Investing in Cryptocurrency

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06 Apr, 2022

7 min read

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This article helps explain the intricacies associated with investing in cryptocurrency.

Defining Cryptocurrency

Cryptocurrency can be defined as digital money. Some forms of this currency make use of blockchain technology which serves as a secure means of establishing a distribution consensus among parties that may be untrustworthy. The blockchains utilized for cryptocurrency are akin to old fashioned ledgers used by bookkeepers, however, what makes them stand out is the fact that these ledgers are electronic and anyone who has access to such a ledger can also serve as its bookkeeper.

Investors across the world have invested and continue to invest in cryptocurrency among which Bitcoin is the most well-known. That being said, there exist thousands of varieties of digital currency which have begun to gain credence as cryptocurrency currently serves one of the most exciting asset classes that investors can direct their money towards.

Examining the Mechanisms of Cryptocurrency Investing

The idea of investing in cryptocurrency may prompt you to think of the purchase of one or more crypto coins. While buying cryptocurrency may serve as the most popular method via which you can add cryptocurrency exposure to an investment portfolio, there exist a few alternative ways in which it is possible to invest in cryptocurrency.

Cryptocurrency can be invested in the following ways.

Purchasing Cryptocurrency Directly

Investors can opt to buy and store cryptocurrencies outright. Options range from the more well-established digital currencies that include Bitcoin and Ethereum to those that aren’t as well known and are newly released via an initial coin offering.

Investing in Cryptocurrency Companies

As an investor you also have the option to direct your money towards companies that have a partial or complete interest in cryptocurrency. These companies include but aren’t limited to 

  • Companies that mine cryptocurrency
  • Those engaged in making mining hardware
  • Companies that help support cryptocurrency (think PayPal Holdings PYPL, Inc. or Robinhood Markets, Inc. HOOD)
  • Companies that feature balance sheets that boast of large sums of cryptocurrency

Investing in Cryptocurrency-focused Funds

If individual cryptocurrency companies don’t appeal to you, you can invest in a fund that is cryptocurrency oriented instead. Investors have the option to choose from cryptocurrency investment trusts as well as a number of exchange-traded funds like futures funds and index funds. Certain crypto-oriented funds directly invest in cryptocurrency while others channel investments towards derivative securities like futures contracts or crypto-centered companies.

Become a Crypto Validator or Miner

One of the most straightforward methods via which cryptocurrency can be invested in is by acting as a validator within a cryptocurrency network or by mining the cryptocurrency. Miners and validators of cryptocurrency are given rewards in the form of cryptocurrency which may either be held as investments or may be exchanged in lieu of alternative currency.

Understanding the Workings of Cryptocurrency Investments

Those wishing to invest in cryptocurrency directly can utilize a cryptocurrency exchange. The method of buying cryptocurrency via such an exchange has been described below.

  1. The first step involves selecting a cryptocurrency exchange that has a good reputation, is well-known and features a broad range of currencies.
  2. Next, you must create an account on such an exchange which means that you must submit your personal information and verify your identity in order to register.
  3. Prior to buying any cryptocurrency, you must fund your exchange account with the aid of another currency such as Indian Rupees. 
  4. After this, you can select to invest in one or several cryptocurrencies. Which crypto to buy depends upon the way they have each performed. Always conduct adequate research prior to investing in a given cryptocurrency.
  5. Follow the steps laid out by the cryptocurrency exchange in order to fill out and complete a buy order for the cryptocurrency (/ies) that appeals to you.
  6. Once you have purchased your cryptocurrency, you will be able to access it via a digital wallet. This crypto wallet will either be available to access via the cryptocurrency exchange you utilized or via an independent wallet provider.
  7. One of the best strategies that investors can follow is to periodically review their portfolios and rebalance holdings if necessary. This may involve scaling back or investing further in cryptocurrency keeping in mind investment goals as well as additional financial needs.

Things to Bear in Mind Prior to Investing in Cryptocurrency

Cryptocurrency investments are known to be tethered to a number of risks. Prices linked to cryptocurrencies including those that are well established are far more volatile in comparison to the prices linked to other assets such as stocks. Regulatory changes made in the future can impact the prices of cryptocurrencies and if they are ever rendered illegal, they may ultimately end up worthless.

However, several investors continue to be attracted to cryptocurrencies owing to the appeal it has. If you do decide to invest in such digital currency, it is of paramount importance that you conduct adequate research prior to buying any digital currency. The transaction fees tethered to crypto purchases must also be considered as they can differ greatly among currencies.

The cryptocurrency arena is evolving at a rapid pace owing to which it is important to understand how new developments may impact cryptocurrency holdings. Investors in these digital assets must understand the tax consequences associated with holding them, especially if they happen to buy or sell cryptocurrency investments.

Finally, since cryptocurrency is one of the riskiest assets, one must only invest what they can afford to lose and no more than that.

 

Disclaimer: Angel One Limited does not endorse investment and trade in crypto currencies. This article is only for education and information purposes. Discuss with your investment advisor before making such risky calls.

 

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.

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