Cryptocurrency is no longer a novelty.
From our social media feeds to Super Bowl commercials, digital currency is increasingly mainstream.
But some people remain hesitant about cryptocurrency because of its inherently risky and volatile nature.
Most experts see online brokers as a good jumping-off point for crypto beginners. But an exchange offers more flexibility, selection and control over how you manage and store your digital money.
What Is Cryptocurrency?
Cryptocurrency is decentralized digital money created using computer networking software.
Most cryptocurrencies are based on blockchain technology.
Probably not as good as youd like.
It always seems like an uphill battle to build (and keep) a decent amount in savings.
But what if your car breaks down, or you have a sudden medical bill?
you’re free to transfer it back and forth to other users.
Or you might buy and trade it like an investment.
Bitcoin is the oldest, most popular and most valuable cryptocurrency.
It was created in 2008 and its share of the total cryptocurrency market was roughly 43% in 2021.
Still, the crypto universe is immense and complex.
Transactions are grouped together and recorded as blocks that are then linked together on a chain of cryptocurrency transactions.
Some cryptocurrencies are created through a process known as mining.
There are two primary ways to mine crypto: proof of stake or proof of work.
Both are validation techniques used to verify transactions before theyre added to a blockchain.
How Do You Start Investing in Crypto?
Buying crypto has never been easier.
you might purchase it on your smartphone or computer.
Youll need to set up an account with an online exchange or crypto broker to get started.
Decide Where to Buy Your Crypto
There are two primary ways to buy cryptocurrency.
A crypto exchange is an online platform you’re free to use to buy and sell cryptocurrency.
The vast majority of crypto trading takes place on centralized exchanges.
While cryptocurrency itself is largely unregulated, centralized exchangesareregulated.
Most of these companies require users to follow Know Your Customer rules to combat money laundering and fraud.
Exchanges have also tightened security protocols in recent years.
Most exchanges charge transaction fees that range from 0.5% to 4.5%.
The fees can differ depending on whether youre the seller or the buyer.
Cryptocurrency exchanges arent always transparent about their fee structures either.
They can fluctuate when demand is high or for no apparent reason at all.
They also offer more control over your assets and a wide selection of cryptocurrencies.
Online brokers make it extremely easy to invest in cryptocurrency.
They offer simple interfaces that interact with exchanges for you.
Some of the most popular crypto brokers include:
Some brokers like PayPal offer other financial services.
And some, such as Robinhood and SoFi, give users access to the stock market.
While crypto brokers are incredibly convenient, but they arent well suited for long-term investing.
Most brokers (including PayPal and Venmo) dont allow you to move your digital currency off the platform.
Instead, you must sell your coins and transfer the balance to an external account.
In this way, you dont really own cryptocurrency purchased on these platforms.
Thats not a huge deal if youre just starting out.
But its something to keep in mind if you continue to invest in cryptocurrency.
Brokers also offer fewer types of crypto coins than exchanges do.
For example, Venmo offers just four and Cash App offers only Bitcoin.
Some online brokers charge higher fees than exchanges.
Or, they may not execute your trade at the best possible market price.
Exchanges generally require strict identity verification processes.
You may not be able to sell or buy cryptocurrency until you complete the verification process.
you’ve got the option to fund your account via debit or bank transfers.
Its a lot like a traditional brokerage account that way.
Pick Your Crypto
There are literally thousands of cryptocurrencies.
Youll have plenty to choose from.
In fact, the sheer number of options can make buying cryptocurrency intimidating for newcomers.
Most cryptocurrencies arent worth anything and many sputter out shortly after creation.
Most major exchanges offer less than 100 different cryptocurrencies.
(Coinbase offers about 50, Gemini offers about 70 and Kraken has about 110).
These exchanges focus on the most popular and viable coins with respectable market caps.
Youll likely need to register on multiple exchanges to access such coins.
Buy Crypto
Orders on an exchange work the same as orders in the stock market.
All cryptocurrency exchanges let you buy fractions of crypto.
Once your trade is complete, the exchange holds your cryptocurrency for you in a custodial wallet.
This gives you more financial freedom and direct ownership over your coins without relying on a third party.
A crypto wallet consists of two main pairs: private keys and public keys.
A public key serves as the address used to send crypto to the wallet.
Think of it like your public email address.
Meanwhile, a private key is like the key to a safe deposit box.
Anyone who has access to the private key of a wallet can take control of the digital assets inside.
Creating and setting up a wallet requires time and research.
Cryptocurrency Investing Guidelines
Investing in cryptocurrency isnt like investing in other traditional assets.
However, many established investing principles still hold true.
Here are a few guidelines on how to invest in cryptocurrency if youre just starting out.
Frequently Asked Questions
Yes.
Coinbase, for example, doesnt provide this information to users.
If you hold the crypto for a year or more, youll owe long-term capital gains tax.
If youre executing multiple crypto trades on a regular basis, your tax situation can get complicated fast.
If you sell at a loss, those losses can help offset your capital gains tax.
You wont owe taxes until after you sell an asset.
Decentralized exchanges, or DEX, are a less-common way to purchase cryptocurrency.These exchanges offer some additional security.
(Because theyre decentralized, there is no single target for a cyberattack.
For example, decentralized exchanges dont always let you deposit U.S. dollars and exchange them for crypto.
verify the exchange supports both the wallet and the asset you want to sell.Move your cryptocurrency onto the exchange.
Sell it for U.S. dollars.
Transfer the cash to your bank account.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.
When you log into your bank account, how do your savings look?
Probably not as good as youd like.
It always seems like an uphill battle to build (and keep) a decent amount in savings.
But what if your car breaks down, or you have a sudden medical bill?
