How to invest in cryptocurrency
Investing in cryptocurrency is a high-risk, high-reward strategy.
Making the decision to invest in it is complex and depends on a variety of factors, including your personal financial goals, risk tolerance, and understanding of the market.
In this article we look at the benefits of investing in cryptocurrency and things to consider. We also outline how you can get started if you feel it’s right for you.
Pros of investing in cryptocurrency
Investing in cryptocurrency has some advantages.
Potential for returns: several cryptocurrencies—like bitcoin—have seen their prices skyrocket since first being introduced. These gains are the main reason people are attracted to them, but the potential for return comes with significant risk
Global: unlike traditional investments, cryptocurrency is digital so it can be stored and traded globally. This means as an investor, you can access and transfer your investments anywhere in the world
Fast and inexpensive: cryptocurrency transfers can be faster and cheaper than traditional exchanges of currency. You can also send and receive cryptocurrency payments at any time, from anywhere.
Cons of investing in cryptocurrency
Like all types of investments, investing in cryptocurrency has disadvantages.
Extreme volatility: cryptocurrency can fluctuate at extreme levels because it’s not backed by assets or cash flow. The only thing influencing cryptocurrency prices is speculation driven by sentiment. This means its value is extremely unstable and can change frequently.
No intrinsic value: cryptocurrencies have no intrinsic value, which means they aren’t backed by underlying assets or earnings the way that shares are.
Regulatory risk: one of the most significant drawbacks of investing in cryptocurrency is the lack of regulatory oversight. Cryptocurrency laws and taxes differ from country to country and are often ambiguous or contentious. A lack of regulation can unfortunately lead to fraud and scams.
Complex: the complexity of the cryptocurrency market can make it difficult to navigate, especially if you’re inexperienced or new to investing.
Other things to consider before investing in cryptocurrency
Plan your investment strategy
One of the main things to consider before investing in cryptocurrency is to have a plan. This helps you put into perspective not only your investment goals, but when and how you want to achieve them.
It can also help to remove the likelihood of emotions influencing your investment decisions. There are times when you may feel tempted to change your investment strategy because an area of your portfolio is not doing well, or you received recent news the market is going to plummet.
While these events may cause you to react quickly, it’s important to consider your investment strategy. If your approach is intended to be a long-term plan, making decisions based on short-term market fluctuations, may greatly affect what you set out to achieve.
Review your timeframe and risk tolerance
Consider how much time you’re giving yourself to build towards your financial goals and how much risk you’re prepared to take on to get there.
For example, an investment plan for retirement may look very different for someone closer to retiring than a person who’s decades away.
If you’re looking to access your money in a shorter time frame, remaining invested through ups and downs in the market may be unlikely, so a less risky investment approach may work to your favour.
Consider where to invest your money
You may choose to divvy up your money across a variety of asset classes such as cryptocurrency, shares, cash or property. This will help to diversify your risk so if one of your investments doesn’t perform well, your losses may not be as significant.
On the flip side, it does take more effort as you’ll need to remain up to date across a variety of markets.
Consider the digital asset not just the share price
If you’re investing in cryptocurrency, it’s also important to look beyond the price and consider the digital assets you’re buying into.
When you own cryptocurrency, it represents ownership in a digital asset.
Ultimately, what you choose to invest in should be based on your interest in the technology and risk appetite.
Here are some factors you may want to consider:
- Investigate the team behind the project and the developer working on the technology
- Find a community of people already investing in the cryptocurrency and gauge their sentiment.
Research the market
It’s critical to take the time to research what factors may have an impact on your investments so you can make informed decisions.
Having a good understanding about the cryptocurrency market and the underlying technology you’re interested in will also help you make better decisions.
And don’t forget to always do your own research rather than relying on hype and other peoples’ opinions. Stay informed about developments in the market and the latest news related to the coins you’re interested in.
Steps to get started with investing cryptocurrency
Investing in cryptocurrency follows a very different process to investing in shares. Here’s some simple steps to follow:
Step 1: Select a cryptocurrency exchange
Cryptocurrency must be bought through an exchange—a platform where buyers and sellers meet to trade cryptocurrencies.
When choosing an exchange consider how much security it offers, the fees and any minimum investment requirements as well as the types of cryptocurrency it has available.
As part of this process, you may need to verify your identity and provide personal information. You also need to have funds available in your account which you can set up by linking your bank account or making a payment with your debit/credit card.
Step 2: Choose which cryptocurrency to invest in
Take some time to understand the different and unique characteristics of each cryptocurrency as there are many to choose from.
Step 3: Store your cryptocurrency
Because cryptocurrency is digital, you need to be able to store your coins in a safe environment.
When you buy cryptocurrency, it’s typically stored in a wallet attached to the exchange. But you can move it into a more secure location such as a ‘hot’ wallet—stored online and run through internet connected devices—or a ‘cold’ wallet—external device such as a USB or hard drive.
Step 4: Decide how much to invest
Just like any type of investment, how much you choose to spend on cryptocurrency should depend on a number of factors like your budget, risk tolerance and your investment strategy.
Always focus on the total dollars you want to invest, rather than the number of coins and never invest more than you can afford to lose.
Step 5: Manage your investments
How you manage your cryptocurrency depends on your investing strategy and goals but it’s important to review your portfolio regularly.
As cryptocurrency is extremely volatile, you may need to increase or scale back on some coins, depending on your investment goals.
Key takeaways: cryptocurrency
Before deciding to invest in cryptocurrency, consider how it fits with your own risk tolerance and financial needs. If in doubt, seek independent professional advice where you can.
The information in this article is current as at October 2024 and may be subject to change.
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