Although cryptocurrency has only been around for a short time, it’s already expanded into a wide, convoluted universe that can be difficult to understand for the uninitiated. But with Bitcoin and other cryptocurrencies seeing wild fluctuations in price, there’s an opportunity for big gains, if you can stomach the risk. A financial advisor can help you create a financial plan to help you reach your investment goals.
Digital platforms like Coinbase and Robinhood have made it significantly easier for people to invest in popular cryptocurrencies like Bitcoin. However, the process is still slightly more complex than acquiring a more traditional currency. If you’re interested in purchasing Bitcoin or another cryptocurrency, here’s what you should know.
What Is Cryptocurrency?
There are thousands of different cryptocurrencies available today, and it can be tricky to nail them all down with a single definition. Broadly speaking, though, a cryptocurrency is a digital currency that is encrypted and often decentralized. Bitcoin, the first and most recognizable cryptocurrency by far, is based on blockchain technology, a permanent, decentralized ledger system.
While Bitcoin is the most popular and most valuable cryptocurrency out there, it’s led to the creation of thousands of alternatives, or altcoins. There are all different kinds of altcoins. Some are close variations of Bitcoin, like Bitcoin Cash or Bitcoin Diamond. Others focus on privacy, like Monero and ZCash. Some are named after Greek Gods (Apollo Currency), reptiles (Komodo) or even internet memes (Dogecoin). It’s a weird, wild world.
Most people only have interest in holding on to Bitcoin or another popular currency, Ethereum. Still, there are some speculators who attempt to buy low and sell high on more obscure cryptocurrencies. The hope is to get rich quick by getting in early on the next Bitcoin.
Regardless of what currency you invest in, the common denominator is volatility. Any cryptocurrency has value only as long as people perceive it to have value. While this is technically true of any currency, it’s more pertinent with cryptocurrencies because they aren’t backed by a government or a precious metal (like gold), as most currencies are. This makes it a much riskier investment, as many investors and speculators have learned the hard way.
How to Invest in Cryptocurrency
In simple terms, you need a place to buy it and a place to put it. The most popular place to purchase cryptocurrency are cryptocurrency exchanges.
There are several different exchanges to choose from, with the most popular being Coinbase, GDAx and Bitfinex. These exchanges allow you purchase currencies like Bitcoin and Ethereum with a debit card. With most popular currencies, including Bitcoin, you can buy fractions of a coin, so you don’t need to invest thousands of dollars to get in the game.
If you’re interested in purchasing altcoins, odds are you’ll need some Bitcoin or Ethereum to make that purchase. As a general rule, you can’t buy altcoins with fiat currency (that’s how crypto enthusiasts refer to paper money, like dollars or euros). But that may change in the future.
Exchanges make money by charging fees for conducting transactions, but there are other websites you can visit to interact directly with other users who are looking to sell cryptocurrencies. LocalBitcoins is one popular example. The process will likely be more drawn out than with an exchange, and there is the added risk of dealing directly with a stranger whose currency you can’t verify. If you’re new to cryptocurrency, you’ll likely want to use an exchange.
One other option that’s becoming more prevalent is the Bitcoin ATM. There are more than 4,000 cryptocurrency ATM locations in 76 countries today. You can use them to purchase Bitcoin and send it to your wallet.
How to Store Your Cryptocurrency
When we say “send it to your wallet,” we don’t mean you put your Bitcoin into an actual wallet. To store your currency, you need a cryptocurrency wallet, which is necessary to securely store the code that makes up your cryptocurrency portfolio. You can have either a software wallet or a hardware wallet. Software wallets are necessary to enable active trading, as they make accessing your currency much easier. If you sign up for a Coinbase account, you automatically receive a Coinbase software wallet.
Hardware wallets are physical devices – they look a bit like USB drives – and they are more secure than software ones. You can use them for currency that you don’t expect needing frequent or easy access to. Think of a software wallet like a checking account, whereas the hardware wallet is more like your savings account.
Should You Invest in Cryptocurrency?
The cryptocurrency fervor is undoubtedly more subdued than it was in, say, 2017. The price of Bitcoin has fallen precipitously from its all-time peak of more than $17,000 (to about $3,500 as of early 2019). If the cryptocurrency market had to be described in just one word, it would be volatile.
So like any other investment, you should weigh the potential gains against your own risk tolerance. If you tend to be more risk-averse with your investments and you’re looking to build wealth over decades, cryptocurrencies probably aren’t for you. No one can accurately predict what will happen to the market for cryptocurrencies. Yes, that’s technically true for all investments. But other markets – say, the stock market – grow much more consistently, with significantly less volatility. Indeed, it may be misleading to even call it “investing” to buy Bitcoin. It would be more accurate to refer to it as speculation.
Still, if you’re willing to take a risk and you believe the current Bitcoin price is the low point before an upswing, then by all means give it a try. Bitcoin has now been around for 10 years — longer than many expected it would last. A future with Bitcoin as some sort of worldwide reserve currency seems increasingly unlikely day by day. But it’s reasonable to expect that it will retain some value for the foreseeable future. The same can’t be said for some of the more obscure altcoins, though.
The most important thing, as with any potential investment, is to have a clear idea of the risks you’re taking. You shouldn’t put yourself in a situation where your financial health is dependent on the success of cryptocurrencies. However, if you’re well aware of the risks and you want to give it a shot anyway, you may get lucky.
Tips for Investing Responsibly
- Investing in cryptocurrencies can be an intriguing prospect for a portion of your portfolio, but you should make sure to diversify your investments with other holdings. A good financial advisor can advise you on a good asset allocation, and most will even invest your money for you. SmartAsset’s free tool can match you with advisors in your area based on your financial needs. Get started now.
- How much you invest depends on how much risk you are willing to take, and how long your time horizon is. Our asset allocation calculator will help you align your investing strategy with your risk tolerance.
- Do you have a rough approximation of how much you can invest? SmartAsset’s investment calculator can assist you in calculating what your investments could become over time.
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