How to invest in cryptocurrencies: a practical guide

With the growing adoption of cryptocurrencies, many investors are looking to diversify their portfolios and take advantage of the high-risk, high-reward potential that the cryptocurrency market offers. Cryptocurrencies can be held as medium- to long-term investments or actively traded over shorter periods.

Of course, buying cryptocurrencies may seem challenging, especially for beginners. However, by following a few steps and understanding the differences between brokers and exchanges, you can go through this process more smoothly.

Below, we present a practical guide to including cryptocurrencies in your portfolio and tips for securely storing your investments.

What are cryptocurrencies?

Cryptocurrencies are digital currencies that use cryptography for security and are based on blockchain technology. A blockchain is a distributed ledger maintained by a network of computers and is not controlled by any central authority. The security of the network is ensured through decentralization and cryptography.

Buying cryptocurrencies directly

The most common way to acquire cryptocurrencies is through dedicated brokers and exchanges. With growing adoption, these platforms have become more secure and efficient, allowing for easy purchases.

Order types when buying cryptocurrencies

When buying, you need to choose between a market order or a limit order. A market order buys the cryptocurrency at the current price, which is ideal for beginners. On the other hand, a limit order lets you set a specific price, making it a more suitable option for experienced investors who wish to wait for a price drop.

Choosing a cryptocurrency broker or exchange

A cryptocurrency exchange is a platform that connects buyers and sellers for trading cryptocurrencies. Exchanges tend to offer low fees but often have complex interfaces, which can be intimidating for beginners.

On the other hand, a cryptocurrency broker simplifies the process by providing an easy-to-use interface that interacts with exchanges on your behalf, generally charging a fee for this convenience.

Considerations when choosing

Before signing up with an exchange or broker, consider:

• Security practices: What security measures are employed? Are cryptocurrencies stored in cold wallets?
• Range of coins: Does the platform offer a wide range of cryptocurrencies for trading?
• Customer aupport: Is there accessible and responsive customer support?
• Transaction fees: What are the trading and transaction fees?

It’s essential to conduct thorough research to ensure that the chosen platform is reputable.

Create and verify your account

Once you’ve chosen a platform, you’ll need to sign up to create an account. This process usually involves identity verification to prevent fraud and meet regulatory requirements. Verification may require submitting documents like an ID card, driver’s license, or passport, and sometimes a selfie. Without completing this process, you won’t be able to buy or sell cryptocurrencies.

Deposit money for investment

With the account verified, you’ll need to deposit funds. This can be done by linking your bank account or using a credit or debit card. However, caution is advised when using credit cards, as this option may incur high fees. Credit card transactions are often treated as cash advances, which involve higher charges.

Place your cryptocurrency order

Once funds are in the account, you’re ready to place your first order. A wide variety of cryptocurrencies are available, and many exchanges and brokers allow you to buy fractions of cryptocurrencies, enabling you to acquire parts of high-value assets.

Alternative options for buying cryptocurrencies

If investing directly in cryptocurrencies doesn’t seem ideal, there are alternative ways to gain exposure:

a. Cryptocurrency exchange-traded funds (ETFs)

For a more indirect approach, cryptocurrency funds offer access to the market without the need to store cryptocurrencies. ETFs and index funds are popular options.

A cryptocurrency ETF tracks the price of one or more cryptocurrencies and can be traded on traditional exchanges, allowing for diversification without directly holding digital assets.

In other words, ETFs allow you to gain exposure to multiple cryptocurrencies simultaneously, offering diversification in a single purchase.

b. Shares of companies related to cryptocurrencies

Investing in companies that use or hold cryptocurrencies can be an indirect way to gain market exposure.

Cryptocurrency mining

Mining is the process of verifying and adding new transactions to the blockchain, where miners compete to solve complex algorithms, and those who succeed add new blocks and receive cryptocurrency rewards.

Investing in mining companies can be an alternative to direct mining, offering a way to engage in the sector without the technical and financial challenges of setting up and maintaining mining equipment.

Choosing cryptocurrencies to invest in

Investing in cryptocurrencies requires careful and studied research. Here are some factors to consider:

• Grasp the elements that contribute to a token’s value and its associated protocol.
• Evaluate the historical performance of the cryptocurrency to determine a fair price.
• Keep an eye on launches or changes that could impact the cryptocurrency’s value.
• Be aware that the cryptocurrency market is highly volatile, and prices can fluctuate dramatically.

If you need more detailed insights, feel free to ask!

Storing cryptocurrencies safely

After purchasing cryptocurrencies, it is crucial to consider how you will store them. While many brokers and exchanges implement robust security measures, risks from hackers and security breaches still exist.

Here are some storage options:

• Hot wallets: These wallets are stored online, making them convenient for transactions but presenting higher theft risks since they are connected to the internet.
• Cold wallets: These are physical devices not connected to the internet, providing greater security. However, you must be cautious, as losing the access code can lead to the permanent loss of your cryptocurrencies.

After acquiring cryptocurrencies, it’s essential to store them securely. Keeping assets in an exchange may be convenient, but it exposes you to a greater risk of loss.

Risks of investing in cryptocurrencies

The cryptocurrency markets are notoriously volatile. Price swings in the double digits are common, and prolonged periods of decline can occur. Therefore, it is advisable to plan investments over longer time horizons and consider diversification.

Diversification helps minimize risk by spreading investments across various cryptocurrencies, preventing your portfolio from becoming overly concentrated in a single asset. Investments in cryptocurrencies should be part of a broader asset portfolio.

Final considerations

Investing in cryptocurrencies can offer significant opportunities; however, it also involves considerable risks due to its inherently volatile nature. It is essential to consider your investment goals and financial situation before making any decisions. Additionally, cryptocurrency regulation in Australia is still evolving, and the invested capital may be at risk.

Therefore, as you explore ways to include cryptocurrencies in your portfolio, conducting thorough research and ensuring the security of your cryptocurrencies is crucial. With the right knowledge and a cautious approach, you can harness the potential of this growing market.