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Investing in Cryptocurrency

Khashayar Abbasi
Khashayar Abbasi
December 1st, 2023
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Despite the current bear market, many people today continue to buy cryptocurrency. There is no doubt that the value of digital currencies has increased significantly since their inception. The cryptocurrency arena has only grown, fuelled by the phenomenal rise of bitcoin (BTC) and ether (ETH).

Those who have yet to invest in the world of digital currencies may be wondering what the reasons are for doing so. Below, we will look at the pros and cons of digital currencies and the different ways to invest in cryptocurrencies.

What is Cryptocurrency?

Cryptocurrency is a new class of assets that exists digitally in the form of tokens held in a digital "wallet" rather than physically in the form of coins or bills. These digital tokens rely on encryption and blockchain technology for security and other benefits. In addition, some cryptocurrencies can be backed by real assets; for example, certain stablecoins are pegged 1:1 to the US dollar.

Cryptocurrencies are utilized in payment systems, program execution, and more. There are thousands of crypto assets in circulation because anyone can create them.

The original purpose of cryptocurrencies was to serve as a form of electronic money. Merchants accept cryptocurrencies to purchase products and services, and some ATMs also allow you to withdraw crypto as cash.

Since most people do not use their funds for daily transactions, cryptocurrencies commonly operate as speculative, long-term investments.

A Little History

The first cryptocurrency, Bitcoin, was born with a core mission of revolutionizing global financial systems by making intermediaries like banks or brokers redundant, for which, it leveraged distributed ledger technology to create a trustless, self-governing network. Bitcoin is a public or ‘permissionless’ network where everybody is welcome to use and participate in its maintenance.

But instead, it created an investment sensation more than anything and reached incredible heights in value. There have been tremendous leaps toward exploring the potential of blockchain-based technologies, most notably after the launch of the Ethereum network, which also paved the way for the decentralized finance sphere to expand to include borrowing, lending, and insurance along with trading.

Despite their perpetual volatility and infamous reputation among many, cryptocurrencies have been following a long-term upward trend since the beginning. Bitcoin was launched in 2008, and by 2013, there were 66 cryptocurrencies. By 2022, there were over 10,000 cryptocurrencies in circulation, and the number has more than doubled since then. The total amount invested in digital currencies since Bitcoin’s genesis block amounted to over $3 trillion.

To understand how cryptocurrencies work, it's essential to have an understanding of the underlying technology, blockchain.

Blockchain and Distributed Ledger Technology

Blockchain underpins all cryptocurrency trading activities, and cryptocurrencies are typically instrumental in the functioning of public blockchain networks.

A blockchain network refers to a distributed ledger system, where every transaction is stored in blocks that can hold a finite amount of data. Every block is cryptographically sealed and chained together in chronological order.

The participants of a network, also called nodes, can create or mine blocks, all of which need the approval of more than half of the network to be added to the chain. Every participant also holds a copy of the entire ledger. This process is designed to render the ledger traceable, immutable, and autonomously governed.

The validation work is incentivized by cryptocurrencies. If a node successfully performs the validation work, they are rewarded with a number of native cryptocurrencies for its contribution. This way, cryptocurrencies ensure the processing of transactions, prevent incorrect transactions from being entered, and pay the participants for their work.

Pros and Cons of Cryptocurrencies

Is buying crypto a smart choice? You can only decide by weighing the benefits and drawbacks of crypto and analyzing their impact.

We describe the main advantages and disadvantages of cryptocurrencies below:

  • No need for intermediaries
  • Faster than traditional money transfers
  • Greater potential for financial gain than traditional investments
  • Secure by design

Bitcoin

Bitcoin launched the cryptocurrency industry in 2009 and is considered the first cryptocurrency. If you are new to cryptocurrency, finding out more about Bitcoin is a good place to start your learning journey.

We recommend you read our guides which include; “What is Bitcoin”, “How to Buy Bitcoin”, “Buy Bitcoin with Bank Transfer”, “How to Sell Bitcoin”.

What are Altcoins?

Any cryptocurrency coin or token that is not Bitcoin is referred to as an altcoin or "alternative coin" Although the first cryptocurrency, Bitcoin, remains one of the most widely used today, some developers are attempting to use their crypto coins and tokens in ways that the Bitcoin blockchain does not support.

There are many altcoins available, we have put together a list of the best altcoins to purchase.

Tips to Know Before Investing in Cryptocurrency

Before making a crypto investment, you should be aware of the following.

Capital gains tax

Cryptocurrencies are considered assets for tax purposes, similar to stocks or real estate. You will have to pay capital gains tax on any profits when selling cryptocurrencies. Take this into account when preparing your annual budget and tax planning.

Short-term investing:

Many investors would consider cryptocurrencies as short-term rather than long-term investments because they are volatile assets. It is likely that cryptocurrencies will one day evolve into a more stable market, similar to the stock market. However, that is a long way off yet.

Ways to Trade in Cryptocurrency

There are numerous ways to invest in cryptocurrencies.

You can choose from brokers, exchanges, P2P marketplaces, ETFs, index funds, mutual funds, trusts, debit cards, different applications, and wallets.

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Cryptocurrency brokers

  • A cryptocurrency broker is a company that connects you with the cryptocurrency market. It is the middleman standing between you and the cryptocurrency you want to purchase, where the broker buys up many cryptocurrency tokens and offers them to you on its platform. This allows you to always have access to cryptocurrency tokens. Here, the brokerage sets the price of the assets.

Cryptocurrency exchanges

  • In cryptocurrency exchanges, you are given the opportunity to invest in cryptocurrency tokens. However, unlike with brokerages, here, the market determines the price of the digital assets on the exchange. These exchanges match orders, which means that there have to be at least two traders for the trade to execute.

Cryptocurrency exchange-traded funds (ETFs)

  • These are funds that allow you to access a diversified portfolio of cryptocurrency tokens or coins for you to trade. ETFs offer transparency and higher liquidity, which is their main point of appeal.

Cryptocurrency index funds

  • A cryptocurrency index fund allows you to buy shares within a fund instead of directly investing in coins or other digital assets. Within these index funds, experts use their knowledge and data to invest their money in multiple tokens, depending on the fund's index.

Cryptocurrency mutual funds

  • Mutual funds exist for investors who want to avoid owning cryptocurrencies through a digital wallet or exchange. These funds consist of different cryptocurrencies and give small or individual investors access to diversified and professionally managed portfolios.

Cryptocurrency trusts

  • Cryptocurrency trusts typically hold digital currency and allow investors to trade shares through a brokerage or a retirement account instead of using a cryptocurrency exchange.

Cryptocurrency credit cards

  • Crypto credit cards enable you to make purchases like you would with a regular credit card, but you earn cashback in the form of free crypto when you use it. Alternatively, if you already hold crypto that you'd like to spend, you can use a crypto debit card to spend it and earn crypto rewards in the process.

Cryptocurrency apps

  • There are many cryptocurrency apps available for a multitude of operating systems, such as iOS and Android, that will allow investors to invest in cryptocurrencies with ease.

Cryptocurrency wallets

  • In order to get started in investing in cryptocurrencies, you will first need a cryptocurrency wallet. These wallets provide you with an address to which brokerages, exchanges, or other cryptocurrency investors can send you cryptocurrency and provide you with the opportunity to send cryptocurrencies to other people, exchanges, or brokerages.

How to Buy Cryptocurrency from an Exchange

If you wish to invest in cryptocurrency directly, one of the most popular methods is through a cryptocurrency exchange.

Carefully follow the below steps to get started:

Step 1: Select the Cryptocurrency Exchange of Your Choice
Step 2: Verify Your Identity
Step 3: Deposit
Step 4: Choose the Cryptocurrency You Want to Buy
Step 5: Place an Order
Step 6: Complete the Purchase

What Kind of Payment Methods Can I Use to Buy Crypto?

There are many different kinds of payment methods to choose from when it comes to buying crypto. Check out our guides to find out how to purchase cryptocurrency with specific payment methods.

Where Can I Store My Crypto?

Once you decide the best way to buy crypto that suits your needs, you will need to decide what kind of crypto wallet to store it in. You can choose to:

Store the crypto on the exchange

When you buy cryptocurrencies, they are often stored on an exchange-based "crypto wallet" If you wish to store them in a more secure location, you can move them from the exchange to another hot or cold wallet. Depending on the exchange and your transfer amount, you may have to spend some money to do this.

Hot wallets

These are online wallets for cryptocurrencies that can be used on tablets, PCs, phones, or other internet-connected devices. Hot wallets are useful, but since they are still connected to the Internet, the risk of theft is higher.

Cold wallets

A cold crypto wallet or hardware wallet is the safest alternative for storing cryptocurrency because it is offline. They appear as external gadgets like hard drives or USB drives. However, caution is advised when using cold wallets because you will be unable to retrieve your cryptocurrencies if you lose both your password and seed phrase.

While the same could occur with certain hot wallets, they are managed by custodians who can help you regain access to your account in case of a lockout.

Crypto Trading Courses

If you would like to know about the most comprehensive crypto trading courses available, make sure to check out our “Best Trading Courses Review”.

What are Crypto Robots?

Crypto trading robots are a relatively new concept that involves bots performing automated trading of cryptocurrencies on one or more platforms on behalf of the cryptocurrency owner or user. If you are interested in auto-trading and would like to learn about Bitcoin robots, check out our auto-trading section.

If you are searching for the best crypto robot, we have done the legwork and put together a full review of the best crypto bots on the market today.

What is Staking?

Locking up cryptocurrency holdings to collect rewards or interest is a technique known as crypto-staking. Blockchain technology, which allows crypto transactions to be validated and associated data to be recorded on the blockchain, is the foundation on which cryptocurrencies are created. You can find out more about the staking processes for specific coins and where to earn staking rewards in our handy guides.

What are Crypto Loans?

Crypto loans are a relatively new phenomenon that enable people to use their crypto as collateral to borrow money, which sidesteps the need for credit checks, paperwork, and approvals from banks. Crypto loans are therefore far more accessible than traditional loans, though they come with their own risks.

What's more, crypto holders can earn interest on their crypto by lending it to borrowers, either through lending platforms or indirectly through crypto savings accounts. This typically provides them with much higher Crytpo lending rates than traditional savings accounts. Check out the guides below to learn more.

What is DeFi?

An exciting new financial system called decentralized finance (DeFi) is built on blockchains, rather than traditional financial systems. This means that users around the world can conduct financial transactions with each other, without the usual limitations imposed by intermediaries such as banks.

DeFi encompasses a range of financial services, such as trading, lending, and borrowing. Financial agreements between users are made and executed through smart contracts. As there is no company managing operations, any fees charged on DeFi platforms go to the users who keep the system running.

distributed ledgers, which are also used for cryptocurrencies. DeFi does away with the user fees that banks and other financial institutions charge. Anyone with a wifi connection can use DeFi, and users can store and quickly transfer money in a secure digital wallet.

What is a Decentralized Application (dApp)?

Decentralized apps, or DApps, are similar to regular apps, but the main difference is that they use smart contracts to run on a peer-to-peer network like a blockchain. Since Dapps are decentralized, they cannot be managed by a single person or entity.

If you would like to know more about crypto apps, you can read about our “Best Cryptocurrency Apps” guide.

What are NFTs?

Non-fungible tokens (NFTs) are exclusive cryptographic tokens that are only available on blockchains and cannot be copied. They are capable of producing anything electronically (e.g., drawings, music, and more).

What is Web3.0?

The term "web3" has come to represent the idea of a new, improved Internet. Essentially, Web3 uses blockchains, cryptocurrencies, and NFTs to return ownership and authority to consumers. You can read more about this exciting concept in our Web3 guide.

Where can I Find the Latest Crypto News Stories?

We deliver up-to-date, breaking crypto news and happenings, specifically in the areas of Bitcoin, cryptocurrency, blockchain, and NFTs.

Cryptocurrency Price Predictions

It's always exciting to read about crypto price predictions. You can check out our predictions for some of the most popular cryptocurrencies below.

Investing in cryptocurrencies will always come with a level of risk.

The Future of Cryptocurrencies

Much like anything related to blockchain, the future of cryptocurrencies is filled with hope, uncertainty, and confusion. While the cycle of dramatic price surges and crashes has become the norm for cryptocurrencies, their future also depends on outside factors like potential regulations, interventions, or whether blockchain technology can overcome its operational challenges.

While the potential of blockchains stretches beyond financial transactions, it easily lends itself to be used in banking due to its impeccable abilities of asset tracking and trading. Some of the major banks including HSBC and JP Morgan have started experimenting with blockchain-based networks in a bid to lower transaction fees and streamline cross-border payments.

Considering these things, it wouldn’t be too wrong to assume cryptocurrencies and tokenization technology will remain in the mainstream and become a part of the future of financial systems.

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FAQs

What's the difference between altcoins, crypto coins, and crypto tokens?
Can cryptocurrency be converted to cash?
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What is PoW vs PoS crypto?
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Contributors

Khashayar Abbasi
Khashayar discovered Bitcoin back in 2014 and has since spent countless hours researching the different use cases of cryptocurrencies. He has a bachelor's degree in International Relations and has been a writer in the financial services industry for nearly half a decade. In his spare time, Khashayar enjoys photography, cycling, and ice skating.