Are you prepared to begin investing in cryptocurrencies?
A little more than a decade after the first cryptocurrency, Bitcoin, was introduced, the industry that has sprung up around the new technology has seen rapid growth. Today, there are a few blockchain-based digital assets available, including crypto tokens and NFTs, in addition to cryptocurrencies.
There are various ways to begin your crypto investment journey. There are options for people just starting out, depending on whether you want support managing your investment or if you want to align with the ecosystem’s ethos and “be your own bank.”
Keep in mind that investing in cryptocurrencies is still hazardous — you might lose the entire value of your assets — so make sure you’re financially secure and take the time to assess your risk tolerance before putting money into the asset class.
How to Purchase Cryptocurrency
Apps for traditional finance
One of the most convenient ways to purchase bitcoin is through one of the traditional financial service providers that have lately integrated the technology.
CashApp, a Square Inc.-owned peer-to-peer payment service, only allows users to purchase bitcoin. PayPal users can buy four types of cryptocurrencies: bitcoin, ethereum, bitcoin cash, and litecoin. Users who have cryptocurrency on PayPal can use it to make purchases on the app as well.
Robinhood, a mobile stock investment service, allows users to acquire seven cryptocurrencies, including the popular Dogecoin parody cryptocurrency. SoFi, a personal finance company, also accepts crypto purchases of 21 different coins and crypto tokens via its app.
These goods are well-established in the industry, and the attractive user interfaces may put new investors at rest. However, they have inherent constraints that make using cryptocurrencies in any other way difficult. PayPal, for example, does not presently allow customers to move cryptocurrency purchased through PayPal to any other crypto wallet, however the business has stated that this feature is on the way.
Robinhood is also working on its own wallet. On SoFi, crypto tokens, which are generally used as collateral — known as staking — to earn passive income, cannot be used in this manner.
The opportunity to trade and/or invest for profit in US dollars is the primary benefit of obtaining crypto through a standard finance app.
Exchanges that are centralized
Because there are thousands of different crypto assets, standard finance apps that support cryptocurrency trading have a relatively limited choices. Purchasing cryptocurrencies through cryptocurrency-first digital wallets and exchange providers will provide customers with more options and capabilities.
Which wallets and exchanges are available to you will vary on where you live in the world, but there are safe and mature solutions in most places.
Because they are operated by a single business, the providers listed below are commonly referred to as centralized exchanges. Centralized exchange providers provide some safeguards that certain investors may appreciate, such as insurance in the event of a cybersecurity incident, regulatory clarity because they are regulated organizations, and assistance in asset protection.
Centralized exchanges often have more user-friendly interfaces, making them more appealing to beginning bitcoin investors.
However, centralized exchanges rely on a central authority or middleman to connect you with your assets. This means that your assets may be frozen or otherwise restricted from participating in certain acts or forms of commerce as a result of the exchange.
Centralized exchanges must also comply with Know Your Customer requirements, which require them to gather and verify personally-identifying information, making them less suitable for people who value their privacy.
Coinbase is the largest cryptocurrency exchange in the United States by trading volume, as well as one of the oldest exchange businesses. The exchange was formed in June 2012 and will go public on the NASDAQ stock exchange in April 2021 with a valuation of about $100 billion. It allows you to purchase, sell, and trade 50 different cryptocurrencies and crypto tokens.
Gemini and Kraken are two other US-based exchanges. All of these exchanges allow users to send their crypto away from the platforms and into third-party wallets, as well as staking to earn interest.
Binance is another prominent cryptocurrency exchange, albeit it does not operate in every state in the United States (for instance, New Yorkers are unable to use the exchange).
The Cayman Islands-based crypto exchange has the most cryptocurrency available. The exchange accepts 500 currencies and tokens, including two that it developed. Binance has been chastised by regulators for insufficient anti-money laundering checks and other consumer protections, but it remains the world’s largest in terms of the trading volume.
Exchanges that are decentralized
Some investors will want to use exchanges that are more closely aligned with the decentralized spirit of the cryptocurrency industry as a whole.
DEXes, or decentralized exchanges, are not run and managed by a single person, corporation, or organization, but rather the code on which they are constructed allows for peer-to-peer crypto transactions without the use of intermediaries.
There are advantages and disadvantages to using a DEX. Decentralized exchanges do not provide hackers with a large honey pot of user monies because there is no single entity involved in handling user assets.
However, hackers can and have exploited vulnerabilities in the exchange’s programming in order to drain money from the protocols.
Because there isn’t often a thorough onboarding procedure that captures personal information about consumers, users who lose money on these exchanges don’t have much recourse. Furthermore, DEXes have more complex user interfaces that aren’t necessarily intuitive for those who are used to standard and easy finance programs.
NFTs, or non-fungible tokens, have recently received a lot of attention and a lot of resale value. These tokens can be used for a variety of purposes, including digital asset access and ownership, but current attention has been drawn to NFT-based digital artwork.
There are several marketplaces where users can pursue NFT collections and purchase artwork for those interested in purchasing NFTs.
OpenSea is the most well-known secondary market for NFTs. To purchase NFTs on this marketplace, customers must already have an Ethereum wallet, such as MetaMask, funded with ether (Ethereum’s native cryptocurrency).
Other popular ways to gain access to NFTs include ArtBlocks, super rare, and Raible. Nifty Gateway, the NFT marketplace owned by cryptocurrency exchange Gemini, enables the purchase of NFTs using standard payment methods such as credit cards.
What cryptocurrency should you consider investing in?
This is a personal inquiry depending on your interest in the technology as well as your risk tolerance.
Because the technology is so new, there is no silver bullet for evaluating these investments. However, there are various approaches for determining if a project has legs or not, such as studying the team behind the project and inspecting the developer community working on the protocol.
Bitcoin is the most established and safe cryptocurrency. Bitcoin started it all and has the greatest market cap of any coin, with over $1 trillion as of mid-October 2021. By many criteria, the project has the most users and a vibrant developer environment that is always striving to improve the code.
Bitcoin is currently trading about $57,000 per coin, with significant swings in both directions from time to time. For example, on April 14, 2021, Bitcoin achieved an all-time high of $63,576 before plummeting by more than half to $29,971 just a few months later.
Most cryptocurrencies and crypto tokens have high price volatility, making them a dangerous investment for many ordinary investors.
Ethereum is another interesting investment option. Ethereum improved on Bitcoin by introducing smart contracts, which allow for more complicated tokens and transactions.
Despite substantial scalability challenges since its inception at the end of July 2015, the Ethereum blockchain is the most regularly utilized blockchain.
It has served as the foundation for various inventions, including the crypto fundraising method initial coin offers (ICOs), NFTs, and decentralized finance (DeFi). In addition, Ethereum has the largest developer community of any cryptocurrency project.
You are never required to purchase an entire unit of a cryptocurrency. Cryptocurrencies have high divisibility. Instead of buying one entire bitcoin, you can buy $10, $100, or $10,000 worth of bitcoin.
What to Expect After Purchasing Cryptocurrency
The most important thing to remember when investing in cryptocurrency is to never share your private key or recovery phrase, which is generated when you open a wallet.
Crypto wallets are used to store your digital assets, and some of them also allow you to buy, sell, and transfer cryptocurrency. If you begin by purchasing bitcoin on a centralized exchange, you may subsequently opt to move that money to a wallet with more functionality.
Transferring ether from Coinbase to a MetaMask browser wallet, for example, allows you to interact with a variety of decentralized applications (or dapps), such as NFT marketplaces and yield-bearing DeFi platforms, directly (where you can earn interest on your crypto).
The private key is an alphanumeric string that secures your crypto and demonstrates your ownership. A recovery phrase is a human-readable form of your private key, which is a 12 to a 24-word set of phrases in a specified order that might assist users in reclaiming custody of their crypto if they forget their wallet password or their machine fails.