How to Invest in Cryptocurrency

How Do You Invest in Cryptocurrency?

Are you considering investing in cryptocurrency? Although Bitcoin is likely the best-known virtual money, thousands of cryptocurrencies already exist. Cryptocurrency investing can take many forms, ranging from buying cryptocurrency directly to investing in crypto funds and companies. For direct investing in crypto coins, you can buy cryptocurrency using crypto exchanges or apps or through certain broker-dealers. Find out more about how you can invest in one of the newest and most inventive asset classes available.

Different Types of Cryptocurrency Investing

When you think of investing in cryptocurrency, you might think about buying and holding one or more crypto coins. Buying cryptocurrency directly is probably the most common way to add crypto exposure to your portfolio, but when it comes to investing in cryptocurrency, you have a few different options:

• Buy cryptocurrency directly: You can choose to directly purchase and store one or more cryptocurrencies. Your options range from the most established digital currencies like Ethereum and Bitcoin to virtually unknown coins that are newly released.
• Invest in cryptocurrency companies: You can invest in companies with a partial or total focus on cryptocurrency. Your options include cryptocurrency mining companies, mining hardware makers, companies like Robinhood Markets Inc. (HOOD) and PayPal Holdings Inc. (PYPL) that support cryptocurrency, and many others with varying levels of crypto exposure. You also can invest in companies like MicroStrategy Inc. (MSTR), which holds large amounts of cryptocurrency on its balance sheets.
• Invest in cryptocurrency-focused funds: If you don't want to choose among individual cryptocurrency companies, then you can decide to invest in a cryptocurrency-focused fund instead. You have a choice of exchange-traded funds (ETFs), such as index funds and futures funds, in addition to a range of cryptocurrency investment trusts. In January 2024, the Securities and Exchange Commission approved the first Bitcoin Spot ETFs. These funds hold bitcoin and offer shares to investors based on bitcoin spot prices.
• Invest in a cryptocurrency Roth IRA: If you want to invest in cryptocurrency and also garner the tax advantages afforded by an individual retirement account (IRA), then you can consider investing in a cryptocurrency Roth IRA. Using the services of a crypto IRA provider can also facilitate more secure storage for your cryptocurrency holdings.
• Become a crypto miner or validator: Perhaps the most direct way to invest in cryptocurrency is to mine it or act as a validator in a crypto network. Cryptocurrency miners and validators can earn rewards in crypto, which they can either hold as investments or exchange for another currency.

How to Buy Cryptocurrency From an Exchange

If you want to invest in cryptocurrency directly, then you can use a cryptocurrency exchange. Here's how to buy cryptocurrency through an exchange:

1. Choose which cryptocurrency exchange you want to use. Your best bet is a reputable, well-known exchange with a large selection of currencies.
2. Establish an account with the cryptocurrency exchange. You will need to provide your personal information and verify your identity to complete the registration process.
3. Fund your account with fiat money. Before you can buy any crypto, you need to fund your exchange account with another currency, such as U.S. dollars.
4. Decide which cryptocurrency you want to buy. You can choose to invest in one or many cryptocurrencies. Research your options to help you decide.
5. Place a buy order for your chosen cryptocurrency. Follow the steps required by the exchange to submit and complete a buy order for one or more cryptocurrencies.
6. Store your cryptocurrency in a digital wallet. After your purchase is complete, the information you need to access your cryptocurrency is held in a digital wallet. That crypto wallet can be hosted either by the cryptocurrency exchange or an independent wallet provider.

A best practice among investors is to periodically review your entire portfolio to assess the need to rebalance your holdings. That might mean increasing or scaling back your crypto exposure, depending on your investment goals and other financial needs.

What to Know Before Investing in Cryptocurrency

Investing in cryptocurrency is considered risky. The prices of cryptocurrencies, even the most established ones, are much more volatile than the prices of other assets like stocks. The prices of cryptocurrencies in the future could also be affected by regulatory changes, with the worst-case possibility that cryptocurrency becomes illegal and therefore worthless.

Many investors are nonetheless attracted to the potential upside of investing in crypto. If you decide to invest, it's important to carefully research any digital coin before buying it. Pay attention to transaction fees when making crypto purchases because these fees can vary widely among currencies.

The cryptocurrency space is evolving rapidly, so it's also important to pay attention to new developments that may affect your crypto holdings. Cryptocurrency investors need to understand the tax consequences of using crypto, especially if they purchase something or sell their crypto investments.

Given the riskiness of cryptocurrency as an asset class, it's especially important not to invest more money in crypto than you can afford to lose.

The Bottom Line

The are several ways to invest in cryptocurrency, so if you're interested and can accept the risks involved, you have many choices. However, it cannot be stressed enough how volatile crypto prices are because other cryptocurrency investors are afraid of missing out on the next big price movements. These movements cause large price, unpredictable price swings that can take out your investments in a matter of minutes or hours. Conversely, you may be able to double or triple your investment—but there are no guarantees.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.