A Guide for Beginners and Newcomers – Forbes Advisor

Cryptocurrencies are a volatile investment class that can build or destroy a fortune in minutes. Here’s what you need to know to get started. 

What Is Cryptocurrency?

Cryptocurrencies are digital assets that use blockchain technology and operate independently of traditional government or corporate oversight. Unlike the U.S. dollar or other fiat currencies, they aren’t issued or backed by any central governmental authority. 

Cryptocurrencies rely on users in a decentralized network to maintain and verify transactions through encryption based on blockchain technology. 

There are more than 17,000 cryptocurrency coins on the market, according to Coingecko. Crypto coins range from household names like bitcoin and Ethereum to controversial meme coins like TRUMP or the Shiba Inu’s SHIB. 

How Do Cryptocurrencies Work?

While you can use cryptocurrencies to make purchases, their acceptance is far from universal. Most retailers still prefer government-issued currencies, so your spending options with cryptocurrency remain relatively narrow. 

Each time you buy or sell something with crypto, a decentralized network of computers using blockchain protocols will check the validity of your payment. Once the details are validated, the transaction is approved and added to the system. 

After transfers are confirmed and finalized, recipients can access funds using their private key. Private keys are secure, encrypted codes known only to recipients. 

How Do Cryptocurrencies Work as Investments? 

While cryptocurrencies work for transactions, using them to replace traditional currency isn’t the primary use case for most crypto enthusiasts. Many treat it like a speculative investment, buying it in the hopes that the value will increase over time and they will be able to sell it at its peak.

In this sense, cryptocurrency investing is similar to investing in stocks, real estate or any other assets, hoping they’ll appreciate. What distinguishes cryptocurrency is that it’s a relatively new entrant to the market, weathering extreme volatility. So crypto investment can make its investors rich or poor very quickly, depending on market sentiment.

Types of Cryptocurrencies

Bitcoin was the first cryptocurrency to launch, debuting in 2009 through an anonymous creator using the name of Satoshi Nakamoto. What started as a niche experiment has grown into a global financial powerhouse, with bitcoin now having a market cap of over $2 trillion. 

Today, there are thousands of tokens and coins, and the total market capitalization of the cryptocurrency market is worth more than $3.3 trillion.

Some of the top cryptocurrencies include:

Bitcoin (BTC)

Bitcoin operates on a decentralized digital ledger known as blockchain. The original crypto uses a consensus mechanism called proof of work. This system relies on a network of bitcoin miners to solve cryptographic puzzles to validate transactions and keep the network secure. 

Learn more: How to buy bitcoin

Ethereum (ETH)

Ethereum’s arrival in 2015 was a turning point, ushering in a new era of programmable blockchains. Today, Ethereum is the second largest cryptocurrency by market cap after bitcoin. 

Ethereum distinguishes itself from bitcoin in that it functions more like a decentralized computing platform than as a currency. It lets people run applications, commonly referred to as DApps, to run on its blockchain instead of relying on a central server. 

Ethereum also lets people set up smart contracts on its system, reducing the need for a trusted intermediary in many transactions. 

Learn more: How to buy Ethereum

Tether (USDT)

Unlike most digital currencies, tether belongs to a group of assets called stablecoins. Stablecoins aim to maintain a relatively stable value by pegging their value to another asset. In the case of USDT, it aims to keep its parity with the U.S. dollar.

USDT is designed to hold its parity value through tether’s reserves. The reserve is intended to match the supply of tokens. In fact, tether publishes quarterly reports accounting for its reserves, which are a mix of repurchase agreements, Treasury bills, money market funds and other assets.

Solana (SOL)

Solana is built for speed and scalability. Its blockchain supports decentralized finance, or DeFi applications, DApps and smart contracts using a hybrid system that blends proof of stake with proof of history. This approach allows it to process transactions quickly and efficiently. SOL, the platform’s native token, is used to power activity on the platform. 

Learn more: How to buy solana

BNB (BNB)

Launched in 2017, Binance coin was created originally as an ERC-20 token on the Ethereum network to help users pay for trading fees on Binance, one of the world’s largest cryptocurrency exchanges. Today, BNB now operates on its own networks and has grown beyond the platform. BNB can be used for everything from crypto trading to payment processing. 

Learn more: How to buy BNB

Pros and Cons of Investing in Cryptocurrency

Cryptocurrency has gained popularity and attention for several reasons, from decentralized design to ease of access for global investors. 

Pros: 

While the technology is intriguing, for many, the most appealing part of crypto is the potential for large returns. Bitcoin and Ethereum have delivered substantial gains over short periods during bull markets, outperforming many traditional asset classes. 

The decentralized nature of crypto provides more financial autonomy; it’s another way to access global markets without traditional financial institutions.

Cons: 

While crypto has produced outsize profits for some, it’s far from a guaranteed win. The crypto market is highly volatile with extreme price swings over short periods. Regulatory uncertainty adds another layer of volatility, as governments continue to shape policies that could influence how cryptocurrencies are taxed, traded and even accessed. 

Security and fraud are additional risks with cryptocurrencies. Unlike traditional investment products that are backed by regulated institutions, cryptocurrency has been plagued by scams, fraudulent projects and exchange collapses. 

What to Consider Before Investing in Cryptocurrency

You must conduct due diligence on any investment before buying in. But this is especially important for crypto due to the lack of industry regulation and oversight. Here are some things to keep in mind before investing in crypto: 

Project details. Before adding any crypto asset to your portfolio, it’s essential to understand how it works and why it exists. 

Your risk profile. Every investor wants to make money, but not every investor can afford to lose money. You have to determine what level of risk you’re comfortable with taking. “The amount of money you should allocate to cryptocurrency should mirror the allocation of any speculative investment,” says Michael Kothakota, CEO of WolfBridge Wealth in Raleigh, North Carolina. 

Your investment goals. Crypto assets are very volatile. If you decide that individually owning crypto isn’t right for you, there are still other ways for you to incorporate it into your portfolio, such as through spot exchange-traded funds.

How to Invest in Cryptocurrency

Getting started with crypto can feel overwhelming, but the process can be broken down into a few simple steps.

1. Pick a Crypto Broker or Cryptocurrency Exchange

You can buy crypto through a broker or via a cryptocurrency exchange.

Cryptocurrency brokers like Robinhood and SoFi offer convenience but don’t offer as many cryptocurrencies and may charge higher fees.

Cryptocurrency exchanges such as Coinbase, Gemini and Binance.US. give you direct access to the crypto markets. These exchanges have a learning curve that can make them feel complex at first, but learning how to use them can help lower your trading costs over time.

2. Set Up an Account

Once you’ve picked a platform, you’ll need to sign up and verify your identity. Generally, this requires answering some basic identity questions like your name, birthdate and Social Security number. Sometimes you’ll be asked to provide additional verification by uploading a picture of your driver’s license during this process. 

3. Add Funds to Invest

You’ll need to add money to your account before you can start investing. You can get money into your account by setting up a bank transfer or using your debit card. Funds may be available instantly or may take a few days to settle before they can be used, depending on your bank, the exchange you’re using and the method you used to transfer funds. 

4. Initiate Your Cryptocurrency Transaction

Once your account is funded, you’re ready to buy crypto. Research your options, decide how much you want to spend, and which crypto you want to buy. You’ll search for the cryptocurrency you want to buy, select the amount you want to spend if you’re buying a fractional share, and click “Buy.” Congratulations, you’ve just invested in crypto!

How Much Crypto Should You Buy?

How To Keep Your Cryptocurrency Secure

Cryptocurrency exchanges are frequent targets of theft and cyberattacks. Also, unlike with traditional investments at brokerages, misplacing your private key or locking yourself out of your account can mean losing your entire investment. 

If you purchase crypto through a broker or exchange, your assets are typically stored in a crypto wallet linked to the exchange. If you’d prefer to store them yourself, you have two main options: 

Hot wallets. Hot wallets are connected to the internet, either through your personal devices or via a crypto exchange. They’re easy to use but more vulnerable to hackers. 

Cold wallets. Cold wallets are offline storage devices offering higher security. However, if you damage the device, lose it, or forget your login information, your investment could be lost forever. 

But storing your crypto yourself can be dangerous too, with numerous stories of people losing millions when they misplace their private keys and cold wallets. 

In recent years, new alternatives have hit the market, hoping to mitigate the risks of hot wallets, cold wallets and exchange-linked wallets. 

Institutional custody aims to blend the security of cold wallets with the convenience of hot wallets by keeping most funds stored offline and facilitating trading operations by keeping a portion in online “hot” wallets with multiple layers of security. 

No matter which custody option you choose, plan to have some expenses involved in transferring assets between exchanges and crypto wallets.

Frequently Asked Questions (FAQs)