How do you invest in cryptocurrency?

In my previous article, I discussed how cryptocurrency (crypto) and gold are forms of money just like cash. I discussed their pros as well as cons when compared to normal money (i.e. dollars). In the end, one of the best ways to create a new money might be a crypto coin that is backed by a real good, like gold. But how do you invest in cryptocurrency?

However, that is something that is probably only going to happen in a movie for the foreseeable future. Right now, you have to decide what your portfolio should have in it based on the investments available to you.

Most investors know how to invest in stocks, bonds, and gold (or their advisor does at least). However, crypto is a new asset class. As such, many investors, even a few veterans, do not know how they can buy crypto. This article intends to change precisely that!  Read on to discover how to invest in cryptocurrency

When Should You Invest in Cryptocurrency?

One thing that is certain is that crypto will be an important part of our lives in the future. With the governments printing more money than ever before and potential invasion of privacy reaching new highs, crypto offers an escape. Crypto payments are traceable as we have discussed in the past. However, they still offer a lot more anonymity than any other method of payment (except perhaps cash!).

However, crypto is still a long way away from being a key part of our financial system. As such, you must be careful when investing in any digital coin. As of right now, it is best to think of crypto as a high-risk, high-reward investment.  This is as opposed to the cash that you normally use.

Who Should Invest in Cryptocurrency?

• If  you are an investor who is used to risky investments
• You believe that the governments are being too careless with the way they handle the money supply.  And you want to protect yourself in the case of a mega-crash and hyper-inflation.
• If you are someone in your early 20s looking for a future-proof investment.  And you hope it could pay off big-time in a couple of decades.
• You have a decent amount of savings to tide you over in the case of a recession.
• You can stomach the highs and lows of a risky investment.

For the most part, investing in crypto requires you to be patient. Although crypto is different in almost every way, the personality required to be a good crypto investor is similar to that of a value investor. Value investing was created by legendary investor Benjamin Graham (who was Warren Buffet’s mentor).  The investor finds the actual value of the stock (value of the total assets and future prospects of the company).   He then compares it with its current price. If the stock’s value is more than its price (i.e. undervalued) the value investor will buy it.  These value investors hold the stock until the price rises to its actual value.

However, Benjamin Graham may turn in his grave after reading this. But I do believe that crypto and value investing are similar for the following reasons:

• Both value investing and crypto requires you to be patient.
• Short term fluctuations are irrelevant to you. 
• This is because your research is based on long-term forecasts
• Your goal is to build wealth, not make a quick buck.
• Most of all, you are ready to stomach crashes which are relatively rare in the world of conventional investments.

Use Investment Apps to Invest in Cryptocurrency!

Investing has become much easier. We have already discussed Robo-advisors in depth on this blog. Robo-advisors can be a great platform if used correctly. However, there are many apps that give you full control over how you invest in cryptocurrency.

There are lots of apps that can allow you to invest in more ‘standard’ investment classes.  However, they are few and far between when it comes to crypto. A lot of platforms offer crypto, but the tools that they provide you are inadequate.

However, one app that does allow you to invest in crypto is Robinhood. Robinhood is a commission-free platform that is seeing increased use. It provides young people with a hassle-free way to invest in almost anything they want.  This is as well as older people, although young people do seem to be the main target of the app.

Advantages of Robinhood

The main benefit of using an app such as Robinhood is that you can use the same app to invest in other asset classes as well. From stocks to ETFs to almost everything else that you can imagine, Robinhood has you covered.

Robinhood offers a commission-free investing model that can help you save a small amount of money in the long run. Suppose you are new to investing and want to keep things simple.  Then Robinhood should be able to handle all of your investments in one place.

Disadvantages of Robinhood

Robinhood currently does not offer you a lot of options when you invest in cryptocurrency. Apart from Bitcoin, you can invest in Ethereum, Ethereum Classic, Litecoin, Dogecoin, Bitcoin Cash, and Bitcoin SV. While it offers market data for numerous other currencies, you can only invest in these ones.

Also, there is not much guidance for new investors on how to start with the platform. You get limited options for crypto coins, and most of them are the well-known ones. Investors looking for high returns usually look for slightly more rare altcoins. Since they are not available on Robinhood, you cannot diversify broadly across multiple coins.  This means it can be difficult to spread your risk across coins.

Sure, seven coins seem like sufficient diversification in traditional finance. However, those in crypto often like to hold a small number of lesser-known coins.   These lesser-known coins are the ones that often have the highest gains (and losses!). With only seven well-known coins on Robinhood, your options are limited.

Lastly, Robinhood is not widely available outside of the USA. Support for the app is gradually being added.  However, there is a chance that you will not be able to use Robinhood if you don’t live in the US.

Blockchain ETFs

Perhaps you feel more comfortable with traditional investments but still want to invest in cryptocurrency.  In this case, a blockchain ETF may be the best choice.

The main advantage of using an ETF is that most of them invest in a large number of different cryptocurrencies. This means that you can gain diversification without having to purchase individual currencies.

The feasibility of cryptocurrencies is still being debated by governments and regulators. Many advocates of crypto argue that this is because a decentralized currency is not in the interest of a government since it is the government that controls the money supply. However, governments are increasingly promoting blockchain technology due to its various uses (which include healthcare, energy, and identity management).

Blockchains Are Decentralized Information Networks

For example, a blockchain can maintain a universal record of your medical profile. Your previous doctors could document any change that they make to it.  Any doctor that you visit can then access this profile. This would essentially allow you to receive better treatment.  This is because health professionals will have access to more data upon which to base their diagnosis.

Essentially, a blockchain is a decentralized information network.  In this network an unlimited number of people can work together to accomplish a certain goal. For example, it may be used to process large amounts of data. It does this by spreading it over thousands of computers and having them work together.

As such, you can still gain exposure to many cryptocurrencies by investing in the blockchains themselves. However, do remember that these ETFs do not invest in cryptocurrencies or blockchains themselves. Instead, they invest in companies that are involved in the blockchain niche.

As for frequently being opposed to crypto, governments do seem to have a valid reason (sometimes). For example, the US government has seized accounts tied to North Korea’s crypto theft ring on numerous occasions. Apparently, North Korea has conducted crypto heists to finance its weapons development program. Incidents like this only hamper the integration of crypto into our financial system. However, they do not deter some governments from promoting blockchain technology.

Risks of Blockchain ETFs

Investing in a blockchain ETF means that you are betting on the blockchain technology. You are betting that it will be used profitably in healthcare and other industries as discussed above. On top of that, decentralization is a huge part of blockchain. So this means that blockchain may become an important part of our life. However, companies that you invest in may not be able to successfully take advantage of it. For example, suppose there are twenty companies working on creating a record of every person’s medical history on a blockchain.  Only a few of them may succeed, and others may fail. So, your ETF may invest in a company (or companies) that ultimately failed.  In this case, you will lose out even if other companies manage to integrate blockchain into healthcare.

Blockchain ETFs are highly volatile.  They should only be invested in after you have properly researched the technology. It’s important that you are confident of  blockchain adoption in the future. ETFDB has a list of 8 Blockchain ETFs that are a great starting point for any investor looking to go this route.

Crypto Wallets/Exchanges

The last option available to invest iu is a crypto exchange. You can purchase a crypto directly on an exchange.  An exchange is a website that buys and sells crypto.  You then transfer it to one of your wallets. A wallet in crypto, if you didn’t know, is anything that can hold crypto. It can be online or offline. Pretty much all exchanges also provide you with wallets on their websites where you can hold your coins. While these wallets are generally secure, there have been instances of security breaches where coins were stolen.

The alternative to this is to store your coins in cold storage. Cold storage is essentially an offline crypto wallet. When cold storing crypto, you could store your coins in an SSD or a flash drive, or even an SD card.  Data backups are necessary whenever you cold store your crypto.  This is in case you lose the flash drive! Cold storage would make theft impossible unless someone manages to physically steal your storage device.

Popular Crypto Exchanges

Crypto exchanges allow you the most amount of versatility when it comes to the coins that you want to purchase. For example, Binance offers over a thousand different digital assets to you, and there are many other platforms that provide a similar variety.

Apart from Binance, some of the other popular crypto exchanges are Coinbase, eToro, and Bitfinex. All of these are pretty similar to one another. There are numerous comparisons that you can find of all of the various exchanges. One tip that is extremely important is to always go with an exchange that has a good reputation. Newer exchanges may offer lower fees.  But they have the risk of not being secure enough to risk your hard-earned money.

However, you will not find a lot of non-crypto assets on these exchanges. As such, you will need to use another platform for your more conventional investments. On top of this, you need to manually buy and sell assets. The user interfaces of many of these websites are non-intuitive. This makes the manual process very difficult.

Conclusion

The 3 ways mentioned above all have their pros and cons. It is up to you to determine which one is right for you.

Robinhood is Best For New Investors

Perhaps you are a new investor who is looking for an all in one solution to invest in cryptocurrency.  Then using an application such as Robinhood is probably the best idea. There are a lot of applications that appear to offer other assets along with crypto.  However, this is frequently not the case. Many of those apps use Contract for Differences (a type of financial derivative)

Contract for Differences are a very controversial and complex instrument. Essentially, you enter into a contract with your broker (the application). You either bet on the asset price increasing or decreasing. If the asset price moves in your favor, you gain money and your broker loses it (and vice versa). However, the broker sells and buys the asset from you at different prices, thus skewing the odds in their favor.  Moreover, you never actually own the asset!

For example, a very popular but controversial investment app is IQOption. It claims that you can trade stocks and crypto on it. Still, remember that you never actually own any of the assets that you trade. Instead, you enter into a contract with IQOption.  In this contract the value of your “investment” will track (move along with) a certain asset.  This might be Bitcoin or Apple stock. Hundreds of apps use CFDs instead of actual assets. This is due to regulatory restrictions and the difficulty in setting up a complete platform.

With Robinhood, you actually own everything that you invest in! Remember that it is extremely easy to start trading CFDs. However, they are a complex instrument that is not ideal for a long-term investment or novice investors. As such, investors who do not properly understand them should stick to standard investment methods.

All Options Are Viable For Experienced Investors

Perhaps you already have a robust investment portfolio.  Now you are looking to simply expose yourself to crypto.  Then you can choose between the other two options. Or perhaps you are skeptical about crypto but have an interest in the underlying technology.  Then you could perhaps stick to ETFs. Or perhaps you believe that crypto will eventually be used by people and businesses worldwide.  Then you can consider buying crypto outright through an exchange.