How to Invest in Cryptocurrency

Wondering how to dip your toe into digital currency as a beginner? Follow these six basic steps to get started.

Written by Robin Hartill CFP® / May 17, 2022

Quick Bites

  • Cryptocurrency may seem like all the rage, but it’s still a speculative investment with limited real-world uses.
  • Bitcoin and Ether are two of the biggest cryptocurrencies you can invest in.
  • If you invest in crypto, brace yourself—these investments can experience wild ups and downs.
  • You don’t need a lot of money to get started with crypto, because you can buy a fraction of a coin or token.

You’ve heard about Bitcoin and how cryptocurrencies seem to be the latest investing craze. And no doubt you’ve heard the latest distressing headlines, too. As of May 2022, two of the most popular cryptocurrencies—Bitcoin and Ether—are down 36.05% and 44.21% year to date, respectively. For Bitcoin, that’s a loss of $17,206 per coin.

But there have been some major ups, too. In late November 2021, Bitcoin and Ether were up about 87% and 300% year to date, respectively.[1,2] Smaller, riskier cryptos yielded even better returns. Had you invested $1 in dog-themed cryptocurrency Shiba Inu in January 2021, your investment would have been worth about $475,000 as of November.[3]

Cryptocurrency isn’t for everyone. The crypto market is very volatile and has seen its fair share of crashes. Recently, the cryptocurrency Luna and its attached stablecoin, Terra, both collapsed, erasing billions of dollars of value in mere hours. And crypto’s real-world uses remain limited, making it a speculative investment.

But if you want to learn how to invest in cryptocurrency, you’ve come to the right place. We’ll walk you through the basics of cryptocurrency in six steps and help you determine whether this investment is right for you.

You’ll learn about how cryptocurrency works and how to choose the best cryptocurrency for beginners. At the end of our crypto investing challenge, you’ll be armed with the information you need to make your first trade.

Inside this article

  1. What is cryptocurrency?
  2. What is a stablecoin?
  3. 1. Set your budget
  4. 2. Learn the types of crypto
  5. 3. Attend a crypto meetup
  6. 4. Try a crypto simulator
  7. 5. Choose a platform
  8. Purchase crypto

What is cryptocurrency?

Cryptocurrency is a virtual form of money, but unlike the dollar or the Euro, it isn’t regulated by a central bank. Instead, it uses a technology called blockchain to verify and record transactions.

Bitcoin is the oldest and most widely circulated cryptocurrency. It launched in January 2009 by an anonymous inventor or inventors using the pseudonym Satoshi Nakamoto.[4] In a white paper, Bitcoin’s creator(s) spelled out a vision for a virtual payment system “based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”

Any type of cryptocurrency that’s not Bitcoin is known as an altcoin. As of May 17, 2022, cryptoasset website CoinMarketCap listed 10,104 types of publicly traded cryptocurrencies.[5] Their total global market capitalization, i.e., the value of all the cryptocurrencies in circulation, is $1.29 trillion.[6]

The top 10 cryptocurrencies by market capitalization are as follows:[7]

CryptocurrencyMarket cap
Bitcoin (BTC)$573.5 billion
Ethereum (ETH)$248.7 billion
Tether (USDT)$75.6 billion
USD Coin (USDC)$52 billion
Binance Coin (BNB)$49.4 billion
XRP (XRP)$20.6 billion
Cardano (ADA)$19.3 billion
Solana (SOL)$18.5 billion
Binance USD (BUSD)$18.2 billion
Dogecoin (DOGE)$11.8 billion

It’s important to note that cryptocurrency prices, and hence, market capitalizations are notoriously volatile and not necessarily tied to current economic conditions. For example, in mid-June 2021, the price of Dogecoin plummeted by about 74% from its peak in early May 2021.[8]

What is a stablecoin?

Stablecoins were intended to be digital assets that maintain a stable value compared to other cryptocurrencies. While they use the same blockchain technology as cryptocurrencies, stablecoins are tethered to a real reference, such as the value of the U.S. dollar, and often have reserve assets on hand to stabilize their value. Stablecoin proponents hope that these ties to real value can reduce risk and make cryptocurrency more palatable to the average investor.

Sadly, May 2022 brought a cautionary tale to hopeful stablecoin investors. The stablecoin Terra and its associated cryptocurrency Luna both crashed to virtual worthlessness in a single day, demolishing millions of dollars in value and shaking the crypto world.

This unfortunate event shows that while the cryptocurrency world continues to grow in popularity and acceptance, there are unique risks that plague the sector—and even stablecoins aren’t all that stable.

Now that you know how crypto works, here’s a step-by-step guide to investing in cryptocurrency for beginners.

Step 1: Set your budget for investing in crypto

The first thing you need to do is decide whether cryptocurrency makes sense for you as an investor. If the answer is yes, you need to make a budget for your investment.

To determine whether cryptocurrency is a good investment for you, consider your risk tolerance. Basically, that means: How much risk can you stomach? Also consider your risk capacity, which is financial speak for how much risk you can afford. Crypto investing requires both an extremely high risk tolerance and high risk capacity.

Many investment websites have questionnaires that can help you gauge your risk tolerance, but here’s a quick way to assess yours: When the stock market crashed in March 2020, did you feel panicked? Or were you eager to invest even more? If you chose the latter, you probably have a high risk tolerance.

Your risk capacity relates to your financial situation. If you’re behind on emergency or retirement savings, you’re retiring soon or you have a big expense coming up, you may lack the risk capacity to invest in crypto, even if your risk tolerance is high.

If you’ve decided that investing in cryptocurrency is worth the risk, you’ll need to set a budget.

Generally, it’s recommended that you invest at least 15% of your pre-tax income for retirement. But any money you invest in crypto should be outside of that 15%. That’s because it’s a highly volatile asset with a limited history. It’s also essential that you have at least a three- to six-month emergency fund in place before you invest.

Whatever amount you decide on, start small. Only invest money in crypto that you can afford to lose.

Tip: The Federal Trade Commission (FTC) tracks crypto scams and you can report fraud via their website.[9] Warning signs of an investment scam include promises of quick profits or guaranteed returns. If an investment requires you to pay via cryptocurrency, gift card or wire transfer, it’s also a major red flag. Usually, there’s no way to get your money back if you fall victim to a crypto scam.

Step 2: Learn about the different types of crypto

With thousands of cryptocurrencies available, choosing your first investment may feel overwhelming. The easiest way for beginners to get started is to invest in Bitcoin or Ether. Unlike many smaller cryptos, they have some real-world utility and there’s plenty of easily accessible information about them.

Regardless of which cryptocurrency interests you, here are a few things you’ll want to ask:

  • What makes the crypto unique? You need to understand what makes a particular crypto different from all the others out there before you invest. For example, many investors think Solana is a top cryptocurrency to invest in because its blockchain offers incredibly speedy processing.[10] Polkadot has generated excitement because its network was designed to maximize scalability.[11]

  • Are people actually using it? Before you invest, make sure you understand whether the crypto has some actual utility—or if the price runup is based only on hype. Keep in mind that even Bitcoin and Ether have limited uses as actual currencies as long as their prices remain volatile. Investing in a small cryptocurrency whose price is skyrocketing may be tempting when you hear about people making huge profits overnight. But these prices often come crashing down just as quickly.

  • What makes the price move? It’s not always easy to discern why cryptocurrency prices are up or down on a given day. But if prices spike wildly solely because of a celebrity tweet or endorsement, consider it a big red flag.

One thing not to focus on too much is the price of a single coin or token. For major cryptos, many platforms allow something called fractional investing, which lets you determine how much you want to invest, even if you can’t afford the price of a full coin or share. So even if one Bitcoin costs $60,000, you could invest $6 and get 1/10,000 of a Bitcoin.

Likewise, don’t be swayed into investing in a crypto just because it costs $0.00001. No matter how low the price, it’s not a bargain if it becomes worthless.

Tip: If you’re bullish on the future of cryptocurrency but don’t want to pick just one, consider an index fund that invests in many cryptocurrencies. For example, the Bitwise 10 Crypto Index Fund invests across an index of the 10 largest cryptos, accounting for about 70% of the overall cryptocurrency market.[12]

Step 3: Attend a crypto meetup

You probably still have lots of questions about how to invest in Bitcoin or altcoins. That’s why your task for a week or so is to learn from experienced investors. You can use an app like Meetup to find other people near you who are interested in Bitcoin, blockchain or cryptocurrency in general. Some chapters also have virtual meetups.

This is a great opportunity to gain insight about how crypto works from actual humans instead of Google. Just be careful not to put too much stock in one person’s experience or opinions.

Step 4: Practice using a crypto trading simulator

Ready to make your first crypto purchase? Not so fast.

First, try your hand at investing in digital currencies without putting real money on the line. You can do so by downloading a free crypto trading simulator app, like Bitcoin Flip or Crypto Parrot. They let you invest imaginary money in real time.

Some apps let you compete against other traders, often for rewards. Many also feature an online community, which is another good resource for connecting with experienced crypto investors.

It’s important to note, though, that past performance doesn’t guarantee future results. You could make gobs of imaginary money using a simulator if crypto prices surge one week. But you can easily lose real money if you invest the next week and prices plunge.

Step 5: Choose a trading platform and crypto wallet

You’ve made it to step five. That means you’re getting close to making your first crypto investment. Now, it’s time to pick a platform so you can actually start investing.

The easiest way to get started is to use a crypto exchange. Some of the major options include Coinbase, Binance, Gemini and Kraken. Some investment apps, like Robinhood, SoFi and Webull, also offer access to major cryptocurrencies, though most mainstream brokerages don’t yet allow for crypto trading.

Before you open an account, look closely at the fees. Many platforms charge trading fees, both when you trade regular currency for crypto and when you trade between cryptos, plus deposit and withdrawal fees.[13]

You’ll also need a crypto wallet, which is where you’ll store your cryptocurrency. The simplest option is to use a custodial wallet, which is the default for many exchanges and apps. However, some investors worry that this option poses security concerns and doesn’t allow for full control of your holdings.

Other options include a non-custodial wallet, like MetaMask or Mycelium, to store your crypto via an app or software. As with a custodial wallet, a non-custodial wallet could be vulnerable to hackers. Also, you’re responsible for storing your private key, which is essentially your passcode. Lose it, and you could lose access to your crypto.

The most secure option for storage is a hardware wallet, which lets you store your crypto offline on a physical device. However, this option can be complicated and inconvenient. Also, if your device becomes corrupted and can’t be recovered, your crypto is gone.

Step 6: Make your first crypto purchase

You’ve made it to the final step. You know the basics of crypto and the risks and rewards of investing. Now it’s time to open your account and deposit money so you can make your first crypto purchase.

With any investment, your odds of success are better if you’re not too hung up on short-term price swings—which are very much to be expected with cryptos. So make sure you believe the crypto you choose is a solid investment that you’re willing to hold even if others panic. Likewise, don’t let FOMO (fear of missing out) drive you to go overboard with your crypto investment.

Investing in crypto certainly isn’t for everyone. But if you’re OK with the risks, you do your homework and you avoid making decisions based on the latest fad, crypto could be a smart addition to your investment portfolio.

Article Sources
  1. Google Finance. “Bitcoin to United States Dollar.”
  2. Google Finance. “Ether to United States Dollar.”
  3. CoinMarketCap. “Shiba Inu.”
  4. CoinDesk. “Bitcoin.”
  5. CoinMarketCap. “​Today's Cryptocurrency Prices by Market Cap.
  6. CoinMarketCap. ​​Today's Cryptocurrency Prices by Market Cap.
  7. CoinMarketCap. ​​Today's Cryptocurrency Prices by Market Cap.
  8. CoinMarketCap. Dogecoin.
  9. Federal Trade Commission. “Spotting cryptocurrency investment scams.”
  10. CoinMarketCap. Solana.
  11. CoinMarketCap. Polkadot.
  12. Bitwise Investments. BITW | Bitwise 10 Crypto Index Fund.
  13. CoinTracker. “2021 Crypto-Exchange Fee Comparison.”

About the Author

Robin Hartill

Robin Hartill CFP®

Robin Hartill is a CERTIFIED FINANCIAL PLANNER™ and a personal finance writer and editor. Her work has been featured on The Motley Fool, The Penny Hoarder, the Tampa Bay Times, USA Today, Yahoo! Finance and more.

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