Cryptocurrency is an exciting but possibly overwhelming new asset class. Is it the right investment for you? Read our beginner’s guide to find out.
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If you’re investigating how to invest money, then you likely know that one of the biggest investing trends right now is cryptocurrency. The idea of using this new asset class to grow your wealth can be an attractive one. However, before you dive into cryptocurrency as a beginner, it’s important to understand how virtual currency works and what risks come with it.
In this beginner’s guide, we give you an idea of whether putting your money into these digital assets is the right move for your situation.
A cryptocurrency is a digital currency created out of computer processing power. Often, these currencies make use of cryptography to secure transactions, and many use blockchain technology (a decentralized peer-to-peer network). Blockchain technology focuses on secure ways of recording transactions and distributing them throughout all the network computers.
It’s important to note that cryptocurrencies are decentralized, which means they aren’t controlled by a single entity, like a government. Governments create their own currencies for official transactions in a centralized monetary system. We often refer to government-backed money as fiat currency. There isn’t something, like gold, backing the fiat currency, so it exists by decree and is considered legal tender.
Cryptocurrency, on the other hand, can be used for transactions and to purchase items but is not considered legal tender. It is also sometimes backed by another asset. Here are the types of cryptocurrency you’ll often see referred to:
Realize, too, that cryptos aren’t regulated like stocks. When you’re starting in the stock market, even though you know there are risks, you also know there are protections for your money and that companies and exchanges are regulated. This isn’t the case with cryptocurrencies.
However, there is some argument that cryptocurrencies are also a form of fiat money because these currencies exist without anything but the faith of those using them and their value isn’t derived from an underlying asset either. In the end, though, the main features of a cryptocurrency are that it’s digital money and that it’s decentralized and not controlled by a government (though a government could conceivably create its own cryptocurrency).
Although not official legal tender, it’s possible to use cryptocurrencies as a medium of exchange. If you perform a service for or buy something from another person, and they accept a cryptocurrency, you can use it as a form of payment. For example, I got paid one Bitcoin in 2011 for writing an article. Additionally, it’s recognized to the point that if you invest in cryptocurrencies, and you realize a gain from it, the IRS expects you to pay taxes.
There are thousands of different cryptocurrencies in existence. However, some of the most popular cryptocurrencies are:
Pretty much anyone can issue a cryptocurrency. The main determinant of success is whether others use your coin as a medium of exchange. As long as you have a way to create your coin and exchange it digitally, you can make a cryptocurrency.
When trying to understand cryptocurrency as a beginner, it’s good to have a general idea of how it all works.
Cryptocurrency transactions are supported on an open public ledger, which is distributed throughout a network. Each person who participates has a public key and private key designed to identify them. In order to complete a transaction, your key is used to verify the authenticity and specifics of the exchange. It’s an interesting process that allows for privacy (your information is encrypted) while also being transparent and public.
If you have a cryptocurrency wallet, you can send and receive coins and make payments. In recent years, cryptocurrencies have adopted some of the trappings of mainstream banking, including connecting your wallet to a debit card and the ability to exchange your cryptos for legal tender at ATMs.
However, if you want to conduct business with someone who accepts cryptocurrency coins as payment, you can do so simply by accessing your digital wallet and transferring the required payment to someone else’s wallet using the key they provide.
Cryptocurrency is created through a process known as mining. Miners solve complex problems to unlock new currency and new blocks are added to the chain. Because transactions and blocks are verified among peers, this is what allows cryptos to operate without the need for a central bank or authority behind them.
First of all, it’s important to understand that using cryptos as a medium of exchange versus investment are different situations.
Some people like using a cryptocurrency as a payment method because it allows them to operate outside the central banking system. Additionally, they like the semi-anonymous nature of it that allows them to maintain a degree of privacy. Blockchain verification technology also makes these transactions fairly secure and it can be harder to commit fraud in some cases.
Finally, completing transactions through cryptocurrency can be fast and easy. In some cases, transferring funds via crypto coins can be faster than a wire transfer with a bank — and the transaction fees might even be lower. Plus, with a bank, there are cutoff times (having to make a transfer by noon for a same-day credit) that you don’t see with cryptos.
The cryptocurrency market tends to look attractive because there’s a lot of interest in them right now, so the value continues to rise. For example, as of the afternoon of July 28, 2021, CoinMarketCap reported that Bitcoin has a price of $40,064.46. If you’d bought a bitcoin or been rewarded one through your mining efforts back in 2014 — back when it’s value was more in the $130 range — you’d be in good shape right now.
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FinanceBuzz writers and editors score products and companies on a number of objective features as well as our expert editorial assessment. Our partners do not influence our ratings.
FinanceBuzz writers and editors score products and companies on a number of objective features as well as our expert editorial assessment. Our partners do not influence our ratings.
Robinhood Benefits
- Buy and sell stocks 24 hours a day, 5 days a week with Robinhood’s “24 Hour Market”
- Commission-free trading (other fees may apply)
- No account minimum
- Trade stocks, options, ETFs, and more
- Earn 4.00% (as of 12/27/24) APY1 <p>Annual Percentage Yield. Rate valid as of April 12, 2024. To earn interest, a cash balance is needed. If you have a margin balance, there is no cash balance to earn interest. Interest rates for cash sweep and margin investing can change at any time. Fees may reduce interest earnings.</p> on your uninvested cash with Robinhood Gold, subscription fee applies
FinanceBuzz writers and editors score products and companies on a number of objective features as well as our expert editorial assessment. Our partners do not influence our ratings.
FinanceBuzz writers and editors score products and companies on a number of objective features as well as our expert editorial assessment. Our partners do not influence our ratings.
FinanceBuzz writers and editors score products and companies on a number of objective features as well as our expert editorial assessment. Our partners do not influence our ratings.
First, as a cryptocurrency beginner, it’s important for you to understand how to look at the investment potential. Even though prices have been rising for the most popular and well-known cryptos, it doesn’t mean getting into the crypto market is the best investment for you.
When trying to decide whether you should invest in cryptocurrency, start with how much you can afford to lose. It seems attractive to say that you could make big bucks by investing in something like Bitcoin, but it’s also important to note that new asset classes, like cryptocurrencies, can experience a lot of volatility. If you want to start small with low risk, you can invest in some of the cheapest cryptocurrencies first and work your way up as you get more comfortable.
As with any investment, it’s important to understand where crypto trading fits in your portfolio. For example, I have Bitcoin, Ethereum, and Litecoin as part of my investment portfolio. However, all of my crypto holdings amount to less than 5% of my total portfolio. My bitcoin is what I accepted in payment several years ago, and I’ve bought Ethereum and Litecoin because I think they have potential.
One way to evaluate cryptocurrencies is to think about what else they can be used for:
When deciding which cryptos to add to your portfolio, consider how you think they might grow in the future, or whether they might be adopted more widely. Some people like Monero right now because it bills itself as a truly private monetary system that will protect your transactions from prying eyes.
For more information, check our guides:
As always, though, realize that you could lose money, and you should be careful about committing more money than you can afford to lose. Cryptocurrency can make an interesting addition to your portfolio and add some diversity beyond stocks and bonds, but because it’s a new asset class, consider exercising caution in how much you rely on cryptos in your portfolio.
If you decide you want to hold cryptocurrency in your portfolio, it’s relatively easy to learn how to buy cryptocurrency and get started in crypto trading. Your first step is to get a cryptocurrency wallet or get set up on an exchange.
Crypto wallets come in a few different forms. Typically they are “hot” (connected to the internet) or “cold” (not connected to the internet).
There are a number of online wallets available. However, not every wallet supports every cryptocurrency. A Bitcoin wallet might only be able to store bitcoins, for example. Research ahead of time to decide which cryptos you’re most interested in. Then, verify that the wallet of your choice supports the use of your crypto.
Some popular wallets include Nano X, Trezor Model T, and ZenGo. These wallets are hardware-based and encrypted, which means you can keep your private key safe in an offline environment. These are also referred to as cold storage or cold wallets. A hot wallet would be one that’s always connected to the internet, and is therefore less secure.
It’s important to remember your private key because it’s the only way to access your wallet. If you lose your key, you could also lose all your currency. Using a hardware wallet for your coins is the most secure way to store them, but it can also make accessing them a little more cumbersome.
On the other hand, it’s also possible to set up with an exchange. These operate more like bank accounts, allowing you to log in and buy and sell cryptos, as well as use your account to direct payment elsewhere. However, these software-based wallet solutions might leave you more vulnerable. But if you want to trade coins and invest in cryptos, rather than focus on cryptocurrency as a medium of exchange, it might make sense to use one of the best cryptocurrency exchanges.
Some common cryptocurrency exchanges include:
You can compare all three exchanges by checking out our guide to Kraken vs. Coinbase vs. Gemini. Or check out our individual Kraken review, Coinbase review, and Gemini review.
For ease of trading, I use an exchange. However, I do have an old wallet from the early days, and I can direct my coins from the exchange to my wallet, and vice versa. For storage, it can make sense to have a hardware wallet. Most of my coins, however, are stored in my exchange account for easy use.
Finally, you can also trade cryptocurrencies using some investing apps and online trading platforms. Robinhood allows you to buy and sell cryptocurrency, as does WeBull.
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Robinhood Benefits
- Trade crypto 24/7, commission-free
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- $0 minimum account deposit
- Real-time market data
What is an ICO?
When you begin trading cryptocurrency, you’re likely to come across the term ICO. This stands for initial coin offering. An ICO is a chance for you to buy coins when they are first released, just as an IPO indicates the release of a new stock.
Although ICOs can be a way to buy cryptocurrency early on, there’s no guarantee the currency will be widely adopted or profitable down the road. Additionally, ICOs are subject to fraud, according to the Securities and Exchange Commission. In general, it’s important to be very careful when investing in an ICO if you want to avoid scams and not lose your money.
What is the best cryptocurrency exchange for beginners?
There are a number of different exchanges and which is right for you depends on your goals and your personal finance situation. Some of the more popular exchanges you might consider include Coinbase, Cash App, Binance, and Bisq. You can learn more by checking out our list of the best cryptocurrency exchanges.
When you begin trading cryptocurrency, you’re likely to come across the term ICO. This stands for initial coin offering. An ICO is a chance for you to buy coins when they are first released, just as an IPO indicates the release of a new stock.
Although ICOs can be a way to buy cryptocurrency early on, there’s no guarantee the currency will be widely adopted or profitable down the road. Additionally, ICOs are subject to fraud, according to the Securities and Exchange Commission. In general, it’s important to be very careful when investing in an ICO if you want to avoid scams and not lose your money.
There are a number of different exchanges and which is right for you depends on your goals and your personal finance situation. Some of the more popular exchanges you might consider include Coinbase, Cash App, Binance, and Bisq. You can learn more by checking out our list of the best cryptocurrency exchanges.
Investing in cryptocurrency can be a different way to make money and grow your portfolio. And there’s no denying it can be exciting to trade in a virtual currency versus the regular U.S. dollar. However, it’s important to realize that, as with any investment, you could lose what you put in.
Additionally, cryptos represent a new asset class — one that remains untested through time. Stocks and stock exchanges have been around for hundreds of years, and there’s a reasonable expectation they will continue to be a viable asset class. We’re still waiting to see what happens when it comes to the future of cryptocurrency.
Increased government regulation could change how these currencies operate, and changes in technology could potentially render today’s cutting-edge digital assets obsolete in a few years. Although you can find success in trading cryptocurrency, make sure that it fits into your overall investing strategy, and that you’re careful to maintain appropriate diversity in your portfolio.
FinanceBuzz writers and editors score products and companies on a number of objective features as well as our expert editorial assessment. Our partners do not influence our ratings.
Robinhood Benefits
- Buy and sell stocks 24 hours a day, 5 days a week with Robinhood’s “24 Hour Market”
- Commission-free trading (other fees may apply)
- No account minimum
- Trade stocks, options, ETFs, and more
- Earn 4.00% (as of 12/27/24) APY1 <p>Annual Percentage Yield. Rate valid as of April 12, 2024. To earn interest, a cash balance is needed. If you have a margin balance, there is no cash balance to earn interest. Interest rates for cash sweep and margin investing can change at any time. Fees may reduce interest earnings.</p> on your uninvested cash with Robinhood Gold, subscription fee applies
FinanceBuzz writers and editors score products and companies on a number of objective features as well as our expert editorial assessment. Our partners do not influence our ratings.
FinanceBuzz writers and editors score products and companies on a number of objective features as well as our expert editorial assessment. Our partners do not influence our ratings.
FinanceBuzz writers and editors score products and companies on a number of objective features as well as our expert editorial assessment. Our partners do not influence our ratings.
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