How to Start Investing in Crypto
Cryptocurrency, specifically Bitcoin (BTC), has made headlines nearly every day for the past month, and I don’t expect that to change anytime soon. With the imminent passing of the $1.9 trillion COVID relief bill, along with efforts by the Federal Reserve to curb the risk of hyperinflation, investing in cryptocurrency has become a means for the average, retail investor to guard themselves against potential market corrections or crashes in the stock market, as well as the devaluation of their dollars in coming years.
Moreover, with returns flowing in that promise ROIs that could quintuple your holdings in a month, both leading and small-cap cryptocurrencies have become the new Dot-Com investment of the 2020s. However, the predominant sentiment among cryptocurrency enthusiasts is that crypto is not a speculative bubble, but rather a way to revolutionize the financial world, as well as drive efficiency and speed in nearly every other aspect of our lives.
It’s not just the little guys that believe in this, either. Companies like Walmart are exploring the uses of block chain technology to improve their own supply chain, such as being able to track produce as it moves along the shipping process to ensure safety and reduce inefficiencies. Even central banks, which have often been critical of cryptocurrencies, are creating their own digital currencies (CBDC) in an effort to counter the negative aspects of traditional fiat currencies. Currently, China’s central bank has one of the world’s most-advanced digital currencies, and it is set to change the way money is transacted forever.
This all begs the question — how can you get a slice of the crypto pie before it’s too late? Let’s explore.
Where to Start
As crypto markets continue to heat up, more and more services are offering their clients the ability to purchase, trade, and even stake their coins to earn extra money. Check out my article on DeFi and other important topics to learn more. This has also brought with it increasing concerns about the security risks of investing through third-party exchanges, and whether a novice investor fully understands the risks of storing their currencies on these exchanges.
Nevertheless, the technology behind these exchanges is improving by the day. In fact, the leading exchange, Coinbase, is even gearing up for a direct listing at record numbers, with some estimates predicting that Coinbase could go public at a valuation of $100 billion or more. Naturally, this has had a strong influence on the public’s perception of both the risks and the future rewards of cryptocurrencies, and institutional adoption is well underway.
The Setup
To start investing on leading exchanges, you will need a bank account that can be linked to the exchange for depositing and withdrawing funds. Once you have linked a bank account, exchanges like Coinbase, which I will be using for example purposes, generally ask for documentation to verify the user’s identity prior to allowing them to access the exchange. Furthermore, certain restrictions are placed upon a user based on their locations, with certain assets not being supported in certain locales. There are also different tiers of investments accessible to new investors, with supplementary functionality offered on premium services, like Coinbase Pro. However, signing up for the lite version of Coinbase is more than enough to get started on your crypto journey.
Once you are approved for trading, Coinbase sets up a digital wallet, which mimics a bank account. Each wallet is given a unique address, which can be used to transfer currencies across platforms, as well as to hardware and software wallets, which we will discuss below.
An important aspect to note is that each of your different cryptocurrencies will be held in its own digital wallet, each with its own unique address. This leads to a potentially dangerous mistake for new investors — sending a different form of cryptocurrency to a wallet will result in the crypto being lost forever.
For example, if you want to send your Bitcoin from Coinbase to a software wallet, like Metamask, but mistakenly use the wallet address for Ethereum, the Bitcoin will be lost in the ether. The golden rule? Before initiating a transfer, be sure to check the addresses of both the sending and receiving wallets to ensure that your crypto reaches its destination.
With that being said, some might wonder how this differs from using a traditional bank account to transfer money. The difference is speed. Transfers between digital wallets are completed within minutes, a significant improvement over big banks, which can take 3–5 business days to verify a transaction. Furthermore, the crypto markets are not affected by working days, meaning that you can transfer money directly 24 hours a day, rather than waiting for the banks to open up to complete the transfer. Finally, cryptocurrencies are global, and transfers can be made between digital wallets without an intermediary, such as a bank or brokerage.
How to Keep Your Crypto Safe
Another potential risk for novice investors in the crypto space is not understanding how these currencies, or coins, are stored, and who is the true owner of the asset at hand. When trading through a platform like Coinbase, your crypto is not truly in your possession — it remains on the exchange. This is similar to the idea of traditional banking. If you have a high balance in your bank account, and wish to withdraw the full amount, this may present difficulties, as the bank uses deposited funds for other activities. The fiat money in your bank account lives in the digital space, not in a physical vault.
Similarly, the cryptocurrency that you purchase is not truly in your possession until it is transferred to an external wallet, which can be a software or hardware wallet. These wallets are guarded by a set of code words that only the owner has, which act as private keys to the digital wallet. Users are instructed to store these private keys on paper, and not on any form of potentially vulnerable electronic medium, in the event of forgetting your credentials. This comes with an additional risk — if you fail to input the correct privacy keys in a certain amount of attempts, the wallet is wiped, and the currency is lost forever. Just ask Stefan Thomas, who forgot his private keys, and lost access to crypto valued at $220 million.
Once the crypto has been deposited into the external wallet, it is significantly more safe from the dangers of hacking or system failures on the exchange. Most crypto investors believe, however, that hardware wallets are superior in this matter, as they are what is referred to as cold storage — completely offline. If you are sincerely concerned about the security of your crypto holdings, hardware wallets, like the Ledger Nano X, are an affordable and safe way to protect your coins.
Investor Beware
Although society is climbing the crypto mass-adoption curve, investors must be aware of the fact that, in comparison to traditional means of investing, the cryptocurrency markets remain volatile. Some early investors have seen their bank accounts reach millions, only to have the value of their holdings evaporate overnight. Novice investors must understand that the crypto markets are not regulated in the same manner as traditional markets, and are subject to high levels of volatility for this reason.
Furthermore, the advent of digital currency has also seen the advent of a new way to scam gullible people on the internet. So-called alt coins have allowed new organizations in the crypto space to raise millions in hours, and even seconds, from across the world through ICOs, or Initial Coin Offerings. Internet scammers have taken advantage of the mania surrounding ICOs that promise 10,000% returns to create alt coins, sell them to the public, and disappear, taking their investors’ money with them. In fact, a recent study suggests that nearly 80% of ICOs are fraudulent.
Finally, in a society dominated by social media influencers, savvy crypto investors with podcasts, Youtube channels, and TikTok accounts are able to reach millions of users daily. This then allows them to promote certain coins in pump-and-dump schemes, which they use to boost their holdings, and sell off before the coin bottoms out once more. One of the primary offenders, it turns out, happens to be the world’s richest man, Elon Musk, who has repeatedly caused surges in the price of the alt coin Dogecoin. This begs the question — can something as simple as a tweet containing a meme be considered market manipulation? The SEC seems to think so.
The point is this — before investing in any cryptocurrency, make sure to do your own due diligence. Investing in Bitcoin and other projects has the potential to create generational wealth for early adopters, and also cause financial ruin for naive investors. The good news is that resources on crypto are ubiquitous, and it is possible to teach yourself cryptocurrency, and even earn a few (non-fiat) profits in the process.
To Sum Up
Despite what critics like Treasury Secretary Janet Yellen might think, cryptocurrencies, and the underlying technologies, are here to stay, and some say that they will change our lives even more than the internet has. Becoming educated on the subject is the first step in investing in the future of the financial world, and promises to generate staggering returns in years to come. Follow these golden rules, and you are on your way to becoming a crypto investor.
- Find an exchange that works for you
- Protect your crypto with a digital wallet, preferably a hardware wallet
- Don’t trust every influencer you see — do your own research!
Happy Investing!
