Your workmate has been in your ear about LUNA all week. In the group chat, your best friend keeps sending you the latest news on the Ethereum merge. And at dinner, your partner just said they bought some Bitcoin.
It’s starting to feel like crypto is everywhere. And as a new investor, it feels even more daunting to enter this growing space. We understand. It’s tough not knowing which decision is the best. It may be even tougher to know which cryptos are best for you, how to invest in them, and how much to invest.
But it doesn’t have to be so scary. Let’s get back to basics and demystify everything you think you know about investing in cryptocurrency. Keep reading to discover how you can get started with your first investment.
What is Cryptocurrency Used For?
What Do You Need to Invest in Crypto?
The Investment Case for Crypto
Strategies For Investing In Bitcoin
Key Points
- There are over 19,000 cryptocurrencies in existence, each with its own uses and applications.
- The use cases of crypto can expand beyond financial reasons, and may influence the value of a coin over time.
- At present, the cryptocurrency adoption rate outpaces the Internet’s adoption rate at a similar stage of its inception. At this rate, the number of people who have bought, sold, or traded crypto could easily reach 1 billion by 2023.
What is Cryptocurrency?
Cryptocurrencies are a type of digital currency that relies on advanced cryptography techniques to secure transactions on a distributed ledger, known as a blockchain. This record of transactions is extremely difficult to hack and prevents double-spending.
Cryptocurrencies are usually created on peer-to-peer networks with no centralised authority or direct government interference. Rather, some users work to secure and validate transactions in exchange for rewards. The method through which this happens varies. Proof of Work (PoW) and Proof of Stake (PoS) are the two most common consensus mechanisms used for validation.
What is Cryptocurrency Used For?
Cryptocurrency use cases vary with each coin. Some coins have utility outside of crypto. Others function like everyday currency. The most common use cases for cryptocurrencies are:
- A Store of Value: Like precious metals hold value in the physical world, cryptocurrency can also function as a store of value. This function usually depends on the asset and its underlying technology. One example is Bitcoin (BTC).
- Everyday Currency: Some coins, like Tether (USDT), attempt to keep their value stable. By doing this, investors can trade these currencies frequently. Not unlike using fiat currency for everyday transactions. These coins are referred to as stablecoins.
- Software Applications: Cryptocurrencies aid in a variety of applications outside of finance. These applications vary from coin to coin but include: data storage, smart contracts, and access to decentralised apps. One example is Ethereum (ETH).
- Meme/Joke Coins: Popularity might be all you need to create value for a cryptocurrency. These trend-based coins rarely hold much use outside of keeping a trending topic at the forefront of an investor’s mind. Meme coins thrive through communities built around a common interest. The continued growth of the community helps the coin grow and/or retain its value. One example is Dogecoin (DOGE).
Further reading: Stablecoins Explained
Deciding What to Invest In
At present there are over 19,000 cryptocurrencies in existence. Getting decision anxiety?
It doesn’t mean you’ll have to make 19,000 choices before you jump into the market. There are ways to help guide your decision making, in hopes that you land on a few choice options that will work for you.
What is the project solving? Is there utility?
A coin may be performing well right now, but is it worth your time and money? Take time to research the underlying project associated with a coin. What blockchain is it on? What are the use cases for the coin?
Do you see the coin having utility that could be valuable now or in the future? Understanding the underlying goals of the project could give insight into the potential value for investment.
Do the values of this project align with your values?
At the end of the day, you want to see your investments grow. Some might feel more inclined to put their money into causes or projects they believe in. Think about your values. Are you eco-conscious? Are there any social causes that you already support? Chances are there is a project out there that aligns with your principles.
Outside of your values, also consider your current investing habits. What is your risk appetite or profile? Do you err on the conservative side? Keep these things in mind when building your portfolio.
What is the asset’s overall ranking?
The crypto market could change overnight, a relatively unknown cryptocurrency could shoot up to the top 10 just from a tweet. Realistically, the top cryptocurrencies are ranked as such for a reason. Look at these projects and the value they are offering to investors. It may give you some insight into the types of projects you should invest in.
Read the project white paper
The white paper is a key document for all cryptocurrency projects. Without it, the wider the public will not have a thorough understanding of the project and its goals.
While reading the white paper, highlight any red flags such as: a lack of real-world utility, or issues with legality.
Price History
Even for a seasoned trader, it can be difficult to spot and identify historical trends. But some of the original projects (e.g. Bitcoin) have a longer history that can be leveraged in your decision making.
Liquidity
Liquidity, or the ability for an asset to be quickly converted into cash or some other asset without major price fluctuations, is something else to consider when investing. Some larger cap coins (like Bitcoin, Ethereum, or Solana) have a tendency to be more liquid than smaller cap coins.
In the case of stablecoins, their price remains relatively constant. But you may not see a considerable ROI as their value is largely dependent on external factors. They are often pegged to fiat currency (like USD) which contributes to their overall stability. They are mainly used as a highly liquid trading pair, an entry point into decentralised finance (DeFi), everyday currency, or lending and borrowing.
Volume
Volume is often used to gauge interest in a particular cryptocurrency. Higher volumes could contribute to overall higher market liquidity. When assessing this measurement for a particular coin, weigh up the volume against a select time period. Trending coins could have a high volume one day and see a drop in trading once public interest dies down.
What Do You Need to Invest in Crypto?
Before making your first investment, security measures should be implemented in places where you could be compromised. Remember: fraudsters don’t even need to touch the blockchain to get their hands on your assets. Here’s what you should have in place:
Secure Internet Connection
When completing a trade, make sure you are always using a secure, private connection. This isn’t much of an issue if you trade with a crypto brokerage though. Here at Caleb & Brown, we complete all trades on your behalf using extremely strict security protocols.
If you decide to enter the market through an exchange, a lack of security on your network could lead to stolen data. Some investors consider using a VPN for additional security. But you should check with your brokerage or exchange first to see if this is allowed.
Proper Storage
After you have the internet connection sorted you'll need to determine how to store your investment. There are two popular options for storage: hot wallets and cold wallets.
Hot wallets are connected directly to the internet, usually through a phone or desktop application. Their popularity lies in their ease of use and ability to make trades quickly. Outside of KYC parameters, there is very little set-up time which makes these wallets very attractive to beginner investors.
Cold wallets are completely disconnected from the internet. As such, they cannot be easily hacked and are often seen as a safer option for infrequent traders. These storage devices often resemble USB flash drives. Keep in mind, though, that you can’t use any USB drive to store crypto. Cold wallets have additional built-in layers of security to prevent a data breach once you connect it to the internet for trading.
Another alternative is using a built-in wallet provided by your chosen exchange. There are some risks to this method, as you are leaving your crypto in the hands of a third party. Nevertheless, they are a breeze to set up if you’re only trading through one exchange. If you want to explore this route, make sure the exchange provides insurance for your crypto if there's ever a data breach on their end.
If you’re still having trouble determining what wallet type will work best for your trading needs, we can help you set this up during our investor onboarding process. Remember to only connect your wallet to protocols you trust and have thoroughly vetted.
Further Reading: Crypto Security Part 1: Best Practices
How to Invest in Crypto
- Decide Where to Buy
You have some ideas in mind, and now you’re ready to make your first investments.
Where do you go to buy crypto? What’s the best way for your situation? We’ll go through the two most popular options as well as some alternatives below.
Exchange
There are hundreds of crypto exchanges out on the market. Given that they all function essentially the same way, we’ll just highlight the common characteristics across all exchanges.
These trading hubs function as third parties to facilitate trades. With an exchange, you’re free to trade however and whatever you want, provided it’s available on the exchange. With most exchanges, there are limits on pairings (assets that simultaneously represent two different coins, like BTC/ETH a.k.a Bitcoin/Ether). These limits on pairings reduce overall liquidity, which means you’ll be stacking up the transaction fees if you ever decide to exchange your current assets into a crypto where no direct pairing exists.
During times of high market volatility, you are susceptible to slippage on an exchange. Some assets have low liquidity which makes them prone to frequent price movements. The onus is on you to plan trades in a way that limits your transaction fees. This isn’t an exact science and depends on the condition of the market at the time you decide to purchase crypto.
One final thing to note: customer service tends to be automated. If you need someone to answer and field your more complex crypto questions, you will find it hard to get a human being on the other end of the line.
Brokerage
Brokerages use a more supportive framework to make beginner trading simple and to execute advanced trades in fewer steps. For example at Caleb & Brown, you are paired with a personal broker, on call to answer any crypto questions you have. When you’re ready to trade, you just send an email and the team of brokers and traders will lock in your request.
In addition to executing crypto trades on your behalf, our direct access to the market means we execute trades across an unlimited number of pairs of the assets we support. As an investor, you don’t need to worry about paying transaction fees across each pairing. Instead, you simply pay one flat rate; a small percentage of the overall value of your trade.
Brokerages pride themselves on an extremely high level of customer service and the use of a wider team of expert traders to execute your crypto purchases in a way that aligns with your investment goals.
Other Alternatives
Although not as common as brokerages and exchanges, you can also acquire cryptocurrency through PayPal or a Bitcoin ATM. To purchase through PayPal, simply use the payment method connected to your account.
Since PayPal’s fee structure recently changed, you’ll need to do the math to determine if this is a viable trading option for you. Depending on the size of your purchase, you may end up paying more than intended in transaction fees. Also, keep in mind that the number of cryptocurrencies you can trade here is limited.
If you find security in handling transactions with physical cash, a Bitcoin ATM may be ideal for you. A quick Google Maps search should pull up any ATMs within your area.
Before heading out, make sure you have a wallet set up and address details handy. You’ll need this information to send the Bitcoin you purchase to your personal wallet. Also, keep in mind that merchant fees will vary and may be proportionately higher for small transactions. You also won’t be able to trade any crypto outside of Bitcoin.
- Buy Your Crypto
Now, it’s time to buy. Once you have an amount in mind, place your first order through the trading platform of your choice. This is usually done through a connected bank card or a bank transfer made from your account.
Keep in mind transaction costs and any additional fees in relation to the size of your investment, especially if you’re not trading through a brokerage. Exchanges and ATMs will schedule your crypto order the moment you put it through. You might be surprised by the additional fees tacked onto your order once the transaction is complete.
- Await Confirmation
Once the order is placed, there may be a waiting game for the asset to show up in your wallet. Transaction speeds are network dependent. Some coins can move at near-instant speeds, while others take a few hours to complete.
Keep in mind that during busier times, centralised exchanges will often charge more in fees to process your transaction quickly.
The Investment Case For Cryptocurrency
A case can be made for just about every crypto on the market. But some key overarching features make crypto a potentially attractive option for any newcomer. These include:
- Digital Store of Value: Certain assets such as BTC with a limited supply can function as a store of value; not unlike precious metals (e.g. gold).
- Historical Trends: Bitcoin is a shining example of the potential of cryptocurrency. Its value has grown exponentially since its introduction over a decade ago, at a compound annual growth rate of close to 200%. This level of growth through volatility makes investors excited about what the future holds for other coins.
- Widespread Adoption: There are over 300 million crypto users worldwide as of December 2021. Year-on-year adoption of crypto has grown at a tremendous rate, outpacing the Internet during its early stages of widespread use.
- Network Effects: As more people invest in a particular cryptocurrency, its use cases become more valid. With more people entering the market, we may begin to see more applications for crypto outside of trading and finance. These include (but are not limited to): digital asset ownership, NFTs and gaming.
- Institutional Adoption: Traditional financial institutions have poured $9.3 billion into cryptocurrency investment opportunities up from $6.8 billion in 2020. On a national level, governments like El Salvador and the Central African Republic have also made Bitcoin legal tender.
Ultimately, it’s up to the individual investor to determine if crypto is the right investment for them.
Tips For Investing In Cryptocurrency
- As with traditional investing, it can be valuable to spread your investments across multiple assets to help negate the risk of an asset dropping in value. You may want to consider diversifying your portfolio to include assets with different applications and use cases.
- Be wary of scams. If sending cash or crypto to an unknown wallet for the first time, consider sending a test amount and confirming with the recipient before sending the full amount.
- The selling of crypto is not free from taxation. Read up on your local and federal laws as they may influence your investment strategy.
Strategies For Investing In Cryptocurrency
As with traditional investing, there are many strategies you can try when investing in cryptocurrency. How you manage your assets and the frequency you trade is your decision to make. Below are a couple of the most common strategies.
- HODL: Short for ‘hold on for dear life’, this strategy involves buying crypto and holding on to it for the long term, riding the waves of volatility in expectation of high returns over a long-term horizon. The popular term is derived from a misspelling of the word “hold”.
- Dollar-Cost Averaging (DCA): This strategy involves making routine smaller investments over time, instead of one lump sum. This method is used to counteract brief moments of volatility and takes the guesswork out of timing the market.
- Short-Term: These strategies tend to be more advanced as short-term traders must be on top of all possible market trends concerning the crypto in their portfolios. An example of this is momentum trading, which involves buying and selling crypto based on recent trends, and your own idea of how that might affect the market.
Further Reading: Invest in Bitcoin With These 3 Simple Steps: A Complete Guide
3 Largest Cryptocurrencies by Market Cap
(Market Cap correct as of May 9, 2022)
Bitcoin (market cap $639,303,898,293)
Bitcoin (BTC) is the original cryptocurrency. Free from direct control by governments or banks, Bitcoin uses peer-to-peer validation, Proof of Work, and automated deflation methodologies to maintain the network. Some users, known as validators, voluntarily participate in attesting to and confirming transactions on the network in exchange for rewards.
Tether ($82,743,487,637)
Tether (USDT) is a type of fiat-backed stablecoin. The goal of this project is to create a cryptocurrency that is pegged to the US Dollar. Tether claims to achieve this through issuing tokens equivalent to the amount of fiat currency in their reserves.
Ethereum ($296,091,184,020)
Ethereum’s open-source blockchain uses a Proof of Work methodology to verify transactions on the network. The unique implementation of smart contracts within the blockchain allows investors to access the world of decentralised apps (Dapps). Ether (ETH) is the official name of the cryptocurrency that lives on the Ethereum network.
FAQs
How much should I invest?
The size and frequency of your investment depends largely on your financial goals. Experts like Tori Dunlap, Ross Gerber, and others suggest allocating no more than 5% of your entire portfolio to crypto.
In the end, it’s up to you to decide how much cryptocurrency should be in your portfolio. Subscribe to our regular Market Updates to get a complete overview of the current state of the market. This, along with your independent research, should help you better understand how much you should invest in cryptocurrency.
Can You Buy Partial Cryptocurrencies?
Yes, in fact many investors only own fractions of a cryptocurrency. This is especially true for coins that are at a higher price point per unit (e.g. Bitcoin or Ethereum).
Is There a Minimum Crypto Investment?
There is no minimum crypto investment. Keep in mind that the platform that you trade with may set its own minimum investment thresholds.
Where is the Safest Place to Buy Cryptocurrency?
There are many safe ways to buy crypto in 2022, such as an exchange, brokerage, or ATM. If you’re looking for a personalised service through a broker to answer your questions and concerns, consider buying through a brokerage like Caleb & Brown. We have a battle-tested security infrastructure, through the leading asset security platform Fireblocks.
How to Buy Crypto Without Fees?
At the moment, there is no way to purchase crypto without fees. While some exchange platforms may pitch zero or near-zero transaction fees, this is often an add-on to a premium paid service.
Where can I find more information about investing?
Visit our blog where we distil crypto essentials for beginner investors, accompanied by deep dives into advanced topics suitable for seasoned investors. Also, don’t forget to subscribe to our regular Market Updates for an up to date analysis of the market.
Make Your First Crypto Investment
Investing doesn’t need to be so scary. With these new tools at your disposal, you’ll be able to demystify fact from fiction and rise above the fear to make your first investment.
If you’re ready to start, Caleb & Brown is here to help. Trusted by over 20,000 investors across 100 countries, our dedicated team of experts works around the clock to carry out all your crypto trades.
Get set up with a personal broker today and you’ll receive a free security consultation, along with support to help you execute your first Bitcoin order.
Disclaimer: This assessment does not consider your personal circumstances, and should not be construed as financial, legal or investment advice. These thoughts are ours only and should only be taken as educational by the reader. Under no circumstances do we make recommendation or assurance towards the views expressed in the blog-post. The Company disclaims all duties and liabilities, including liability for negligence, for any loss or damage which is suffered or incurred by any person acting on any information provided.
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