If you’re a total cryptocurrency n00b (that’s crypto slang for a newbie), you might be wondering about the first steps to start investing in crypto in 2022.
While the blockchain technology behind cryptocurrencies may sound intimidating, making your first Bitcoin, Ethereum, or other cryptocurrency investment is just as easy as buying a share of stock using your favorite brokerage, if not easier.
Follow this beginner guide to start investing in cryptocurrency, and you could have your first cryptocurrency in less than 15 minutes!
What Is Cryptocurrency?
Before we cover how to invest in crypto, it's important to understand a bit more about what this technology even is so you know what you're buying.
Cryptocurrencies are a type of digital asset. And what makes cryptocurrency exciting and unique is that transactions are verified and recorded using decentralized blockchain technology, not a central authority.
With cryptocurrencies, anyone in the world can participate in the digital economy. You can send or accept crypto payments from around the world, and people are even using crypto to take out loans or buy virtual real estate without going through a middleman like a bank.
Granted, some cryptos are more decentralized than others. And some are tied to specific platforms, companies, games, or other purposes. But the overarching principle of crypto and blockchain is to provide a medium of exchange that's decentralized, trustless, and immutable.
Of course, there’s no guarantee that cryptocurrencies will hold their value or go up in value in the future. And the future of crypto regulation is still playing out.
However, if you want to diversify your portfolio with digital assets and are considering crypto, it's important to know how to invest safely and what your options are.
How To Start Investing In Crypto
Now that you know what cryptocurrencies are, here are the four simple steps it takes to actually invest in digital assets.
Choose A Cryptocurrency Exchange
If you’re ready to buy your first cryptocurrency, the first thing you need is a place to buy it. The easiest way for most people to get started is with a cryptocurrency exchange, so that’s where we’re going to focus here.
A crypto exchange is similar to a stock broker, except you're dealing with digital currencies, not shares of Apple.
Every exchange has unique pricing and features that make them more or less attractive to various users. Depending on your level of tech-savvy, trading experience, cryptocurrency knowledge, and desired currencies, you may find one platform, or a combination of a few, make the most sense for your needs.
The best-known exchange in the United States is arguably Coinbase, but that’s far from your only option (and far from the cheapest). Other popular exchanges include Gemini, Kraken, and Binance (which is great for global investors.)
Verify Your Account
Once you choose a crypto exchange, you need to set up your account.
Most popular exchanges are centralized. This means there's some regulatory oversight and that exchanges have to follow certain rules. One of the main rules most exchanges follow are know your customer requirements, or KYC requirements.
KYC requirements mean you have to verify your identity to use an exchange. So, when signing up, make sure you have your SSN ready and a copy of government ID, like a passport or driver's license. Thankfully, many exchanges verify accounts instantly or within a business day or two.
Once your account is established, you can link a bank account and add funds. Many exchanges offer the ability to trade cryptocurrency instantly, even while the transfer is still underway. (You can’t withdraw until the funds have settled.)
Place Your First Trade
Time for the exciting part: actually buying your first crypto!
Most exchanges have beginner-friendly interfaces that let you spot trade different cryptos at current market prices. All you have to do is pick the crypto you want, choose your linked payment method, and select how much you're buying.
Exchanges like Coinbase make the process very simple. You even get a quote that tells you how much crypto you should get after accounting for trading fees and blockchain network fees.
Once you click the buy button, your order should execute near instantly. Congrats, you’re a cryptocurrency owner and investor! High five.
Store Your Cryptocurrency
Your cryptocurrency adventure doesn’t end with the first purchase. You’re just scratching the surface of what’s possible. If you’re interested in getting more experience with crypto, you may want to transfer currency to an outside wallet.
Centralized cryptocurrency exchanges like Coinbase hold the currency as a custodian for clients, similar to most stock brokerages. But you can also transfer your currency to a software wallet like Trust Wallet or a hardware wallet like Ledger or Trezor.
The advantage to holding crypto in your own wallet is that you're in charge of security. You get to control your own private keys, which is basically the master key for unlocking your crypto wallet. This way, if the exchange you trade on gets hacked, you don't lose your crypto.
The trade-off is you need to take charge of your own security. And if you lose your private key, which is really just a long alphanumeric string that's basically impossible to remember by memory, you could be locked out of your wallet for good.
We recommend beginner investors keep their crypto on a secure exchange while they learn the ropes. But once you understand more about crypto and blockchain, you can and should move your crypto to your own wallet for increased security.
Cryptocurrencies To Know Other Than Bitcoin
Many new crypto investors start out with Bitcoin, the most popular crypto by market cap.
This isn't a bad idea, and many investors actually view Bitcoin as a store of value and inflation hedge rather than a crypto you'd day trade.
However, what makes cryptocurrency investing so exciting is that there are thousands of coins. And many of the top coins have unique technology and use-cases which is why they're considered valuable.
Here are some other top currencies to know about when starting:
- Binance Coin (BNB)
- Ripple (XRP)
- Solana (SOL)
- Cardano (ADA)
- Dogecoin (DOGE)
- Avalanche (AVAX)
- Litecoin (LTC)
- Polkadot (DOT)
- Shiba Inu (SHIB)
- TRON (TRX)
- Polygon (MATIC)
It can honestly take months to wrap your head around the top 50 or 100 cryptos. But even learning about a few choice coins can open more investing opportunities.
For example, some investors choose Solana because it can process far more transactions per second than Ethereum, making it more efficient. In contrast, other investors stick with meme-coins like Shiba Inu and Dogecoin to try and swing-trade their way to profits.
There's no right or wrong way to invest in crypto. But you should always understand the underlying tech of the assets you're investing in.
Pros & Cons Of Cryptocurrency Investing
So, you know how to invest in crypto. But, should you add digital assets to your portfolio?
Here are some of the pros and cons to consider before you go down the crypto rabbit hole:
But despite these advantages, the reality is that crypto investing has several downsides and risks you should be aware of.
Other Factors To Consider Before Investing In Crypto
If you consider the pros and cons of crypto investing and decide to take the plunge, congrats! You're well on your way to diversifying your portfolio with digital assets.
However, there are still several other factors you should consider when dabbling in crypto.
Cryptocurrency Investing & Tax Implications
According to the IRS, you must report any crypto-related income on your tax return. This means reporting income from trading but also from sources like staking, airdrops, gifts, or any type of free crypto you might have gotten.
This isn't too complicated if you use crypto tax software. But know that you're responsible for tracking and reporting your gains and losses.
Your Portfolio Composition
How much of your asset allocation do you want to be in crypto?
Many investors want to get started with crypto, but what amount do you feel comfortable investing in?
Decide on a rough percentage or start out with small amounts. Even if you invest $100 to learn the ropes, you can always add more to your portfolio when you feel confident.
Other Cryptocurrency Investing Opportunities
Investing in cryptocurrencies like Bitcoin is the straightforward path. But some investors prefer the picks and shovel approach rather than owning coins.
For example, you can always invest in the companies that are powering the new digital revolution. This might mean investing in metaverse stocks like Meta (Facebook) and NVIDIA. Or, maybe you want to invest in crypto mining companies like Riot Blockchain.
These days, there are even Bitcoin and Ethereum ETFs out there, so you have plenty of options besides direct crypto investing.
Is Crypto Investing Right For You?
Cryptocurrency investing isn’t for everyone, but there’s plenty of enthusiasm and excitement around this growing space. From the ability to use cryptocurrencies for payments to facilitating NFTs and blockchain-based games, it seems the world of blockchains and cryptocurrency is here to stay.
That said, there are plenty of risks involved, so it’s best to avoid investing more than you can stomach losing in the markets.
And if there's one golden rule, it's this: always do your due diligence and research so that you understand what you're investing in. Cryptocurrencies are incredibly exciting, but not all of them are worth your attention. But if you do your research and put in the work, you can find success and diversify your portfolio with digital assets.
Eric Rosenberg is a financial writer, speaker, and consultant based in Ventura, California. He holds an undergraduate finance degree from the University of Colorado and an MBA in finance from the University of Denver. After working as a bank manager and then nearly a decade in corporate finance and accounting, Eric left the corporate world for full-time online self-employment. His work has been featured in online publications including Business Insider, Nerdwallet, Investopedia, The Balance, HuffPo, Investor Junkie, and other fine financial blogs and publications. When away from the computer, he enjoys spending time with his wife and three children, traveling the world, and tinkering with technology. Connect with him and learn more at EricRosenberg.com.