How to Invest in Crypto

On September 15, 2022, Ethereum’s long-awaited Merge was executed, marking the network’s transition from a Proof of Work (PoW) to Proof of Stake (PoS) consensus mechanism. As this content was written pre-Merge, any mentions of Ethereum using PoW are in reference to the network’s previous consensus mechanism, not its current one.

Key Points

• There are over 20,000 crypto assets in existence, each with its own uses and applications.
• Crypto has more utility than fiat currency. It is globally accessible, it can function as a store of value, an everyday currency, and can be used in software applications.
• At present, the cryptocurrency adoption rate outpaces the Internet’s adoption rate at a similar stage of its inception. At this rate, the number of people who have bought, sold, or traded crypto could easily reach 1 billion by 2023.

Your workmate has been in your ear about Solana all week. In the group chat, your best friend keeps sending you the latest news on the Ethereum merge. And at dinner, your partner just said they bought some Bitcoin.

It’s starting to feel like cryptocurrency is everywhere. And as a new investor, it can feel daunting to enter this growing space. We understand. It’s tough not knowing which decision is the best. It may be even tougher to know which cryptos are best for you, how to invest in them, and how much to invest.

But it doesn’t have to be so scary. Let’s get back to basics and demystify everything you think you know about investing in crypto. Keep reading to discover how you can get started with your first investment.

What is Cryptocurrency?

Cryptocurrencies are a type of digital currency that relies on advanced cryptography techniques to secure transactions on a distributed ledger, known as a blockchain. This record of transactions is extremely difficult to hack and prevents double-spending.

Cryptocurrencies are usually created on peer-to-peer networks with no centralised authority or direct government interference. Rather, some users work to secure and validate transactions in exchange for rewards. The method through which this happens varies. Proof of Work (PoW) and Proof of Stake (PoS) are the two most common consensus mechanisms used for validation.

What is Cryptocurrency Used For?

Cryptocurrency use cases vary with each coin. Some coins have utility outside of crypto. Others function like everyday currency. The most common use cases for cryptocurrencies are:

• A Store of Value: Similar to how precious metals hold value in the physical world, crypto can also function as a store of value in the digital world. This function usually depends on the asset and its underlying technology. The most prominent store of value is Bitcoin (BTC).
• Everyday Currency: Some coins, like Tether (USDT), attempt to keep their value stable by pegging it to an existing asset (e.g. US Dollar). By doing this, investors can trade these currencies frequently; not unlike using fiat currency for everyday transactions. These coins are referred to as stablecoins.
• Software Applications: Cryptocurrencies aid in a variety of applications outside of finance. These applications vary from coin to coin but include: data storage, smart contracts, and access to decentralised apps. One example is Ethereum (ETH).
• Meme/Joke Coins: These coins are digital assets inspired by the social currency of the internet: memes. They could be directly inspired by a meme, like Dogecoin (DOGE), or centred around a community interest. Meme coins leverage the existing popularity of a meme or attempt to become a meme on their own through the use of humour and an idea with viral potential. This fun approach to crypto can be attractive to some casual investors. Especially in a market where everything can feel overly technical.

Further reading: Stablecoins Explained

Deciding What to Invest In

At present there are over 20,000 cryptocurrencies in existence. Getting decision anxiety?

It doesn’t mean you’ll have to make 20,000 choices before you jump into the market. There are ways to help guide your decision making, in hopes that you land on a few choice options that will work for you.

What is the project solving? Is there utility?

A coin may be performing well right now, but is it worth your time and money? Take time to research the underlying project associated with a coin. What blockchain is it on? What are the use cases for the coin?

Do you see the coin having utility that could be valuable now or in the future? Understanding the underlying goals of the project could give insight into the potential value for investment.

Do the values of this project align with your values?

At the end of the day, you want to see your investments grow. Some might feel more inclined to put their money into causes or projects they believe in. Think about your values. Are you eco-conscious? Are there any social causes that you already support? Chances are there is a project out there that aligns with your principles.

Outside of your values, also consider your current investing habits. What is your risk appetite or profile? Do you err on the conservative side? Keep these things in mind when building your portfolio.

What is the asset’s overall ranking?

The crypto market could change overnight, a relatively unknown cryptocurrency could shoot up to the top 10 just from a tweet. Realistically, the top cryptocurrencies are ranked as such for a reason. Look at these projects and the value they are offering to investors. It may give you some insight into the types of projects you should invest in.

Read the project white paper

The white paper is a key document for all cryptocurrency projects. Without it, the wider the public will not have a thorough understanding of the project and its goals.

While reading the white paper, highlight any red flags such as: a lack of real-world utility, or issues with legality.

Price History

Even for a seasoned trader, it can be difficult to spot and identify historical trends. But some of the original projects (e.g. Bitcoin) have a longer history that can be leveraged in your decision making.

Liquidity

Liquidity, or the ability for an asset to be quickly converted into cash or some other asset without major price fluctuations, is something else to consider when investing. Some larger cap coins (like Bitcoin, Ethereum, or Solana) have a tendency to be more liquid than smaller cap coins.

In the case of stablecoins, their price remains relatively constant. But you may not see a considerable ROI as their value is largely dependent on external factors. They are often pegged to fiat currency (like USD) which contributes to their overall stability. They are mainly used as a highly liquid trading pair, an entry point into decentralised finance (DeFi), everyday currency, or lending and borrowing.

Volume

Volume is often used to gauge interest in a particular cryptocurrency. Higher volumes could contribute to overall higher market liquidity. When assessing this measurement for a particular coin, weigh up the volume against a select time period. Trending coins could have a high volume one day and see a drop in trading once public interest dies down.

What Do You Need to Invest in Crypto?

Before making your first investment, security measures should be implemented in places where you could be compromised. Remember: fraudsters don’t even need to touch the blockchain to get their hands on your assets. Here’s what you should have in place:

Secure Internet Connection

When completing a trade, make sure you are always using a secure, private connection. This isn’t much of an issue if you trade with a crypto brokerage though. Here at Caleb & Brown, we complete all trades on your behalf using extremely strict security protocols. 

If you decide to enter the market through an exchange, a lack of security on your network could lead to stolen data. Some investors consider using a VPN for additional security. But you should check with your brokerage or exchange first to see if this is allowed.

Proper Storage

After you have the internet connection sorted you'll need to determine how to store your investment. There are two popular options for storage: hot wallets and cold wallets.

Hot wallets are connected directly to the internet, usually through a phone or desktop application. Their popularity lies in their ease of use and ability to make trades quickly. Outside of KYC parameters, there is very little set-up time which makes these wallets very attractive to beginner investors.

Cold wallets are completely disconnected from the internet. As such, they cannot be easily hacked and are often seen as a safer option for infrequent traders. These storage devices often resemble USB flash drives. Keep in mind, though, that you can’t use any USB drive to store crypto. Cold wallets have additional built-in layers of security to prevent a data breach once you connect it to the internet for trading.

Another alternative is using a built-in wallet provided by your chosen exchange. There are some risks to this method, as you are leaving your crypto in the hands of a third party. Nevertheless, they are a breeze to set up if you’re only trading through one exchange. If you want to explore this route, make sure the exchange provides insurance for your crypto if there's ever a data breach on their end.

If you’re still having trouble determining what wallet type will work best for your trading needs, we can help you set this up during our investor onboarding process. Remember to only connect your wallet to protocols you trust and have thoroughly vetted.

Further Reading: Crypto Security Part 1: Best Practices

How to Invest in Crypto in 4 Easy Steps

The easiest way to buy crypto is through a brokerage, like Caleb & Brown.

With 24/7 access to your personal broker, you can buy crypto with fiat currency with no deposit fees. Since brokerages do not need to deal with network latency issues like exchanges, you’ll have access to a pool of interchangeable assets. This not only makes crypto acquisition easier, but it also makes other, difficult to access tokens easier to acquire. Here’s how you can buy crypto in 4 easy steps.

1. Open an Account

Register as a client for free in just 5 minutes. You can register as an individual, corporation, business, trust, self-managed super fund, self-directed IRA or 401(k).

2. Verify Your Account

Verify your account by submitting the required Know Your Customer (KYC) documentation. This usually includes a photo ID, proof of address, and other documentation depending on the type of entity you register as. For more information, see our Onboarding Your Account FAQs.

3. Deposit Cash

Once your account is verified, deposit your funds into the account provided by Caleb & Brown. A test transaction will be done first and, if successful, you can then transfer the entire amount. 

4. Buy Crypto

Once the funds hit your account, you’re ready to place an order. Simply send your order form via email to your personal broker. Your broker will execute your trade as requested, avoiding slippage where possible. Additionally, all Caleb & Brown clients have 24/7 access to their brokers, on-call to answer any crypto questions you may have.

What Crypto Brings to the Table

A case can be made for just about every crypto on the market. But some key overarching features make crypto a potentially attractive option for any newcomer. These include:

• Digital Store of Value: Certain assets such as BTC with a limited supply can function as a store of value; not unlike precious metals (e.g. gold). 
• Historical Trends: Bitcoin is a shining example of the potential of cryptocurrency. Its value has grown exponentially since its introduction over a decade ago, at a compound annual growth rate of close to 200%. This level of growth through volatility makes investors excited about what the future holds for other coins.
• Widespread Adoption: There are over 320 million crypto users worldwide as of 2022. Year-on-year adoption of crypto has grown at a tremendous rate, outpacing the Internet during its early stages of widespread use.  
• Network Effects: As more people invest in a particular cryptocurrency, its use cases become more valid. With more people entering the market, we may begin to see more applications for crypto outside of trading and finance. These include (but are not limited to): digital asset ownership, NFTs and gaming.
• Institutional Adoption: Traditional financial institutions have poured $9.3 billion into cryptocurrency investment opportunities up from $6.8 billion in 2020. On a national level, governments like El Salvador and the Central African Republic have also made Bitcoin legal tender. 

Ultimately, it’s up to the individual investor to determine if crypto is the right investment for them.

Tips For Investing In Cryptocurrency

• As with traditional investing, it can be valuable to spread your investments across multiple assets to help negate the risk of an asset dropping in value. You may want to consider diversifying your portfolio to include assets with different applications and use cases.
• Be wary of scams. If sending cash or crypto to an unknown wallet for the first time, consider sending a test amount and confirming with the recipient before sending the full amount.
• The selling of crypto is not free from taxation. Read up on your local and federal laws as they may influence your investment strategy.

Common Investment Strategies

As with traditional investing, there are many strategies you can try when investing in cryptocurrency. How you manage your assets and the frequency you trade is your decision to make. Below are a couple of the most common strategies.

• HODL: Short for ‘hold on for dear life’, this strategy involves buying crypto and holding on to it for the long term, riding the waves of volatility in expectation of high returns over a long-term horizon. The popular term is derived from a misspelling of the word “hold”.
• Dollar-Cost Averaging (DCA): This strategy involves making routine smaller investments over time, instead of one lump sum. This method is used to counteract brief moments of volatility and takes the guesswork out of timing the market.
• Short-Term: These strategies tend to be more advanced as short-term traders must be on top of all possible market trends concerning the crypto in their portfolios. An example of this is momentum trading, which involves buying and selling crypto based on recent trends, and your own idea of how that might affect the market.

Further Reading: Invest in Bitcoin With These 3 Simple Steps: A Complete Guide

3 Largest Cryptocurrencies by Market Cap

(Market Cap correct as of Sept 2, 2022)

Bitcoin ($384,559,671,364)

Bitcoin (BTC) is the original cryptocurrency. Free from direct control by governments or banks, Bitcoin uses peer-to-peer validation, Proof of Work, and automated deflation methodologies to maintain the network. Some users, known as validators, voluntarily participate in attesting to and confirming transactions on the network in exchange for rewards.

Ethereum ($193,906,606,520)

Ethereum’s open-source blockchain uses a Proof of Work methodology to verify transactions on the network. The unique implementation of smart contracts within the blockchain allows investors to access the world of decentralised apps (Dapps).  Ether (ETH) is the official name of the cryptocurrency that lives on the Ethereum network.

Tether ($67,555,769,503)

Tether (USDT) is a type of fiat-backed stablecoin. The goal of this project is to create a cryptocurrency that is pegged to the US Dollar. Tether claims to achieve this through issuing tokens equivalent to the amount of fiat currency in their reserves.

FAQs

How much should I invest?

How much crypto you buy depends largely on your financial goals and risk appetite. Investors should weigh a variety of factors before choosing a project to invest in. Ultimately, it’s up to you to determine how much you decide to invest, and what strategies you use to invest in crypto. Doing your own independent research will go a long way in helping you create and set investment goals.

Can You Buy Partial Cryptocurrencies?

Yes, in fact many investors only own fractions of a cryptocurrency. This is especially true for coins that are at a higher price point per unit (e.g. Bitcoin or Ethereum).

Where is the Safest Place to Buy Cryptocurrency?

There are many safe ways to buy crypto in 2022, such as an exchange, brokerage, or ATM. If you’re looking for a personalised service through a broker to answer your questions and concerns, consider buying through a brokerage like Caleb & Brown. We have a battle-tested security infrastructure, through the leading asset security platform Fireblocks.

How to Buy Crypto Without Fees?

At the moment, there is no way to purchase crypto without fees. While some exchange platforms may pitch zero or near-zero transaction fees, this is often an add-on to a premium paid service. 

Where can I find more information about investing?

Visit our blog where we distil crypto essentials for beginner investors, accompanied by deep dives into advanced topics suitable for seasoned investors. Also, don’t forget to subscribe to our regular Market Updates for an up to date analysis of the market.

Make Your First Crypto Investment with Caleb & Brown

Investing in crypto doesn't have to be complicated.

Caleb & Brown is the world's leading cryptocurrency brokerage for those looking to invest in digital assets.

Our personalised broker service makes crypto investing simple. A dedicated member of our broker team is always on hand to guide you along the way, giving you the confidence you need to navigate the world of crypto. Not to mention key features such as:

• No joining or signup costs
• Industry-leading storage solutions
• 24/7 customer support

If you are ready to take the next step and invest in crypto, contact your crypto broker today.

Not yet a client? Sign up for your free consultation.