In this article:
- 1. Understand How Cryptocurrencies Work
- 2. Know the Risks of Investing in Crypto
- 3. Only Invest What You Can Afford
- 4. Choose Where You Want to Invest
- Look Before Leaping
As cryptocurrency investing becomes more mainstream, you might be curious about how and where to get started and whether it's a good idea at all. Here are the basics you need to know about the risks involved with cryptocurrency and how to get started investing—without any of the jargon.
1. Understand How Cryptocurrencies Work
Bitcoin is the most well-known cryptocurrency, but there are thousands of different cryptocurrencies and crypto tokens that you can buy. But most of these share some similarities:
- They rely on blockchain technology. One of the major innovations behind cryptocurrencies is the use of blockchain ledger technology. These are public databases used to track transactions that can't be changed once new information (a block) is added to the existing chain. This transparency and permanence helps make sure cryptocurrency isn't duplicated, spent twice or otherwise manipulated.
- There are different blockchains. Cryptocurrencies may have their own unique blockchains. For example, there are separate Bitcoin, Binance and Ethereum blockchains.
- They are decentralized. People and companies around the world use their computers to help run the blockchains and get rewarded in return. Because the database and computing power is spread out, there isn't a central authority—such as a company or government—that controls what's happened.
- They are minimally regulated. While cryptocurrencies are relatively new and regulations can be murky, state and federal agencies have shown that they can and want to regulate them. But that doesn't mean you're protected or should trust everything you read on a crypto company website.
While the underlying technology is similar, you can invest in cryptos that are created with different purposes in mind. For example, Bitcoin was created as a digital form of currency, while other coins let you use certain crypto platforms or apps.
2. Know the Risks of Investing in Crypto
Investing always involves taking a risk, and sometimes a big risk can lead to a big return. But it could also mean losing most (or all) of your money.
Cryptocurrency investing can be particularly risky as it involves investing in a brand-new type of asset that tends to go through huge fluctuations in value. For example, the cost for a single Bitcoin was as low as $26,826 and as high as $68,991 from February 2021 to February 2022.
There are also additional risks when investing in cryptocurrencies—such as the many cryptocurrency-related scams. These can be especially dangerous when you're not familiar with the cryptocurrency world and feel pressure to act quickly because you're worried about missing out on the next big opportunity. Additionally, people have been able to develop hacks to steal peoples' crypto.
3. Only Invest What You Can Afford
Because of the risks involved, you may only want to invest money you can afford to lose if your cryptocurrency investments don't pan out—similar to how many investors approach other types of high-risk investments.
You may also want to diversify your crypto investments by researching different types of coins and projects. For example, if you decide to put 10% of your investments into cryptocurrencies, you might take 5% and put it into well-known coins like Bitcoin and Ethereum. The other 5% could go to other investments in the crypto space, like crypto lending.
4. Choose Where You Want to Invest
Once you're ready to buy your first cryptocurrency, you'll need to decide whether you want to use a centralized or decentralized exchange.
For-profit companies create centralized exchanges that can be simple to use but come with fees that can eat into the value of your coins and may be vulnerable to hackers. These companies, like Crypto.com, Coinbase and Gemini, make it easy to create an account and invest in any cryptocurrency that the platform supports in your area.
Alternatively, you can create a cryptocurrency wallet you control, add funds and buy crypto with it. You can then connect the wallet to a decentralized exchange—popular options include Curve, Sushiswap and Uniswap—to buy others.
In either case, you may be able to add funds with a bank transfer, debit card or credit card. The fees for depositing money and each trade can depend on the platform, funding source and how much you're trading.
In general, a centralized exchange is the safest and easiest way to start. The company will hold the cryptocurrency for you and can help you reset your password if you forget it. They may also have insurance or guarantees that can help keep your money safe from hacks. But using a centralized exchange means you don't have total control over your cryptocurrency, which can be a downside.
Using a wallet and decentralized exchange, on the other hand, means you're the only one that has access to the cryptocurrency—you don't give up control or have to share your identity with a private company. You also may be able to buy cryptos that aren't available from centralized exchanges. But there are fewer protections in place. You could lose your wallet or password and no longer be able to access the crypto, or wind up buying a cryptocurrency that turns out to be part of a scam.
Look Before Leaping
Cryptocurrencies present an interesting and new investment opportunity, and one that may be worth exploring. But consider the risks involved and learn more about the different cryptocurrencies and crypto projects to find opportunities that interest you and fit your investing style.
Whenever you're considering a new investment, make sure you're able to cover your bills and debt obligations, and that your emergency fund and retirement savings plans are taken care of. Falling short of your financial obligations can cause major credit score harm, and may lead to other consequences such as repossession or foreclosure. You can view your credit report and credit score for free through Experian to keep an eye on one important aspect of your financial health.
