How to invest in cryptocurrency? For beginners, it’s a big question. Despite high volatility, cryptocurrencies attract people who seek to make a profitable investment.
This guide is a ‘literacy class’ for those with little or no experience with cryptocurrencies. If you want to learn how to invest in crypto, you are in the right place.
TABLE OF CONTENTS
Why Invest In Cryptocurrency
Before we start, let’s see what makes cryptocurrency investments so attractive. There are several reasons why people invest in digital assets, and here are the main ones:
- It offers secure and fast transactions. If you know what to do and you can follow some simple rules, it’s easier than dealing with conventional assets. Despite what many people think, you don’t have to be tech-savvy to become an investor.
- It’s your chance to become a part of the future: Sure, FOMO (Fear-of-Missing-Out) is not the best driver when it comes to investing in crypto. But today, when the technology is still young and full of promise, you still have a chance to become an early investor — and a part of the next big thing.
- It can be very profitable. Many of us know someone who invested in Bitcoin at an early stage and got some easy money. They made their friends feel like they had missed a great opportunity. This miracle may still happen to any investor who is lucky or smart enough to buy the right coin and sell it when the price reaches its peak.
Buying Cryptocurrencies vs. Buying Tokens
Investing in cryptocurrency is not the same as investing in tokens. This is because the nature of these two assets is different.
In short, cryptocurrency is a digital means of payment that functions more or less like normal money. At least from the point of view of a user. It is a store of value that accommodates transactions. These transactions can happen both inside and outside its native blockchain.
A token is a unit value that represents some utility within a certain blockchain. It may be roughly compared to casino chips, bonus miles or game assets.
Tokens are divided into 2 big classes — utility tokens and security tokens.
Let’s see what we fix on when choosing cryptocurrencies or tokens for investment.
Let’s see what we fix on when choosing cryptocurrencies or tokens for investment.
How To Choose Cryptocurrencies For Investment
If you think about a coin to invest in, the first thing that comes to mind is Bitcoin, the king of crypto. At this point, you should decide if you want to buy the best on the market and hold it, or you prefer the ‘rags to riches’ scheme.
In the first case, buy Bitcoin. In the second, consider some of the less famous and younger cryptocurrencies. They might have great potential for growth.
Next, you have to choose between centralized coins (Ripple) or decentralized coins (Bitcoin). Centralized coins might be an excellent option if you trust the team and believe in their cause. Research, and if you like what you have googled up, buy this coin.
If you opt for a decentralized coin, learn what value it has for the financial ecosystem. Read the White Paper and the Road Map provided by the team. Also, check parameters like:
- Market capitalization. This metric reflects the value of the coin — the bigger and more stable the market cap is, the better. But keep in mind that it may be misleading, as the crypto market is very unstable and unpredictable. It would be wise to invest in various coins that seem to do well, to avoid losing it all in case of a sudden price drop.
- Total (maximum) supply. The logic is simple: if the number of coins is limited, it has more value. If the number of coins in circulation is nearing the max supply (with fewer coins issued), the coin is likely to rise in value.
- The community behind the coin. The more people support and use this particular crypto, the stronger it grows. Again, Bitcoin is a gold standard here. Ethereum, Ripple and some others have a great number of believers, too. Every use case adds to the popularity and, thus, to the value of the coin.
How To Choose a Token For Investment
If you buy a token, you get a certain amount of rights you can exercise within the ecosystem the token belongs to. Early investors often buy tokens at the stage of an ICO (Initial Coin Offering). Thus, it would be smart to focus on the role of the token.
It may represent your right to vote for the system updates. It may serve as a reward for certain actions (like sharing good content or otherwise contributing to the popularity of the platform). Or it may act as an internal currency, used to pay for some services the platform provides. So, if the token seems useless or its function is far-fetched, odds are the ICO is a way to raise money and close shop.
Remember that investing in tokens makes you dependant on the team. The rule of thumb is to dig into that team and avoid getting associated with it if you find something sketchy. Below, we will list the things that you should check to avoid investing in a scam project.
How To Avoid Scams
To make a good choice, we recommend you (again!) to read the White Paper and learn more about the team behind the startup. Pay attention to the following things:
- New approach to solving an urgent problem. A promising project would address an important problem and have some distinctive features. For instance, Ethereum was the first to come up with the idea of ‘smart contracts’, which made it unique. It was the feature behind their success.
- The team’s experience. Experience is essential. Google the team to see if they have any previous experience in the field. If not — it’s a red flag for an investor. It’s even worse if the team is anonymous and offers no information about themselves. The people who have appeared out of thin air are likely to disappear with your money in the same manner.
Check The Team’s Experience
Almost all startups that bring value are created by people with education or experience. They can be software developers, well-known fintech entrepreneurs. They can have support from famous angel investors.
- History of fraud. FOMO (Fear-Of-Missing-Out) drives many inexperienced investors. They are afraid to miss the second (and last) chance to get rich after failing to become early adopters. No wonder, fraudsters play on this powerful emotion which clouds your judgment.
- Playing on FOMO. Many inexperienced investors are driven by FOMO (Fear-Of-Missing-Out). They are afraid to miss their second (and last) chance to get rich after they failed to become early Bitcoin or Ethereum investors. No wonder, fraudsters play on this powerful emotion which clouds your judgment.
Thus, if you have the feeling that you are being forced into buying something, listen to your guts. If it’s presented as your ‘last and only chance’, or if you are given a short period to make a decision, you’re likely dealing with a scam, not the “next Bitcoin”.
Check Social Proof
Is there anything sketchy in the social media presence of the project? Does all marketing seem to purse the goal of departing you from your money? Those are big rad flags signaling to stay away from a project.
- Social media presence. Pay attention to the social media pages of the project. Do they look like something that appeared overnight, just before the ICO announce? If so, it’s a red flag.
- Social proof. If none of the crypto experts you know have heard about the project (if you have no pros among your friends, use websites like Cointal), it’s a clear sign of a heist.
- It all looks suspicious and shallow. The company’s website offers few technical details but promises quick and great returns? Does it lure you with images of Lambos or luxury vacation houses? They prefer the “Give us your money and let us do all the thinking” approach? Well, you know what conclusion to draw.
How To Buy Cryptocurrencies And Tokens
Ok, you have made your choice and are impatient to buy cryptocurrencies, or tokens, or both. How do you do it? You can use an exchange or an online wallet.
How to Buy Cryptocurrencies And Tokens Using An Exchange
An exchange is a marketplace where conventional and digital assets are traded. Thus, if you want to buy a coin or a token, you should start by choosing the best exchange and understand how it functions.
Read our cryptocurrency trading guide to learn how to work with exchanges.
In a nutshell, the exchange should be trustworthy. It must have a good reputation, have the relevant documents available at the website for inspection, clear fee policy, etc.). It should also be secure. Check that the platform features all the necessary safety measures and there is no history of successful cyber attacks. Last but not least, it should be available in your jurisdiction.
Most exchanges allow using different payment methods, including your credit card or bank account. If you are dealing with expensive cryptocurrencies like BTC, you can buy fractions of a coin (called ‘satoshi’). It’s a good solution if you are on a budget.
To start buying and selling, you have to pass a verification procedure and provide the requested documents. After that, you can place an order, indicating the amount you want to buy. When the deal is finalized, your newly acquired crypto funds will go to the wallet, provided by the exchange. Later, you can withdraw them to the storage you prefer.
How To Buy Cryptocurrencies And Tokens Using An Online Wallet
Another way to buy crypto assets would be to use an online wallet. Some wallets offer an integrated currency exchange option. It means, that you can buy a coin or token you want (if they are available in the app) with digital or fiat currencies.
Such a wallet is often integrated into a popular payment system. Keep in mind, that different apps can have different commissions and exchange rates. We recommend checking them before you decide to buy anything.
There are two types of wallets an investor should know about — hot and cold wallets. Hot wallets are more convenient but less secure. They come as the software you install on a PC or a mobile device, or as an online service.
Cold wallets are devices resembling external hard drives. They are very secure but less user-friendly.
How To Store Cryptocurrencies
If you invest in crypto assets in the hope their price will rise someday, you will need storage. This is where the bulk of your funds will rest in complete safety.
Since most hot wallets are not recommended for long-term storage, consider getting a cold wallet. It will keep your private and public keys safe. If you invest in a pull, think about a multi-signature wallet.
Cold wallets come in 2 types: hardware wallets and paper wallets.
It represents a piece of paper with your private and public keys printed on it. You can place it in a bank vault, or dig it in your garden, or both. It will allow you to restore access to your funds if you forget your keys.
As you can guess by the name, it is a portable piece of hardware. Hardware wallets are 99,99% immune to hacker attacks because they are disconnected from the Internet. It’s an analog of a bank vault or a safe. A hardware wallet requires extra manipulations to reach the money, it’s bulkier than a mobile wallet (for sure!) but it’s perfect for investors, who do not use their digital funds for active trading or everyday purchases.
The most famous hardware wallet brands are Ledger, Trezor, CoolWallet, KeepKey, and Digital Bitbox. Before you buy any of these devices, check if they can store your assets. Most popular models support several major cryptocurrencies and ERC-20 tokens.
A multi-sig wallet is a hot wallet that protects collectively owned assets. The principle of its work is simple — several users (you and your partner investors) use a special type of digital signature to control the funds. To open the storage, you need at least two people. It reduces the risk of any partner escaping with the money. Also, it ensures an extra layer of protection from hackers, who now have to get two keys instead of one.
In general, hot storages often feature a high level of protection, too. But they, by definition, cannot be ‘bank vault’ secure as they need to be connected to the web at all times.
How To Cash Out Cryptocurrencies
You have held your bitcoins for some time and now you feel it’s a good idea to sell them for fiat money, like USD or EURO.
You can do it using any of the following methods:
If you are in a big city, you can withdraw cash from a BTC ATM. It’s a fast and easy way for those who want to skip all these verification steps on an exchange and get physical cash. Some machines allow you to sell BTC for local currencies. To find them in your location, use the Bitcoin ATM Radar. It shows a live map with all Bitcoin ATMs by location.
But this method is good for small transactions only. Most machines have deposit and withdrawal limits. Also, they may have different fees and lists of currencies they support. Another disadvantage is a high commission, compared to exchanges. Machines will charge you 2 – 11 percent, and exchanges 0.1 – 1 percent. Feel the difference.
Using a third-party exchange (Exscudo, Binance, Coindesk, Huobi, Bittrex, etc.) is the cheapest and most secure way to cash out. But you will have to pass a verification procedure before you can deposit/withdraw.
Through an exchange, you can sell your crypto at the best price possible and withdraw the resulting amount in fiat to your card or bank account. The commission rates and conditions vary and depend on the country where your bank is located.
The benefits of using a third-party (broker) exchange are clear. Depending on your customer status you can withdraw a large amount to your bank account, paying comparatively small fees. But, you have to wait up to 6 business days until the money arrives and pass the KYC procedure. Thus, if you have a lot of cryptos, enough time and nothing to hide, a broker exchange is the option we recommend.
IMPORTANT: Before you convert your crypto into fiat, check if this transaction can be defined as a taxable event. It may vary depending on your jurisdiction or the jurisdiction of your exchange.
If you prefer a more anonymous approach and want to negotiate the price, there are P2P exchanges like LocalBitcoins and Paxful. These platforms have no central authority, with all its pros and cons. Here, users make private transactions without any intermediary involved. Although peer-to-peer exchanges are generally rather secure, the risks of running into a scammer are much higher here.
P2P platform users have to pass a verification procedure, find a buyer for their bitcoins and then make a transaction. They can choose between various methods of withdrawal like bank transfer, PayPal, Western Union and more. Waiting time and fees depend on the method preferred. Use a P2P platform with an escrow service, to reduce the risk of being cheated.
An exchanger is an online service that lets you buy or sell crypto at a fixed rate, paying a certain fee to the website. A good example is 365cash.co
Here, you have to pass a simplified registration procedure. It’s nothing compared to what you do on an exchange: often, login, password and valid email are quite enough. Then, you choose the currency you sell (BTC) and the currency you buy, enter the amount, press Exchange and wait for notification. Don’t forget to check the fees — they should be shown on the main page, and not hidden somewhere else.
As you see, the process is very user-friendly. It is also fast and hassle-free. Most big exchangers are rather secure, too, as their owners use all the necessary measures to protect the funds. The cons are higher fees and less attractive exchange rates. The rates will depend on the service owners’ rather than on the combined activity of traders and market laws.
Offline Peer-To-Peer Exchange
Finally, you can always organize a real-life meeting with a buyer to settle the matter and avoid paying commission to a website. It seems simple, but it is dangerous if you are dealing with a big amount of money. Some people get robbed when they arrived at a meeting, tempted by an appealing exchange rate.
You can only use this method with a person whom you trust 100%. if you don’t know the buyer or seller well, it would be better to avoid meeting in person because the risk is too high.
When you have no choice, at least take someone with you. Tell your friends where you are going and never meet in a public location.
In general, your preferred method depends on how much crypto you have to exchange and if you are ready to wait and reveal personal information. Also, it depends on how much you can afford to pay and the level of risk yoг are ready to run.
How To Invest In Cryptocurrency: Summary
With this article, we sought to answer the question “How to invest in cryptocurrency?” in a way that would be easy to understand, even for a beginner.
We hope that it will make your investing experience more enjoyable and successful. Good luck!