Imagine if you knew how to invest in cryptocurrency like the people that have been in the game for several years.
Surprisingly, that’s not as hard as it sounds, and you will have no issues at all following this guide even if you’re a beginner.
The people that bought Bitcoin at $50 or Ethereum at $1 are not highly sophisticated traders, but they did have a decent understanding of how to invest in a HYPER volatile asset like cryptocurrencies.
And that’s precisely what you will learn in this guide.
If you’re looking for answers to questions like:
How do I buy cryptocurrency? Which cryptocurrencies should I buy? What is the best time to buy cryptocurrency? How do I avoid investing in frauds?
Then you’re in the right place.
Introduction: Investing in Cryptocurrency
There are thousands of cryptocurrencies out there, and contrary to popular belief, they not all just aim to replace money like in the case of Bitcoin. Blockchain, the technology that powers most cryptocurrencies, has a very wide array of use cases.
Some coins like Ethereum, aim to build a global computer for so-called “Smart Contracts”, other coins like Ravencoin aim to create a network to make the transfer of assets (like Real Estate or Stocks) more efficient.
We will soon explore how you should balance all of these cryptocurrencies in a well-diversified cryptocurrency portfolio, but first, let’s quickly run through what this asset class really looks like.
Historically, cryptocurrencies are one of the most volatile investment opportunities out there. This can beautifully be observed in the price action of Bitcoin, the first cryptocurrency to ever be created. Since its launch in 2009, the Bitcoin price has rallied from less than $0.01 to a (current) peak of $20,000 per coin.
However, due to its volatile nature, Bitcoin has also experienced several 80%+ corrections on its path to new all-time highs. One example is the 2014 Bitcoin bear market.
This extreme volatility also applies to cryptocurrencies other than Bitcoin, like for example Ripple. In 2017, Ripple rallied by nearly 16,000% jumping from $0.0063 to over $1.
And what followed is a 90% correction that hurt many investors that bought the top and simply joined the market for a short-term profit.
This clearly illustrates how Bitcoin and other cryptocurrencies are an extremely volatile asset class, and should always be treated with caution. While its true that the general trend for the cryptocurrency market has always been up since its inception, some coins have gone to zero and the massive volatility can be a reason of concern for conservative investors.
With that being said, it’s now time to explore why you might want to invest in cryptocurrency (and why you might not).
Should I invest in cryptocurrency?
One of the main reasons why people ask themselves whether they should still invest in cryptocurrency is because they see the crazy returns that some coins have offered and therefore think that it might already be too late.
That is not the case. Cryptocurrencies and blockchain technology can reshape the lives of every single human on Earth, and at the time of writing, less than 10 Million people are involved in the space.
With 3 Billion people on Earth with access to the internet that still don’t own any cryptocurrency, there clearly still is some room for growth.
Another factor why even more traditional investors might want to consider investing in digital assets like Bitcoin is because they can serve as a hedge against USD or EUR hyperinflation.
Sophisticated investors know that it’s not wise not to leave all your eggs in one basket, and as international political tensions keep building up, some people are starting to look into cryptocurrencies as a safe haven from the political turmoil and the consequences that it might have on stocks and fiat currencies (USD, EUR, etc).
What are the risks of investing in cryptocurrency?
Although there is clearly a lot of potential in the growth of the crypto world, investing in cryptocurrency is risky and you should never allocate more than what you can afford to lose. Some of the main risks include volatility, fraudulent coins, and fundamental issues with the underlying technology. Let’s explore each one in a bit more detail.
As mentioned previously, it is completely normal for a cryptocurrency to fluctuate 20% in a day. However, that also applies to the downside.
Cryptocurrencies are also extremely cyclic, in a cryptocurrency bear market, it is common for the average coin to lose 80% of its value in a year.
The cryptocurrency space is a playground for scammers and bad actors, and you need to keep that in mind as a risk when investing. A general rule of thumb is to stay away from offers that are too good to be true.
One example of this is Bitconnect. The coin promised guaranteed 40% profits every single month to its investors. Needless to say, the platform turned out to be a pyramid scheme and investors lost their entire capital as the coin crashed to zero.
Blockchain, the tech that powers most cryptocurrencies, is still extremely young and we don’t know yet if its the best approach to the problem that cryptocurrencies are trying to solve.
Although its true that the Bitcoin blockchain, for example, hasn’t had a single minute downtime since its inception, it’s important to keep fundamental risks in mind since flaws in the technology could be found one day.
What Cryptocurrencies Should I buy? Building your Portfolio
In this section of my cryptocurrency investing guide for beginners, I will be covering the best cryptocurrencies to invest in, the different types of cryptocurrencies, and how to diversify a crypto portfolio correctly.
However, before diving in, you need to be aware of the fact that your cryptocurrency portfolio structure will largely depend on the type of investment that you are after. Are you in it for a short-term gain? Or are you placing long-term bets on the industry?
“Money flows from the impatient to the patient.”
Investing in cryptocurrency in the short-term is extremely risky due to the wild price fluctuations and you if that’s what you want to do then you should focus more on TA (Technical Analysis), rather than the fundamentals of the coins you’re investing in.
On the other hand, if you are playing the long-term then you need to pay close attention to the fundamental value of the cryptocurrencies you are investing in and you need to make sure that you have a well-diversified portfolio.
Prior to 2015, there weren’t really any legitimate cryptocurrency investment alternatives to Bitcoin. However, that has radically changed as the cryptocurrency space continued gaining momentum. Today there are thousands of so-called “altcoins”, which are alternatives to cryptocurrency.
These coins can be quickly found on platforms like CoinMarketCap, which displays the largest cryptocurrencies by market capitalization and also lets investors check cryptocurrency prices.
With that in mind, let’s now explore what types of cryptocurrencies there are, which ones are the best to invest in, and how to properly diversify a crypto portfolio.
Best cryptocurrencies to invest in
There are certain cryptocurrencies that every crypto investor should consider holding. This is mainly because these coins have been around for a long time, the team working on them has proven to be legitimate, and there is a strong community backing them.
A good starting point for the best cryptocurrencies to invest in are the following ones:
Bitcoin: The first cryptocurrency to be created. It is by far the most used coin and many people see it as “digital gold”, and even as a potential competitor to fiat currencies like the US Dollar. Many people invest in Bitcoin because they consider it a safe bet in contrast to other crypto assets.
Ethereum: Launched back in 2015, Ethereum was one of the first platforms to enable the creation of “smart contracts”. At the time of writing, Ethereum is the most popular smart contracts platform out there and is often described as a “world computer”.
Ripple: The Ripple platform aims to onboard banks and other traditional financial institutions into the cryptocurrency world. Although controversial to some, the platform has partnerships with some of the largest banks in the world and buying Ripple has been one of the best cryptocurrency investments so far.
Monero: The first privacy coin to launch, and currently also the most popular coin used by people wanting to keep their transactions private. Monero was created back in 2014 and is being moved forward by a highly respected and competitive team of developers.
Holding these assets in your cryptocurrency portfolio will help you to profit from the growth on the market, while at the same time minimizing the risk that comes with smaller less established cryptocurrencies.
Different types of cryptocurrencies
There are 11 main types of cryptocurrency categories, it’s important to be familiar with at least a few of them when building a cryptocurrency portfolio.
We have already written an in-depth guide to the top cryptocurrency categories, so I’ll only cover the 5 most important ones here:
- Currencies: Coins used as a method of exchange in payments and other transactions.
- Interoperability: Platforms that connect different blockchain platforms (for example Bitcoin with Ethereum), to enable the flow of information of one platform to the other.
- Smart Contract Platforms: Platforms, like Ethereum, that enable anyone to create a smart contract.
- Fintech: Platforms like Ripple that aim to re-shape the finance world through the use of blockchain technology.
- Stablecoins: Coins that are pegged to currencies like the USD or to stable assets like Gold, in order to maintain a stable price (like for example 1 USD per coin).
The key to a well-diversified portfolio is to understand and properly combine at least 3 of the above cryptocurrency categories. More on that in the next section.
How to diversify a cryptocurrency portfolio
One of the best cryptocurrency investing tips that I can give you is to have a very well diversified portfolio. I will show you how you can do that, but let’s start with the basics.
When cryptocurrencies enter a bear market, all coins suffer similar losses so the purpose of diversifying your crypto portfolio is not to hedge a market downturn. However, diversifying a cryptocurrency portfolio is obviously still incredibly powerful.
“Risk never looks like risk when it’s generating a high return”
– Howard Marks
The major factor why it’s important to diversify a crypto portfolio is to mitigate the risk of losing capital in a coin that fails or that turns out to be a scam. If for example, an investor with $1,000 had invested all of it into Bitconnect (a cryptocurrency pyramid scheme that collapsed), then he would be left with exactly $0 now.
However, if he had invested $100 into 10 coins and one of them goes to zero, like in the case of Bitconnect, then he would have only lost 10% and would still be left with $900.
Interestingly, diversification can not only be used to mitigate risk and losses, but also to maximize profits. The more coins your portfolio holds, the higher the chance that you hold one that eventually does a 50x or 100x price increase, which would drastically push up the overall performance of your portfolio.
One good approach to diversifying a crypto portfolio is to split your holdings into 3 risk categories: safe portion, moderately safe portion, high-risk portion.
Moderately Safe portion
We usually recommend to allocate 60%, 30%, and 10% of your funds respectively to each risk category in order to have a well-diversified portfolio, but the ultimate decision is yours of course and it will depend based on your risk tolerance.
Invest the right amount of money
Even in a well-diversified cryptocurrency portfolio can potentially result in a massive loss. If you had bought $100 worth of the top 10 cryptocurrencies by market capitalization in January 2018, 1 year later those $1,000 would only be worth less than $200 due to the brutal 2018 bear market.
Therefore, it’s crucial that you never invest in cryptocurrency more than what you can afford to lose. A good way to think about this is to imagine that the money you are planning to put into crypto is gone forever. Would that make you anxious? If yes then you should probably invest a lot less.
How to buy cryptocurrencies?
If something has consistently gotten better and easier over the years in the crypto space, then that’s the user experience of buying cryptocurrency. What used to be a daunting task that leads users to shady platforms, is now simple and intuitive and can even be done from one’s smartphone.
Let’s now explore a few options that users have to buy Bitcoin or altcoins.
Cryptocurrency ETNs and ETFs
One option to get exposure to cryptocurrency is to buy ETPs (Exchange Traded Products) or ETFs (Exchange Traded Funds). In both cases, you wouldn’t be holding the actual underlying asset, but just a certificate that proves your ownership in these cryptocurrencies.
Although many people don’t like this option because they want to actually hold their cryptocurrencies to potentially use them, some others like it because the experience of buying an ETF, for example, is similar to buying a stock on the stock market.
At the time of writing, the most popular cryptocurrency ETP is the Switzerland-based $HODL ETP. The $HODL ETP gives investors exposure to Bitcoin, Bitcoin Cash, Ethereum, Ripple, and Litecoin, and can be easily purchased on the Swiss Stock Exchange.
Buying real Bitcoin on exchanges
If you want to leverage the true benefits of Bitcoin then you need to own the actual coins, and not just a paper certificate like a Bitcoin ETF.
By buying real Bitcoin, you will not only be able to store value in a non-confiscatable and uncensorable form of money, but you will also be able to experience the revolutionary power of being able to send money to anyone in the world without relying on any intermediary (like a bank).
Buying Bitcoin on exchanges is simple, and if you are just getting started then you should definitely stick to a cryptocurrency exchange for beginners.
The simplest bitcoin exchanges are:
- Cash App
We compare these exchanges and more in our list of best crypto exchanges for beginners, so definitely make sure to check it out if you’re about to buy your first coins!
Buying Bitcoin on an exchange for beginners like Coinbase is really not that hard. You just sign-up, verify your identity by submitting a selfie with your password, deposit some money, and that’s it!
It’s true that these beginner exchanges do have trading fees that are slightly above average, but for most people, that’s not an issue at all since the simple user experience and added security definitely makes up for the small trading fee.
Buying altcoins on exchanges
Buying cryptocurrencies other than Bitcoin (altcoins), can be a bit more challenging since they can usually only be bought with Bitcoin and not with USD or EUR.
The best altcoin exchange is Binance. You can use the exchange to buy nearly 100 different cryptocurrencies in a very intuitive and secure manner.
Another plus for Binance is that, to the contrary of other exchanges, it does not ask you to verify your identity if you are transacting less than 1 Bitcoin per day.
Here’s how to buy your first altcoin:
- Buy some Bitcoin on Coinbase.
- Create an account at Binance.
- Send some Bitcoin to Binance.
- Use that Bitcoin to buy any cryptocurrency that you wish.
- That’s it!
Two additional very popular altcoins exchanges are Bittrex and Kraken, however, they’re far from matching the number of coins and user experience that Binance has to offer to its users.
As a final note on the topic of cryptocurrency exchanges: please only use trustworthy exchanges. You may find yourself in a situation where there’s a coin that you really want to buy, but that is only being traded on a shady and unknown exchange.
In those cases, please remember that there have been countless cases of cryptocurrency exchanges running away with the funds of its users and think if that coin is really worth the risk of being stolen off your money.
Buying cryptocurrency stocks
Some people ask how to buy Bitcoin stock, yet as you know by now, cryptocurrencies are not companies so there isn’t something like a “Bitcoin stock”.
However, something that can be done is to invest in stocks that have exposure to the cryptocurrency market. You could, for example, invest in cryptocurrency mining companies, mining chip manufacturers, cryptocurrency exchanges, crypto service providers, and more.
Here’s a list with some of the best cryptocurrency stocks to buy:
- Overstock: Overstock started out as an online retailer and has since then heavily moved into the service business for blockchain related companies.
- NVIDIA: One of the largest cryptocurrency mining chips producers in the world
- Square: The Parent company of “Cash App”, a simple app that not only enables people to easily send money but also to purchase Bitcoin at the click of a button.
- AMD: Another chip producer that also produces chips for cryptocurrency mining machines.
- TSMC: Hardware producer that is the main producer for BITMAIN, one of the largest cryptocurrency mining firms out there.
Stocks in these companies are bought on the stock market just like you would buy any other stock as well. They can be an effective way to get exposure to the cryptocurrency market without having to hold any actual coins, which can make them an interesting choice for more conservative investors.
Is there a good time to buy cryptocurrency?
Many people wonder if now is the right time to buy Bitcoin, or when they should invest in cryptocurrency. Fact is, although there are some general price trends, no one can accurately tell you when the best time is to buy cryptocurrency.
There are two main factors that you can watch when trying to decide if now is a good time to buy crypto: seasonality, and market cycles.
Historically, cryptocurrencies usually rally in the months of February and March, and at the end of December. Although it might have been a complete coincidence that this pattern emerged over the course of the years, some people think that these rallies might be related to the tax season.
Many people call this phenomena “alt season”, since its especially the altcoins that generate very high returns during these periods of time.
“Altseason” is a time period where the prices of altcoins skyrocket.
The second and probably more important factor is to watch the market cycle. It’s obviously better to buy cryptocurrencies at a 80% discount from their all-time high than it is to buy at the top during a frenzy. However, often you might not get a chance to buy at rock bottom prices. Judging by past price actions, once the cryptocurrency market enters a new bull market then it often doesn’t stop until the price of most coins has increased by at least a factor of ten.
Therefore, if you didn’t manage to catch the bottom of the bear market, a good moment to scale into Bitcoin and other cryptocurrencies is every time there is a “dip” in the price. Bitcoin often dips 10-15% during rallies before continuing to move higher up so that’s something that you can leverage in your investment strategy.
How To Store Cryptocurrencies safely?
After you bought your first coins, you now need to make sure that they are safe at all times. The cryptocurrency space is a highly adversarial world, meaning that if something can be stolen it WILL be stolen.
Let’s now explore 3 crypto security tips that you can follow to keep your coins safe.
Don’t keep your coins on an exchange
Although you most likely purchased your first cryptocurrency on a crypto exchange, the first security is to get your coins off the exchange immediately. History has shown over and over again that even the most trustworthy cryptocurrency exchanges get hacked, and the results are devastating.
Back in 2013, the largest cryptocurrency exchange at the time, Mt. Gox, was hacked out of approximately 740,000 Bitcoin. Needless to say, nearly everyone that had their coins on the exchange lost all of it. This was especially devastating for people as the Bitcoin price increased by a factor of 100x in the 4 years following the attack, making the lost coins worth a fortune.
However, exchange hacks are not the only risk. By storing your coins in the hand of a third party, you are exposed to the risk of the third party simply running away with all your coins. Unfortunately, that has also happened over and over again.
A recent example is the case of Canada-based “Maple Exchange”, which closed down its exchange after claiming to have been hacked. Many people believe that the exchange did not, in fact, get hacked, and that it was all just an elaborate exit scam. Needless to say, everyone that stored their coins on the exchange permanently lost all of them.
Alright, now you might be wondering: But I need to use a crypto exchange from time to time! How do I know it’s safe?
Very simple, just watch out for the following 5 red flags:
- Small or unknown exchange
- Withdrawal issues or other problems
- Negative reviews or experiences on social media
- Not clear what the company behind the exchange is
- Team members not publicly known
If a cryptocurrency exchange that you’re planning to use flashes one of the above red flags, then you should stay away from it. Check out our list of legitimate crypto exchanges for beginners if you need some help with finding the exchange that’s best for you.
So, keep this in mind: your coins are only safe if you are holding them yourself on your own crypto wallet. If you keep them in the hands of a cryptocurrency exchange, they can be gone at any time.
Watch out for scams
Due to the anonymous and partially unregulated nature of cryptocurrency, the crypto space is a playground for scammers.
On the contrary of a bank account, where all transactions are usually connected to an identity and can often even be reversed, if someone steals your cryptocurrency then chances are high that the bad actor will never be found, and the transaction can definitely not be rolled back.
There are countless ways in which crypto scammers target their victims, but one of the most common ways are phishing attacks. In a phishing attack, the bad actor pretends to be someone else (like a cryptocurrency exchange), in order to steal your coins.
Phishing scams can be performed via email, social media, or even google ads. Let’s briefly check out some examples.
One of the most common phishing techniques in the crypto space is where bad actors pretend to be a celebrity or crypto company holding a “Giveaway” on Twitter.
The scammer will then ask you to send a certain amount of cryptocurrency to him, and that you will receive back an amount that is 10 or 20 times larger.
Needless to say, the moment you send the money you will never hear back from the scammer.
Another commonly used tactic is that bad actors create a website that looks 100% identical to a legitimate site they want to imitate (like a cryptocurrency wallet) and they then register a domain that also looks similar and run ads to promote it.
Therefore, you ALWAYS need to double check the URL before clicking on any crypto-related ad. Or even better, don’t take the risk and avoid clicking on crypto ads.
Email phishing works in a similar fashion to “Ads phishing”, but instead of Ads email are used.
The bad actor will send you an email that looks like if it was sent by a real company in order to get you to visit his fraudulent website so that he can steal personal information or your coins.
How can you protect yourself from all of these scams? Simple:
- If something is too good to be true, it’s not.
- Always double-check you are interacting with the official website when using a crypto product.
With that being said, let’s now dive into the final point of how you can boost the security of your coins after you made your first cryptocurrency investment.
Purchase a hardware wallet
There isn’t a safer way to store your coins on that on a cryptocurrency hardware wallet. Crypto hardware wallets are essentially devices that store your private keys (“password for your coins”) offline, leaving them always out of reach of attackers.
Many cost less than $70, and if you hold cryptocurrency worth over $500 then you should definitely buy one. We wrote a guide comparing the best crypto hardware wallets so make sure to check it out if you want to learn more.
Using a crypto hardware wallet is simple:
- Connect your hardware wallet to your computer (Usually via USB)
- Type the pin to your hardware wallet
- Open the computer program of your hardware wallet
- And that’s it! You can now send and receive coins while staying safe from hacks and even some scams
If you want to learn more about how you can keep your coins safe, make sure to check out our article about the 11 Ultimate Cryptocurrency Security Tips.
Is investing in cryptocurrency tax-free?
We’re not tax advisors at CoinDiligent, so you should hire a professional tax consultant if you need help. That being said, in most countries investing in cryptocurrencies is NOT tax-free and you will have to file your taxes for cryptocurrency profits.
In order to make your job easier when tax season arrives, its recommended to either keep track of all your investments and trades on a spreadsheet or to purchase a tool like CoinTracker or Bitcoin.Tax, which will take care of everything for you.
When using a tool like CoinTracker, you will only have to connect your crypto exchange accounts and wallets to it, and the software will automatically analyze all your data and calculate your tax liability.
It’s important to note that in most jurisdictions, crypto to crypto trades also represent a taxable event. That means that if you purchase Bitcoin, and use that Bitcoin to purchase another cryptocurrency, that is most likely a taxable event where you live.
How to keep track of cryptocurrency prices?
Due to the high volatility of cryptocurrencies, a single day can make a huge difference in the value of your portfolio. This is why most of us crypto investors are addicted to constantly checking the price.
CoinMarketCap (CMC) is by far the most popular website to check cryptocurrency prices. In fact, it became so popular during the 2017 crypto bull-run that it actually was one of the 100 most visited websites in the world.
CMC enables you to check the prices and market capitalizations of thousands of cryptocurrencies. It also enables you to see on which exchanges the coins are traded and it also provides you with some relevant links about each coin.
An alternative to using a site like CoinMarketCap is to use a crypto portfolio tracker. These portfolio trackers are usually simple apps that you can download to your smartphone, and that not only show you the latest crypto prices, but also the total value of your crypto portfolio.
If you’re looking for a good crypto portfolio app, then make sure to check out our guide to the best cryptocurrency portfolio trackers.
Where to stay up-to-date on cryptocurrency and follow crypto news?
The final step when investing in cryptocurrency is to always stay up-to-date and to follow cryptocurrency news. The fundamentals of your cryptocurrency holdings can change on a daily basis, hence why it is important to stay informed.
Cryptocurrency news sites
The most popular way to follow recent developments in the crypto space is to check cryptocurrency blogs and news sites from time to time.
A great starting point is CoinDiligent, but since we are aware of the fact that we don’t cover news in as much depth as other sites, we prepared a list of the best cryptocurrency blogs that you should know about.
If you’re too busy to spend 2-3 hours per week to read crypto blogs and news sites then subscribing to a newsletter might be the best for you.
Crypto newsletters curate everything that has happened in the cryptocurrency and blockchain space in the entire week, and summarize it in a short email that lands straight in your inbox.
Make sure to check out our list of the best crypto newsletters out there.
Podcasts are a great fit for people that spend a lot of time in situations where they’re not in front of a screen. So if you spend a lot of time traveling, working out, or in the outdoors, then you should definitely give crypto podcasts a try.
We compiled what we believe to be the most interesting crypto and blockchain podcasts out there into a single list so that you can easily pick one for you.
Finally, for the book lovers out there, there are also some excellent cryptocurrency books that have been written over the past few years. While they are not very helpful to follow the news, they do help you to learn more about this revolutionary new technology.
To save you time, we reviewed the 15 best crypto books that you can buy.
And that’s it! If you read the entire guide until here then you now know how to invest in cryptocurrency and know significantly more about crypto investing than most people on Earth.
If you still have any unanswered questions then make sure to let me know in the comment section below and I’ll try to give you an answer!
CoinDiligent Staff Writer