How to Invest in Cryptocurrency?
The purpose of this article is to describe step by step how to invest in cryptocurrency. Deploying capital in cryptocurrency and blockchain though potentially very rewarding, can also be daunting. There are so many moving parts to take into account. Which crypto, what exchange, how to invest safely into cryptocurrency, what blockchain to invest in, how to invest in multiple cryptocurrencies, how to effectively research crypto projects? The list goes on and on and while the web is replete with answers to every question – trust in both the advice given and the source of that advice is hard to come by and particularly difficult for a newcomer to the crypto space to identify.
Sectarianism, hyperbole, and misleading claims permeate the crypto landscape. Buy this, sell that, buy now, join this telegram, shun that one. Dip into crypto Reddit – amidst the great tech discussions controversies rage on every corner. Scan a crypto themed Twitter feed and it won’t be long before you encounter strongly held and diametrically opposed opinions with communities rallying behind them each viewpoint. It is a lot to ‘take-in’ for anyone new to crypto.
As a new investor its critically important you accept some basic principals or truths:
Investing in Crypto is High Risk
Despite your best efforts you may well lose all your capital. This is a fact and happens on a regular basis – blockchain projects large and small fail, turn out to be scams or simply fall out of favour. The best you can hope for is to mitigate risk.
The Risk is Higher than More Mature Assets Classes
Investing in Crypto is much riskier than a seemingly equivalent large-cap stock investment. Most projects are going to zero. If you balk at this statement you are not ready to make a substantial investment into this space. The crypto landscape changes radically from year to year and the process of winnowing is only picking up pace. A typical stock market sees only a handful of companies fail per year. Crypto sees many projects blaze for a moment before fading away.
It’s Going to Take Time (1)
While sound investment principles are just as valid in crypto as in any other asset class you are likely to start off at a disadvantage when it comes to assessing the ‘qualities’ of a particular project until you have had some time to navigate the tech, sectors, narratives, and peculiarities of crypto. More information on how to educate yourself can be found here.
It’s Going to Take Time (2)
You may have come to this space in pursuit of quick gains. You are likely to be disappointed. A common narrative is that crypto is ‘not like’ other assets. Now, of course, it has its own characteristics but the process of project building, deployment and revenue acquisition will take years. An exciting whitepaper and high-flying team will still have to put in the development time and face all the challenges of a typical start-up. Partnerships, networking, regulations, code iterations, bug hunting and so on, all take a substantial period of time.
Crypto projects will take years to mature and hit even first level iterations. While the price may well be volatile during this period, if you’re not day trading it will be difficult to capitalise on these swings. So, before you begin, accept that whatever investment you make, it’s going to take a number of years.
You Will Feel Like a Lone Wolf
Crypto is disreputable – for all sorts of reasons it has a tarnished reputation. From illicit use, to price manipulation within exchanges, from high profile scam projects, to stolen code – society at large is still distrustful and dismissive of crypto in general. Years from now this is will almost certainly not be the case but for now be prepared for raised eyebrows, tuts-tuts and most of all –‘I told you so’ from friends, family and colleagues. A more detailed explanation of the negative views surrounding crypto can be found here.
Before you Invest
The degree to which you need to invest time into learning the ‘ropes’ of crypto will, of course, vary on the level of financial commitment you intend to allocate to it. If you simply wish ‘to hedge’ and are looking for minor exposure to the crypto asset class, then a basic level of understanding of the various components of the market will suffice.
If, however, you forsee ongoing and substantial investments into crypto then a commensurate degree of time should be set aside to come to terms with the space. How much to invest in cryptocurrency is entirely dependent on the particulars of your situation but as a guide, the more wealth allocated, the more research and ongoing commitment to education that is required.
In any case, the following general knowledge banks are a good place to start:
A highly accessible but still reliable place to start if you are just beginning your research as essentially, it’s a cryptocurrency dictionary.
The Ethos project has also compiled a collection of short, informative videos on topics such as ‘What is a blockchain?’
Another excellent source of explanations of crypto technologies, terms, and phrases. Helpful studies of blockchain use cases.
A treasure trove of blockchain articles spanning the entirety of the crypto space.
More information on reliable sources of educational material can be found here
What Blockchain to Invest In?
With over two thousand projects currently in the market, it can seem all but impossible to pick ‘a winner’. However, a great deal of the complexity can be removed by initially looking only at large-cap blockchains. In fact, narrowing your focus down to the top ten cryptos by market capitalisation, would be my recommendation.
Going one step further – you may have to ask yourself – why not Bitcoin? This most famous of all cryptocurrencies has a lot going for it. It arguably leads all over projects in network depth, longevity, established and battle-tested security, brand awareness, institutional penetration and decentralisation.
Currently trading at around $3k down more than 80% from its all-time highs, Bitcoin is the ‘safest’ investment in a high-risk asset class. More information on the current price supporting fundamentals of Bitcoin can be found here. The vast majority of other crypto projects have been established for a year or two perhaps 3 or 4 at most.
If Bitcoin feels too sedate, then any of the other top ten projects by market capitalisation represent comparatively ‘safe’ investments (aside from Tether which is a stablecoin). Safe, of course, is relative – crypto from first to last is a high-risk investment.
After taking some time to situate yourself in the cryptosphere, you may wish to look to other projects of lower captialisation. It’s worth noting that crypto project market valuation is yet another topic steeped in complexity and controversy.
How to Invest in Multiple Cryptocurrencies?
A ‘typical’ portfolio might look something like this:
70-75%% Large cap (top 20)
20% Medium cap (21-100)
5-10% Small cap (101-)
Remember the lower the market capitalisation the higher the risk. This is a gross over-simplification but a useful starting point.
Research – Verify Don’t Trust
Assessing the investment worthiness of any blockchain endeavour requires systematic research. A model of such research might look like this:
- Take a project snapshot.
- Examine what problem the project seeks to solve or lessen.
- Identify what the project brings to market that’s not already there.
- Assess the quality of the team
- Ensure you understand the tokenomics of the project.
- Establish whether the published roadmap is detailed and whether targets are being met.
- As community plays a critical part in most crypto start-ups, research the depth, and engagement of that project’s support base.
- Lastly, don’t become distracted by marketing hype – verify that the project is still active and under full development.
Simple Investment Guidelines
Once you’ve identified a project you are interested in, it’s worth reflecting and attempting to internalise common investor behaviour to avoid.
Try Not To
- Invest first and only afterward consider your preferred entry and exit point and your risk tolerance for the position.
- Ignore the challenges faced by retail investors.
- Chase price – with patience the price will come to you and if not there’s always another investment.
- Go ‘all-in’ on one position and or over-invest into crypto (remember there is a high probability of your investment going to zero).
- Second-guess yourself by frequently selling in and out of positions (if you are not a day trader – you are simply whittling away capital on fees).
- Buy on the recommendation of any single entity.
- Reflexively enter or exit a position on breaking news (again if you are not a day trader why act like one – a poor one at that).
- Attempt to pick the top or bottom of a trend – it’s almost impossible to do.
A detailed explanation of each of these points can be found here.
How to Safely Invest in Cryptocurrency?
This brings us to fiat onramps (exchanges) and crypto storage (wallets).
Exchanges are the intermediary that facilitates the trading of fiat (money) into a particular crypto. They come in many shapes and sizes but for a first-time investor ease of use, security and liquidity are key.
Binance – though a relatively new exchange offers a wide-range of trading pairs, has a demonstrated commitment to security and is one of the biggest exchanges by daily volume. There are alternatives with lower withdrawal fees but if you are only taking a few positions Binance is ideal. A step by step guide on how to use Binance can be found here.
Coinbase – One of the oldest exchanges – Coinbase has an established record as a ‘trustworthy’ broker. It has a limited range of trading pairs but the selection of currencies on offer has expanded recently. Fees are comparatively high but the increased security and overall dependability of the exchange makes it an attractive first investment venue. A step by step guide on how to use Coinbase can be found here.
Storing your Crypto
Simple rule, if you control the keys it’s your Bitcoin. If you don’t control the keys it’s not your Bitcoin.
Do not leave your crypto on an exchange. If you leave your investment on the exchange you are effectively treating it as a bank but they are not a bank and your assets are not guaranteed. If the exchange is hacked or shutdown you may well find yourself with no access to your funds. Therefore, it is critical that you move your investment to a secure wallet for storage. There are a wide range of options.