Bitcoin was considered nothing more than an interesting phenomenon when it first came out in 2009. Technicians and futurists could see the future potential of cryptocurrency in general, but it wasn’t drawing much interest as an investment. But as the years have passed and hundreds of more cryptocurrencies have come and gone, Bitcoin has emerged as the standard-bearer of the currency. Here’s our comprehensive guide to how to invest in cryptocurrency.
Cryptocurrencies and the Stock Market Speculators
Cryptocurrency hasn’t been missed by investors and speculators. Some are now coming to see cryptocurrency as an alternative global currency that will eventually replace sovereign currencies such as the U.S. dollar and the euro. But the trading activity has also drawn a large number of speculators. They’re betting on cryptocurrencies — Bitcoin in particular — rocketing all the way to the moon. Speculators are rarely seriously concerned with fundamentals. They see a sudden and dramatic price rise, and whatever the asset, it draws their attention.
This article isn’t meant to be an endorsement of Bitcoin or any other cryptocurrency. Instead, it’s a general guide for anyone who wants to start investing in cryptocurrency. It is entirely possible cryptocurrencies will continue their march forward over the next few years. And if you’re betting on that outcome, we hope this information will help.
How to Invest in Cryptocurrency — Step By Step Guide
As you might imagine, you can’t go to a local bank or even a brokerage firm (there is one exception we’ll discuss later) and buy cryptocurrency. It’s still seen as something exotic in the world of financial institutions. Since it’s not well understood and is virtually unregulated, most financial institutions don’t want to deal with it. For that reason, it tends to function within its own network.
Read our tips if you want to start investing in cryptocurrencies.
- Allocate Only a Small Percentage of Your Portfolio to Cryptocurrencies
You’ll have to decide in advance how much of your portfolio you want to allocate to cryptocurrency. With recent advances, particularly in the price of Bitcoin, it can be difficult to make a rational decision. All investing is ruled by a combination of greed and fear, and it may be hard to keep the greed part under control given the advances cryptos have shown in recent years.
But no matter what, cryptocurrency should occupy only a very small part of your portfolio. Exactly how much is completely up to you. But you should be wary of investing more than 10% or even 5%.
Understand that cryptocurrency isn’t an investment in the same way a stock is. Much like investing in gold and silver, it doesn’t pay interest or dividends. To the degree that cryptocurrency will be a good investment all depends entirely upon its price increasing significantly – and staying there for a while.
Cryptocurrencies weren’t designed to be investments. They are mediums of exchange. They’ve widely been seen as an alternative to sovereign currencies, like the dollar, yen and euro. It’s been thought that they’ll ultimately represent a more efficient means of commerce, particularly on the web. That’s because its value is determined strictly by the market and not by manipulation as sovereign currencies tend to be.
But at least up to this point, cryptocurrencies haven’t satisfactorily filled the role of being a medium of exchange. Only a very limited number of merchants accept them, so most trading is taking place between individuals.
Up to this point, both the current uses and the future of cryptocurrencies are uncertain.
- Choose Your Cryptocurrency
This is one of the real complications of cryptocurrency. There isn’t just one, but hundreds. Maybe even more than a thousand.
Complicating the issue is that more are coming online all the time. That has to be counterbalanced by the reality that hundreds of cryptocurrencies have come and gone already. And the whole concept of cryptocurrency started only about a decade ago.
Right now, the largest cryptocurrency is Bitcoin. It’s also the crypto that’s drawing the most attention and investment dollars. In a very distant second position is Ethereum, and there are others like Zcash, Dash, and Ripple.
Given its dominant position, Bitcoin seems to be the most reliable among all the many cryptocurrencies available. In fact, Bitcoin has become practically synonymous with “cryptocurrency.” What’s interesting about the connection is that while the media has been carefully following the price action of Bitcoin, some cryptocurrencies have performed even better.
Because of the dominant position of Bitcoin, your cryptocurrency position should be mainly in this crypto. Other cryptocurrencies should occupy a much smaller position in your portfolio. And if Bitcoin as the bellwether of cryptocurrency is speculation, any other cryptocurrency you hold should be seen as even more speculative.
This assumption should not be underestimated. Most of the cryptocurrencies that have come on the market in the past decade have either flatlined or disappeared completely. That means any investment you make could go all the way to zero. And given the price volatility that’s common with cryptocurrencies, your investment could disappear completely with very little notice.
- Choose a Platform to Buy Cryptocurrencies
One of the disadvantages of buying cryptocurrencies is that you can’t get them in all the usual financial places. Banks don’t offer them and neither do investment brokerage firms.
For the most part, you’ll be limited to buying, holding, and selling cryptocurrencies on dedicated cryptocurrency exchanges. Some of the largest of these exchanges include:
You can think of these platforms as brokerage firms specifically designed for cryptocurrencies. Each offers trading in the most popular cryptos, and of course, you should expect to pay a fee for both buying and selling