How to start investing in cryptocurrency: A guide for beginners
INVESTING
Written by
James Royal, Ph.D.
Edited by
Brian Beers
The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money.
Cryptocurrencies are enormously volatile, but that volatility can create opportunities for profit if youâre looking to trade these digital assets. Cryptos such as Bitcoin and Ethereum have risen a lot since their debut â but theyâve also experienced tremendous boom-bust cycles along the way. Experienced traders have been speculating on cryptocurrencies for years, but how can you get started if youâre new to the crypto market?
Hereâs how to start investing in cryptocurrency and the significant risks you need to watch out for.
5 steps for investing in cryptocurrency
First things first, if youâre looking to invest in crypto, you need to have all your finances in order. That means having an emergency fund in place, a manageable level of debt and ideally a diversified portfolio of investments. Your crypto investments can become one more part of your portfolio, one that helps raise your total returns, hopefully.
Pay attention to these five other things as youâre starting to invest in cryptocurrencies.
1. Understand what youâre investing in
As you would for any investment, understand exactly what youâre investing in. If youâre buying stocks, itâs important to read the annual report and other SEC filings to analyze the companies thoroughly. Plan to do the same with any cryptocurrencies, since there are literally thousands of them, they all function differently and new ones are being created every day. You need to understand the investment case for each trade.
In the case of many cryptocurrencies, theyâre backed by nothing at all, neither hard assets nor cash flow of an underlying entity. Thatâs the case for Bitcoin, for example, where investors rely exclusively on someone paying more for the asset than they paid for it. In other words, unlike stock, where a company can grow its profits and drive returns for you that way, many crypto assets must rely on the market becoming more optimistic and bullish for you to profit.
Some of the most popular coins include Ethereum, Dogecoin, Cardano and Solana. So before investing, understand the potential upside and downside. If your financial investment is not backed by an asset or cash flow, it could end up being worth nothing.
2. Remember, the past is past
A mistake that many new investors make is looking at the past and extrapolating that to the future. Yes, Bitcoin used to be worth pennies, but now is worth much more. The key question, however, is âWill that growth continue into the future, even if itâs not at quite that meteoric rate?â
Investors look to the future, not to what an asset has done in the past. What will drive future returns? Traders buying a cryptocurrency today need tomorrowâs gains, not yesterdayâs.
3. Watch that volatility
The prices of cryptocurrencies are about as volatile as an asset can get. They could drop quickly in seconds on nothing more than a rumor that ends up proving baseless. That can be great for sophisticated investors who can execute trades rapidly or who have a solid grasp on the marketâs fundamentals, how the market is trending and where it could go. For new investors without these skills â or the high-powered algorithms that direct these trades â itâs a minefield.
Volatility is a game for high-powered Wall Street traders, each of whom is trying to outgun other deep-pocketed investors. A new investor can easily get crushed by the volatility.
Thatâs because volatility shakes out traders, especially beginners, who get scared. Meanwhile, other traders may step in and buy on the cheap. In short, volatility can help sophisticated traders âbuy low and sell highâ while inexperienced investors âbuy high and sell low.â
4. Manage your risk
If youâre trading any asset on a short-term basis, you need to manage your risk, and that can be especially true with volatile assets such as cryptocurrency. So as a newer trader, youâll need to understand how best to manage risk and develop a process that helps you mitigate losses. And that process can vary from individual to individual:
Risk management for a long-term investor might simply be never selling, regardless of the price. The long-term mentality allows the investor to stick with the position.
Risk management for a short-term trader, however, might be setting strict rules on when to sell, such as when an investment has fallen 10 percent. The trader then strictly follows the rule so that a relatively small decline doesnât become a crushing loss later.
Newer traders should consider setting aside a certain amount of trading money and then using only a portion of it, at least at first. If a position moves against them, theyâll still have money in reserve to trade with later. The ultimate point is that you canât trade if you donât have any money. So keeping some cash in reserve means youâll always have a bankroll to fund your trading.
Itâs important to manage risk, but that will come at an emotional cost. Selling a losing position hurts, but doing so can help you avoid worse losses later.
5. Donât invest more than you can afford to lose
Finally, itâs important to avoid putting money that you need into speculative assets. If you canât afford to lose it â all of it â you canât afford to put it into risky assets such as cryptocurrency, or other speculative assets, for that matter.
Whether itâs a down payment for a house or an important upcoming purchase, money that you need in the next few years should be kept in safe accounts so that itâs there when you need it. And if youâre looking for an absolutely sure return, your best option is to pay off high-interest debt. Youâre guaranteed to earn (or save) whatever interest rate youâre paying on the debt. You canât lose there.
Finally, donât overlook the security of any exchange or broker youâre using. You may own the assets legally, but someone still has to secure them, and their security needs to be tight. If they donât think their cryptocurrency is properly secured, some traders choose to invest in a crypto wallet to hold their coins offline so theyâre inaccessible to hackers or others.
Other ways to invest in cryptocurrency
While investing directly in cryptocurrency is popular, traders have other ways to get into the crypto game, some more directly than others. These include:
Crypto futures: Futures are another way to wager on the price swings in Bitcoin, and futures allow you to use the power of leverage to generate massive returns (or losses). Futures are a fast-moving market and exacerbate the already volatile moves in crypto.
Bitcoin ETFs: In January 2024, the Securities and Exchange Commission approved several exchange-traded funds that invest directly in Bitcoin. Spot Bitcoin ETFs are available through most online brokers who offer traditional securities like stocks and bonds. So these ETFs can be an easy way to buy crypto through a fund-like product.
Crypto exchange or broker stocks: Buying stock in a company thatâs poised to profit on the rise of cryptocurrency regardless of the winner could be an interesting option, too. And thatâs the potential in an exchange such as Coinbase or a broker such as Robinhood, which derives a huge chunk of its revenues from crypto trading.
Blockchain ETFs: A blockchain ETF allows you to invest in the companies that may profit from the emergence of blockchain technology. The top blockchain ETFs give you exposure to some of the key publicly traded companies in the space. But itâs important to note that these companies often do much more than crypto-related business, meaning your exposure to cryptocurrency is diluted, reducing your potential upside and downside.
Each of these methods varies in its riskiness and exposure to cryptocurrency, so youâll want to understand exactly what youâre buying and whether it fits your needs.
Cryptocurrency investing FAQs
How much money do I need to start investing in cryptocurrency?
In theory it takes only a few dollars to invest in cryptocurrency. Most crypto exchanges, for example, have a minimum trade that might be $5 or $10. Other crypto trading apps might have a minimum thatâs even lower.
However, itâs important to understand that some trading platforms will take a huge chunk of your investment as a fee if youâre trading small amounts of cryptocurrency. So itâs important to look for a broker or exchange that minimizes your fees. In fact, many so-called âfreeâ brokers embed fees â called spread mark-ups â in the price you pay for your cryptocurrency.
How does a blockchain work?
Cryptocurrency is based on blockchain technology. Blockchain is a kind of database that records and timestamps every entry into it. The best way to think of a blockchain is like a running receipt of transactions. When a blockchain database powers cryptocurrency, it records and verifies transactions in the currency, verifying the currencyâs movements and who owns it.
Many crypto blockchain databases are run with decentralized computer networks. That is, many redundant computers operate the database, checking and rechecking the transactions to ensure that theyâre accurate. If thereâs a discrepancy, the networked computers have to resolve it.
How do you mine cryptocurrency?
Some cryptocurrencies reward those who verify the transactions on the blockchain database in a process called mining. For example, miners involved with Bitcoin solve very complex mathematical problems as part of the verification process. If theyâre successful, miners receive a predetermined award of Bitcoins.
To mine Bitcoins, miners need powerful processing units that consume huge amounts of energy. Many miners operate gigantic  rooms full of such mining rigs in order to extract these rewards. As of March 2024, running the Bitcoin system burned as much energy per year as the country of Malaysia.
How can I invest in Bitcoin?
If youâre looking to invest in Bitcoin, you have a variety of ways to do so, and you can work with a number of companies, including:
Crypto exchanges: Exchanges have some of the widest selection of cryptocurrencies, and they tend to be the most competitive on price. Top players include Coinbase, Kraken and Binance, but there are literally dozens of others.
Traditional brokers: Many traditional brokers also allow you to trade Bitcoin in addition to stocks and other financial assets, though they have a relatively limited selection of other cryptocurrencies. Some of the top online brokers for beginners let users trade crypto, including Interactive Brokers and Robinhood.
Financial apps: Many financial apps now allow you to trade Bitcoin and a few other cryptos. Top players here include Robinhood and Webull as well as payment apps such as PayPal, Venmo and Cash App.
If youâre looking to buy Bitcoin, pay particular attention to the fees that youâre paying. Here are other key things to watch out for as youâre buying Bitcoin.
What are altcoins?
An altcoin is an alternative to Bitcoin. Many years ago, traders would use the term pejoratively. Since Bitcoin was the largest and most popular cryptocurrency, everything else was defined in relation to it. So, whatever was not Bitcoin was lumped into a catch-all category called altcoins.
While Bitcoin is still the largest cryptocurrency by market capitalization by far, itâs no longer the only game in town. Other altcoins such as Ethereum and Solana have grown in popularity, making the term altcoin somewhat outmoded. Now with a reported 15,000 or more cryptocurrencies in existence, it makes less sense than ever to define the industry as âBitcoin and then everything else.â
Bottom line
Cryptocurrency is a highly speculative area of the market, and many smart investors have decided to put their money elsewhere. For beginners who want to get started trading crypto, however, the best advice is to start small and only use money that you can afford to lose.