Stocks witnessed the sale action in early 2022 due to cocktails events such as increasing inflation, aggressive monetary policy expectations by the US Federal Reserve, and the Russian-Ukraine War. But when the market blinks red, Cryptocurrency Rally in March amid US efforts to formalize regulations related to digital assets.
Crypto quickly strengthened himself as the main asset class with many investors now open to add some to their portfolio. While Bitcoin is used as a word that includes all for Cryptos, it is just one of the thousands; Ethereum, Dogecoin, Litecoin, and Cardano are some of the other main digital currencies. But this is a very fluctuating asset that is vulnerable to price fluctuations every hour.
Before you take risks, know that there is a possibility you might lose your money because Crypto is a high -risk investment. You might also want to educate yourself about Cryptos Blue-Chip, transaction fees and tax treatment before you start investing. But Cryptos also made a proper investment; They provide a hedge for inflation and you might see a return that is too large.
In this article, you will learn all different ways that you can invest in crypto so you can choose the most suitable type of crypto for your investment portfolio.
What is a cryptocurrency?
Cryptocurrencies are digital assets and exist virtually, and they’re not created by central banks. So, how are they created? It involves volunteers from all across the world using specialized computers. And this is the reason cryptos are called “decentralized;” they aren’t controlled by a single entity.
The most common way cryptos are created is through mining
, a process that involves verifying new transactions and adding them to the blockchain. Bitcoin and Ethereum are some of the cryptos that can be mined. But mining these digital currencies are extremely detrimental to the environment because of their high energy consumption.
Proponents believe crypto will replace traditional financial institutions and disrupt many industries. Critics direct attention to cryptos’ wild price swings and their usage in criminal activities.
Things to consider before investing in crypto
The crypto industry is rampant with scams. In fact, investments related to digital assets are the top threat to investors in 2022, according to a survey
of securities regulators. Ponzi schemes, fake websites, and pump-and-dumps are just someone of the ways fraudsters will try to lure you in. As the old adage goes, if it’s too good to be true, it probably is.
Crypto prices fluctuate all the time so it’s important that you do not invest the majority of your capital in this asset class. Instead, only invest what you’re willing to potentially lose.
Never put all your eggs in one basket. Buying only one cryptocurrency means you may lose money if that crypto’s price falls. Instead, invest in different coins so to limit any losses should prices plummet.
All investments should be made over a long investment horizon, but that’s especially true for crypto. While prices decline, in the long run, they always increase. If you buy and hold, you should be able to maximize your returns.
How to invest in crypto
Directly buying coins on an exchange is the most common way to invest in crypto. It is also one of the simplest ones. You pick an exchange you like, create an account there, transfer some money, and buy your favorite coins.
That’s how it works on centralized exchanges. But that’s not the only type of exchange, there are also decentralized and peer-to-peer exchanges. So, let’s go into each of them.
A centralized exchange (CEX) works like traditional investment brokers and stock markets. Users transfer money to the exchange, and it is credited to their account so they can trade. The exchange is in control of all the transactions and the private keys for the hardware wallets where the cryptocurrencies are stored.
The daily volume of transactions on CEXes reaches tens of billions of dollars, and because of the ease of use, it is one of the preferred methods to buy crypto.
A few of the exchanges operating in the United States:
A decentralized exchange (DEX) is one of the big innovations made possible because of blockchain technology. It creates a trustless environment, where users trade directly with each other. These trades happen on the blockchain, with the help of a protocol and smart contracts. This way, a decentralized exchange does not hold a user’s funds, and the user does not have to trust an intermediary. Besides security, privacy is another advantage, since there’s no need to provide personal information to create an account.
The traded volume on DEXes is generally lower than on CEXes since a user has to already own cryptocurrency bought somewhere else and DEXes require higher technological affinity to understand and use them.
A peer-to-peer (P2P) exchange is similar to a DEX because a user trades directly with another user. The difference is that there’s no coded protocol or smart contract on the blockchain. A user gets in contact with another user over a platform or website, and they decide on the terms of the trade. Some of these P2P exchange trades also take place in person, especially if they don’t want to leave traces on the traditional banking system.
P2P exchanges are more common in countries where there is less trust in the government, or where crypto is banned. It’s also a method people found to keep their savings safe from high inflation.
Over-the-counter (OTC) trading takes place off of exchanges. In an OTC trade, the parties involved trade directly with each other. No one else knows about the price and volume traded besides the parties involved. It is mainly used for big orders which would be too disruptive if placed on normal exchanges.
Investment brokers, besides offering their traditional financial products like enabling their clients to purchase stock, bonds, and other securities, have recently picked cryptocurrencies as an additional offering.
So, if you already have an account with an investment broker, it is an easy way to purchase crypto directly or invest in crypto futures. Just be aware that most of them don’t allow you to withdraw your coins. You’d have to sell your crypto or your futures and withdraw in dollars. Also, they usually only offer mainstream cryptocurrencies. You won’t find smaller altcoins here.
A few of the investment brokers who offer crypto:
Cryptocurrency ATMs are a very convenient way to buy crypto using bank cards or cash. There are over 15,000 ATMs just in the United States alone, according to Coin ATM Radar. They often differ from each other, as they belong to many different operators. You might need a government-issued ID to buy crypto on some ATMs. And while some only allow you to buy crypto, on others you can buy and sell.
Payment providers like Paypal, Square, and BitPay are also jumping on the crypto bandwagon. Customers can buy and sell cryptocurrencies on their platforms. Most payment providers don’t let you withdraw them though, so you’ll have to convert your coins to cash before withdrawing or transferring. Still, it’s one of the simplest and easiest ways to get exposure to crypto if you already have an account with them.
n traditional finance, companies can raise capital through an initial public offering (IPO). Company shares are sold to institutional and retail investors and then listed on an exchange like the New York Stock Exchange or Nasdaq.
Projects can similarly raise funds in the crypto space. They raise money, often in the form of Bitcoin (BTC) or ether (ETH), from investors and then later distribute the coins and tokens. Over the last couple of years, three main methods to do an initial offering have emerged.
Initial Coin Offering
Initial coin offerings (ICOs) were all the craze in 2017, especially on the Ethereum blockchain. Billions of dollars were raised through them. Projects would launch a website where people could register for the ICO with their personal information and wallet address. Then they’d send ETH or BTC to the project’s digital wallet, and the smart contract would, in turn, send them their new tokens. Once they got their tokens, they could deposit the tokens on a CEX or a DEX and trade them there.
Today, the ICO market has cooled off considerably. Nevertheless, some projects still prefer to launch using an ICO, and it is a valid method to invest in crypto.
Initial Exchange Offering
An initial exchange offering (IEO) is very similar to an ICO. The difference lies in who manages the offering. Instead of the project team doing it on their own, they partner with an exchange. Then, the exchange does the offering on their website. It adds trust and ease to the process since buyers often already have an account with funds on the exchange.
Initial DEX Offering
Initial DEX offerings (IDOs) have recently picked up in popularity and it is becoming the preferred method to raise capital in decentralized finance (DeFi). Instead of paying a fee for a CEX to create the offering and launch the token, it is launched directly on a DEX. And because it is a DEX, there are no restrictions on who, when and from where can buy the tokens.
One way to get exposure to Bitcoin and other cryptocurrencies without straight out buying and holding it is to invest in companies that provide services to the crypto space or hold coins themselves. Investing in company stock is much easier and likely safer than investing in a digital currency.
Tesla and MicroStrategy made headlines and bought billions of dollars worth of Bitcoin. Nvidia and AMD manufacture GPUs used for mining crypto. Visa has recently started settling payments in USDC, a Stablecoin on the Ethereum blockchain. Riot blockchain is a Bitcoin mining company. Salesforce has created its own blockchain. Companies like
Google, IBM, Amazon, Microsoft, and SAP have all invested in blockchain technology. These companies and many others are involved in blockchain and cryptocurrencies. But they’re involved to varying degrees, so the best pick depends on what you’re looking for.
The stock of a company like Microsoft, which has dozens of revenue streams and has a market capitalization of over a trillion dollars, will be much more stable than that of a small company where 100% of its revenue comes from mining Bitcoin.
Investors looking to invest in Bitcoin through the capital markets can do so through investing in funds. Holding a fund with exposure to cryptocurrencies can reduce volatility. You also don’t have to worry about exchanging fiat currencies into a cryptocurrency or maintaining a digital wallet.
Right now, there are a few players that are creating Bitcoin trusts, the best known being Grayscale’s Bitcoin Trust (GBTC). GBTC is a fund that does hold Bitcoin. However, GBTC’s 2% management fee is much higher than you’ll pay for the typical index fund or even an actively managed mutual fund.
And, people could also invest in funds that have exposure to cryptocurrencies and blockchain technology. These funds invest in companies involved in developing and using blockchain technology.
The three largest blockchain ETFs are:
Amplify Transformation Data Sharing ETF
Reality Shares Nasdaq NexGen Economy ETF
First Trust Index Innovative Transaction & Process ETF
ProShares Bitcoin Strategy ETF, Simplify U.S. Equity PLUS GBTC ETF, Valkyrie Bitcoin Strategy ETF, VanEck Bitcoin Strategy ETF, Global X Blockchain & Bitcoin Strategy ETF and Valkyrie Balance Sheet Opportunities ETF are the Bitcoin exchange-trade funds approved for trading by the SEC.
In March 2021, Saturday Night Live aired a sketch describing NFTs (non-fundable tokens). A month later, SNL sold the sketch for $365,000. The sketch followed news of Christie’s selling an NFT of Beeple’s artwork for $69 million. NFTs are all the rage right now. Big chains like Taco Bell have launched their own. Celebrities are partnering with platforms to create NFTs. Tweets and JPEGs are being sold for millions.
If you’re an artist or have other ideas you can sell as NFTs, it could be a way to invest in crypto since you’ll most likely get paid in cryptocurrency. Most NFT platforms and marketplaces are based on top of the Ethereum blockchain, and the sales are settled in ether. You can turn your drawing, song, or meme into crypto.
Mining is how it all started with Bitcoin back in 2009. Bitcoin is a proof-of-work blockchain, meaning it takes computational power to secure the network. And as a reward for spending computational resources, miners get Bitcoin. By mining, you can earn cryptocurrency without having to put down money for it. Well, besides the cost of the hardware and electricity.
So, if you want to mine cryptocurrencies like BTC, ETH, Monero, and others, you’d first have to buy the necessary hardware, which can be different depending on what you’ll mine. For Bitcoin, you’re looking at specialized processing units called ASICS, and for Ethereum, you’ll need GPUs. Unfortunately, both are often sold out worldwide because of the recent rise in Bitcoin prices we’ve seen, along with other cryptos. Then, the next important factor to determine your profitability is going to be how much you pay for electricity. Free electricity is ideal. A couple of cents per KWh is acceptable. And over 10 cents per KWh, like in European countries, makes it unprofitable to mine cryptocurrencies.
Cryptocurrency lending works by connecting borrowers to lenders via an online platform. You can lend your digital assets through crypto exchanges or different lending sites with an interest rate. The interest rate is frequently between 2% and 14% APY, much higher than in traditional banking. The downsides are the volatility and the risk of the platform you’ve put your digital assets having problems like getting hacked.
Trading on a centralized exchange is done through order books. On a decentralized exchange, there are no order books. Trading is done through liquidity pools. A liquidity pool is a collection of funds locked in a smart contract and used to facilitate decentralized trading. When you place an order, you’re effectively trading with the liquidity pool. And for stocking this liquidity pool with coins on both sides of the trade, users are rewarded with a small percentage of the trading volume as a fee. This is called liquidity mining.
Not clear? Imagine you have ETH, and you want to trade it for some UNI, the token from the decentralized exchange Uniswap. There’s a smart contract on the Ethereum blockchain, which provides this trading pair. And inside this smart contract, there’s a liquidity pool filled with thousands of ETH and UNI. This ETH and UNI were put there by other users. And as a reward for them doing this, they get to keep a small percentage of the transaction volume. So, essentially, he is passively earning crypto.
There are more implications to this, especially if the value of the coins in the pool, ETH and UNI, fluctuates. This can lead to something called impermanent loss, but this is a complex topic for another day.
We’ve talked about how through mining proof-of-work blockchains are kept secure using computational power. An alternative to proof-of-work is called proof-of-stake, where instead of using computational resources, those keeping the network secure do so by staking crypto they own to validate the transactions in the blockchain. They lock their crypto with the blockchain to keep it secure by being validators, deciding which transactions are valid and should go through. As a reward, they receive a small amount of crypto.
The bottom line
There are many ways to invest in digital assets. You can buy them directly, invest in funds, or even create and sell your own NFTs. The path you choose depends on your preferences, your goals, and your risk tolerance.
Like any other investment, do your homework before investing. Beware of scams and opportunities that look too good to be true. Understand what you are investing in as well as the risks and returns. This is an asset class with high volatility. And the golden rule is to only invest what you can afford to lose.