The overall cryptocurrency market cap reached $1 Trillion in 2021. Crypto assets are fast becoming an important asset class that can be included in investment portfolios.
Cryptocurrency investment, like any other type of investment carries a risk and the asset class is highly volatile.
Cryptocurrency is an umbrella term that refers to an asset class that includes tokens such as Bitcoin, Ethereum, Algorand, Matic, Cardano, Solana and Chainlink. Crypto tokens are digital internet money powered by the blockchain technology and secured by cryptography.
Here is a quick cheatsheet for beginners looking to start investing in the crypto markets.
Step 1: Get an account in a cryptocurrency exchange
Cryptocurrencies can be bought or sold in exchange for fiat currencies like the US dollar. Whenever you need to exchange crypto for fiat or buy crypto using fiat, you will need the services of a crypto exchange.
The easiest and perhaps the safest way to begin investing in cryptocurrencies is to get an account with a popular exchange like Coinbase or Gemini.
- Setting up an account with a crypto exchange like Coinbase is your first step toward owning cryptocurrency.
- Once you've set up an account, you'll need to fund your account. This can be done either by wire transfer or by linking a bank account to your crypto exchange account.
- You'll also need to complete KYC and/or other procedures based on your location.
Step 2: Storing your cryptocurrency
Once you have picked your crypto assets and made your purchases, you have options on how to store your crypto assets. Crypto can be stored in an exchange or can be sent from exchanges to wallets.
There is always a risk associated with leaving your crypto in exchanges and popular exchanges offer wallet services for a fee. Once you transfer your crypto to a wallet, when you decide to sell your crypto, you will need to send them back from the wallet to an exchange before you can initiate the sale.
Storing in Exchanges
Cryptocurrencies can be stored in exchanges for free. Most popular exchanges also offer extended paid custodial services to securely hold your tokens. In addition to providing paid custodial services to store your assets, top exchanges will also provide free services to transfer your cryptocurrency to an external wallet.
Cryptocurrencies can also be stored in wallets. Following is a list of popular crypto wallets:
- Metamask is a popular mobile wallet that comes with a browser exchange.
- Popular exchanges like Coinbase offer wallet services.
- Trustwallet is a free open-source, decentralized mobile wallet.
- Ledger Nano X is a very popular hardware wallet that is considered a secure option to store your crypto.
Step 3: Cryptocurrency Taxes
As crypto market cap increases and adoption becomes wider, sovereign governments have created specific tax laws for crypto assets. The tax laws are country specific and can change over time, so you must refer to the laws that are specific to your respective country.
In general, the follow actions may trigger a tax event:
- Selling a cryptocurrency for fiat money.
- Converting cryptocurrency to a different cryptocurrency.
- Interest from staking, yield farming or any other means using cryptocurrency.
Step 4: Types of Crypto Assets
Bitcoin is the first ever cryptocurrency and it was created in 2009. In the initial years, Bitcoin was obtained by techies who used their laptops and personal computers to mine bitcoin as rewards for solving Math problems. In 2022, you can still mine bitcoin, but the difficulty levels have increased such that mining is done by large corporations with extended facilities.
In 2022, there exists several other cryptocurrencies, each with different utilities and use cases.
Tokens Each blockchain has its native token that is traded in an exchange like Coinbase or in a DEX like Uniswap. You can think of owning tokens in a blockchain as something similar to owning shares in a company.
ICO stands for initial coin offering and is similar to an IPO. During an IPO, a company's shares are offered to the public for the first time. Similarly, during an ICO a project's tokens are offered to the public. If you choose to invest in a project at this stage, the upside is huge, but the risk is also very high.
NFT stands for non fungible token. It means that each token is unique unlike regular tokens like a bitcoin which is the same token for all the holders. An example of an NFT is an image for each token. NFTs have different applications like utility tokens, tokenized assets and more.
DeFi stands for decentralized finance. There exist several opportunities to invest in projects that are re-building financial services on the blockchain.
ETF stands for exchange traded fund. Investing in a fund will add a layer of management and diversification over investing in individual crypto assets.
Step 5: Earning with Crypto Assets
In addition to trading and holding crypto for profit, you can earn passive income by lending, staking or yield farming and DeFi.
Step 6: Risk and Volatility
Crypto assets are gaining mainstream acceptance and serious investors and institutions are beginning to view Bitcoin and Ethereum as an important asset class. However, as a new investor, you will need to be aware of the risks that come with the high volatility of this asset class.
Types of Risk
The following is a list of the different types of risks that you need to be aware of when you invest in crypto assets.
Security Cryptocurrency is digital money that is secured by cryptography technology on a blockchain ledger. Although the technology is mature and offers high security, individual projects may have issues and so there is always an inherent security risk associated with crypto assets. You can think of this as something similar to the risk associated with online banking systems. One thing to understand is that the risk associated is not the same across different projects.
Volatility Crypto assets have historically see very high price fluctuations. The market size is still relatively small, the market is unregulated and several new projects and use cases are being built. All of these factors contribute to the high volatility of the crypto markets.
Liquidity Since the market is unregulated, there is a liquidity risk. This is especially true for newer projects that may have a high potential but will also carry a high liquidity risk.
Regulatory Crypto markets are unregulated and the space is closely watched by all the stakeholders.The risk of unfavorable regulations against crypto by sover
Viability and Fraud There is a huge opportunity and potential for new projects but these come with an inherent risk. Also, there is a chance for fraudsters to utilize this space to defraud investors. Projects, especially new ones will need to be evaluated for long term viability and any potential fraud.
Dollar Cost Average
A very popular investment strategy among crypto investors is the dollar cost average method. This is a strategy used to hedge against price volatility. Investors typically invest in a crypto asset like bitcoin at regular intervals.