in your country. Check with your local laws.
No. Most cryptocurrencies allow fractional investing.