If you took a small chance back in 2009 and invested $100 in bitcoin, you would have roughly $48,000,000 today.
Clients and friends have been talking with me about cryptocurrency for the past few years, and I finally jumped on the bandwagon in early 2021. I knew it would be hard to study crypto investing without skin in the game.
I opened a coin base account. Then, I opened a couple of other accounts as I learned more.
I will share what I have learned so far about cryptocurrency, including my experience with the various platforms I’ve used.
The goal here is if you have only heard of cryptocurrency, perhaps in the news, then this article will give you a basic understanding of using it as an investing tool.
Think of it as a cryptocurrency 101 guide.
Like all online investment articles, this is not meant as specific investment advice. All investments (especially crypto) come with risk. It would be wise to figure out the details with a trusted financial advisor for your goals and situation.
Table of contents
In cryptocurrency 101, you’ll learn:
- the basic terminology
- how it works
- where to start
I’m also offering examples from my experience starting with the feeling that I’m late to the game. Talk about the parts I like and dislike of the exchanges I’m using and how I’m keeping track of all my trades for tax reporting come April.
Cryptocurrency 101 – The Basics
Crypto was invented because the underlying security makes it nearly impossible to hack. Unlike a bank or other financial institution, the records have to be verified, and we will get more into how this works a little later.
It’s a digital currency. You might also see it called virtual currency. There are many types of coins, and a few retailers will even let you pay for goods and services using crypto coins. New coins come out regularly, but there are risks.
Until each nation figures out laws, and as a globe, we find a place for digital currency in our daily lives, it’s not quite the same as using traditional currencies (like U.S. dollars) to buy something. The basis of an economic system using dollars, gold, euros, or yen is that businesses can reasonably expect currency stability.
For example, if you buy a loaf of bread today for $5, you can reasonably expect to pay $5 next week for another.
Currently, cryptocurrencies are not stable. If you pay 5 coins for a loaf of bread this week, you could spend 20 next week, or 2.
Instability makes it difficult to trade goods and services, so when you hear news about runaway inflation in a country, it creates enormous problems in even getting basic goods.
Crypto Terms to Know
The best advice is don’t invest in something you don’t understand.
If you, like me, end up curious about bitcoin and want to jump into the game, I highly recommend doing more extensive research.
Here are a few terms to help you along the way.
A coin is a single unit of currency. Bitcoin is an example of a popular cryptocurrency. Etherium is another. You can also own parts of a coin.
When Bitcoin started to get popular, lots of companies, banks, and even governments jumped on the bandwagon trying to create their own currency to compete.
Alt coins mean alternate coins that are less popular than the main ones.
Alt coins pose more risk. Some people put out coins to try and take other people’s money. There is a genuine risk of a brand new coin disappearing entirely, so do your research.
You often see things like this when coin values sit right around a penny. Some people try to play that game like penny stocks, essentially doubling the money if the coin value jumps to $0.02, but it’s a high-risk game.
When you own coins to hold them in a cryptocurrency wallet. You can choose between two types of wallets, hot and cold.
You can use a hot wallet, which is usually a company providing storage for your crypto online. It provides convenient access and can make trades whenever you want. This is what most people think of when discussing wallets.
A cold storage wallet typically functions on a flash drive or other system you can disconnect from the internet when you aren’t using it. Disconnecting makes it much harder to steal your wallet but also creates more inconvenience.
Transaction security comes from the protocols involved in the digital ledger. Unlike our financial institutions, where a bank would keep its own records of who has how much in what account, everyone who has crypto holds the digital ledger. That’s what makes it virtually unhackable.
If I go to make a trade, the ledger confirms my numbers against millions of copies of the ledger, and when they match, it allows the trade.
This also makes everything anonymous. For example, if I give you 5 coins, the transfer goes in the ledger, but what happens after that and who owns the account doesn’t get recorded – making wallet theft untraceable.
This is called blockchain technology. The constant record-keeping of millions of ledgers all confirm the same information, constantly check the numbers of the whole ledger, not just one transaction, prevent some currency exploitation and digital security failures.
It also opens up the technology for things beyond cryptocurrency, but that is beyond the scope of this article.
Think of the crypto market like you would think of the stock market, an exchange for cryptocurrency. You can buy and sell coins for the value of what someone is willing to pay at the time, just like stocks.
You also see these called crypto exchanges or cryptocurrency exchanges.
Crypto investors are people trying to make as much profit as possible through whatever strategy they can. Just like you have real estate investors who speculate on land value and invest in buying, selling, and renting property. They’re just like stock traders or hedge fund managers who try to beat the market by buying and selling stocks.
Crypto investors are the same thing. It’s another way to get your money to work for you.
Staking is simple.
You leave your coins in a designated staking wallet, and the exchange pays you interest over time.
It’s like keeping your money in a savings account. However, staking offers interest rates that make it worthwhile, unlike savings accounts where the interest is almost zero. Staking rates can vary widely. Some coins have rates closer to 1% others coins get closer to 14% interest. As of publication, Bitcoin was generating about 6% interest.
Other Terms to Know
- Blockchain networks – the computer network infrastructure on which cryptocurrency is built. It makes it impossible to hack or fake transactions.
- Initial coin offering – raising money for a new type of coin through either crowdfunding or venture capital.
- Utility tokens – a token built on a blockchain network for a specific product or service, exclusive to a company.
- HODL – Hold On for Deal Life, encouragement to avoid panic selling since crypto can be incredibly volatile.
How Does Investing in Cryptocurrency Work?
There are the top coins you’ve probably heard of: bitcoin and etherium.
These two are the largest, the most popular, and offer holders a reasonable amount of confidence in those coins. You can buy the top coins pretty much anywhere that allows you to trade crypto.
After hours of research and many conversations with friends who have experience in crypto investing, these are the places I ended up choosing for my accounts.
I go into detail on why I chose each one and what it’s best at.
My first account was Coinbase. It is the largest exchange and had an IPO in 2021. Coinbase offers many opportunities to watch videos about various types of crypto. Then you can take a short quiz. Completing the quiz earns you a few dollars in different currencies.
I now have many different coins in my accounts, albeit a small amount of each, that I earn free from my quizzes. Coinbase will add a new video series quiz to my account every once in a while, and I’ll earn a little more.
I like that the app and the website are easy to use. Having ongoing opportunities to watch videos and the frequent incentive to do so helps make continuing education on cryptocurrency easier.
It’s always changing.
Coinbase charges higher trading fees than other platforms. Staking options are also limited.
You can upgrade to Coinbase Pro for lower fees and more complex trading options, but I’d recommend starting simple and learning as you go.
One of my seasoned crypto trader friends recommended VeChain (VET) as a good alt-coin with lots of potential. Since Coinbase doesn’t hold VET, I signed up for a Binance account to buy some. Then I ended up picking up some different cryptocurrencies on there as well.
Binance has the added benefit of lower fees than Coinbase when you make purchases. Similar to Coinbase, it also has an easy-to-use website and app.
Finally, I use CoinTracker.
If you get into crypto and use multiple platforms, tracking your various buys and sells can get cumbersome. You end up with extra work when it comes time for tax season. Unfortunately, Uncle Sam wants his cut in the form of capital gains tax. If you plan on holding on to your crypto as a long-term investment, you might be interested in our article on future taxes.
CoinTracker aggregates my crypto numbers in one place. You can connect the three exchanges above (and hundreds more) to see the total value of your crypto daily.
CoinTracker provides tracking for free. It’s a user-friendly app with optional paid features to track individual performance. They also offer tax reporting and tax-loss harvesting in their paid options.
How to Start Investing In Crypto
Are you ready to own cryptocurrency? Crypto investments are high risk.
Many economists don’t even consider it investing. They call it speculation.
Financial planners tend to view crypto as something to do with your money if it interests you AFTER you have maxed out your retirement accounts for the year and have built up real assets for long-term investments.
There are safer and potentially better strategies to grow your portfolio. We can’t know what the future of crypto will be, but it’s all high risk right now.
Step 1. The best way to start is evaluating your risk tolerance. Are you okay with losing every penny you invest in crypto? Are you looking for short-term or long-term returns?
The next unique step in crypto investing is considering the future of crypto. Do you believe that digital currencies will be the future of money? In that case, your strategy will probably be to buy coins now and hold on to them for when their value increases as more people use them in daily life.
Are you more interested in speculation and trying to profit from how other people feel about crypto? Then you’ll be carefully watching the rise and fall, reading the news, doing research on the people and companies creating coins and exchanges – like a day trader for the stock market.
Are you more interested in staking? Then you’ll probably keep tabs on what exchanges are offering the highest rate for what coins and invest in those.
Once you’ve researched the method you’re most interested in using, start with money you’re willing to lose. Learning about investments usually involves some financially costly lessons.
Then it’s on to choosing the exchanges and wallet(s) you want to use. Look for a company with an established reputation. Then look into the people behind the company. If they have good reputations in the tech/finance world, then you can trust them to do right by their investors over someone with no reputation.
Other risks to keep in mind with crypto is that wallets can be stolen, like debit cards and credit cards. Except, if your wallet gets stolen, there is no way to get it back. It’s not traceable like someone using your debit card to empty your bank account. You can mitigate this by using a security protocol like two-factor authentication on your digital wallet. That’s the technical term for when you log into an account and you get a text with an authentication code on your phone.
Overall, I’ve been happy with my crypto journey. It does allow me to discuss crypto with friends and clients with confidence. I can use examples from my successes and mistakes to illustrate what I’ve learned, not just someone else’s theory.
I particularly like taking advantage of the free coins from the CoinBase educational videos and the staking options through Binance, where interest rates are much higher than you would find on a savings account, money market, or even CDs. However, coin value variability creates more risk than any of those options.
Please note nothing in this article should be considered investment advice. Crypto is highly speculative and comes with risks. Only invest what you are willing to lose, and talking about your situation with your financial advisor can give you additional insight.
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If you have any questions about financial planning or where cryptocurrency belongs in your wealth-building strategy, feel free to call any time at 858-703-6178.