Introduction
You’ve decided to venture into cryptocurrency investing—maybe as a hedge against geopolitical uncertainty, or out of sheer intrigue about this revolutionary financial space. But what steps should you take? Traditional financial advisors or banks may not yet have the expertise to guide you unless you’re banking with a few cutting-edge institutions, like progressive Swiss private banks that currently offer cryptocurrency trading.
This guide dives into everything you need to know about cryptocurrency investing, from the differences between passive and active approaches to practical insights on buying, selling, storing, and monitoring your holdings. We will also discuss tax considerations and regulations in this space.
*A quick note: this article will not delve into whether you *should* invest in cryptocurrencies or how much of your portfolio should be allocated to crypto. These decisions depend on factors like your age, wealth, risk tolerance, and exposure to other asset classes. You’ll need to dig deep into research, whitepapers, and resources from reliable platforms like Reddit, Medium, and GitHub accounts of various cryptocurrencies. The crypto market is vast, with over 1,380 cryptocurrencies as of writing—more than just Bitcoin (BTC). Understanding your goals and underlying fundamentals in this investment space is crucial.*
Passive vs. Active Cryptocurrency Investing
Cryptocurrencies have emerged as a new asset class, and their investment methodologies have begun to parallel those of traditional assets like equities. Investors can choose between two primary approaches:
- Passive Investing: A long-term, buy-and-hold approach resembling equity index investing.
- Active Investing: A hands-on strategy, requiring frequent buying, selling, and monitoring of investments to capitalize on short-term market movements.
Much like the ongoing debate in stock markets between passive index-fund investing and active portfolio management, both approaches have their pros and cons in the crypto sphere.
Active Cryptocurrency Investing
Buying and Selling Cryptocurrencies
1. Buying via Exchanges
Cryptocurrency exchanges remain the dominant platform for buying and trading digital assets. These online platforms facilitate purchases of cryptocurrencies either with fiat currency (e.g., USD or EUR) or by trading between cryptocurrencies themselves.
Top exchanges include platforms like Binance, Kraken, Coinbase, and Bitfinex, some of which handle daily trade volumes exceeding $100 million.
- Fiat-to-Crypto Exchanges: Platforms like Coinbase allow users to purchase leading cryptocurrencies (e.g., Bitcoin, Ether) using debit/credit cards or bank transfers. However, these exchanges often feature limited cryptocurrency options.
- Crypto-to-Crypto Exchanges: Platforms like Binance enable users to trade established cryptocurrencies like BTC or ETH for smaller altcoins.
When using multiple exchanges, you’ll frequently need to transfer assets between accounts. For example, you might purchase BTC on Coinbase and then transfer it to Binance to exchange for a less common cryptocurrency like NEO. Always research fees (0-0.5% per transaction), user interfaces, and Know-Your-Customer (KYC) requirements before choosing an exchange.
2. Peer-to-Peer Transactions
Peer-to-peer platforms like LocalBitcoins.com allow you to find direct buyers or sellers. Such transactions typically involve a cryptocurrency wallet to facilitate transfers. Conduct these trades cautiously, preferably in public or during dedicated crypto meetups.
3. Cryptocurrency ATMs
Located predominantly in the U.S., Canada, and the UK, cryptocurrency ATMs serve as an alternative means to buy cryptocurrencies with cash. Though expensive (fees can exceed 7%), these ATMs allow users to deposit fiat money and receive digital wallet access to purchased cryptocurrencies.
4. Private Bank Accounts
Progressive banks like Falcon Bank and Swissquote now offer crypto-trading services. Customers can buy and sell cryptocurrencies like BTC, Ether, and Ripple directly through their accounts, avoiding the need for standalone exchange setups.
Selling Cryptocurrencies
Selling cryptocurrencies mirrors the process of purchasing them. You can:
- Use an exchange to sell crypto directly for fiat money.
- Trade minor cryptocurrencies for more liquid ones (e.g., BTC or Ether) before converting to fiat (note: this involves double transactions and fees).
- Use crypto debit cards (e.g., TenX or Xapo) to spend crypto directly. These cards automatically convert cryptocurrency into fiat during transactions for merchants.
Passive Cryptocurrency Investing
Passive investments provide exposure to cryptocurrencies with lower activity or involvement. Common routes include:
- Single-Currency Funds
Passive vehicles like the Grayscale Bitcoin Trust (GBTC) or ETNs like Bitcoin Tracker One allow you to track prominent cryptocurrencies like Bitcoin without owning them directly. While these funds simplify logistics and storage for investors, note that they can trade at a substantial premium over the actual value of the underlying cryptocurrency. - Multi-Currency Funds
Emerging products like the Crypto Market Index Fund by Swiss Crypto Finance aim to track multiple cryptocurrencies. These funds provide diversification, reduce volatility, and aim for better risk-adjusted returns. They typically include weighting across the top 5-20 cryptocurrencies by market capitalization or liquidity. - Futures Contracts
Cryptocurrency futures, traded on platforms like CBOE, CME, and NASDAQ, enable investors to speculate on Bitcoin prices and hedge risk. While futures introduce regulation and broaden accessibility, margin requirements can be steep, and they don’t offer ownership of actual cryptocurrencies.
Cryptocurrency Storage and Monitoring
Storing Cryptocurrency
Security is a top priority for cryptocurrency investors. Long-term holders are advised to use cold storage, keeping private keys offline to prevent cyber theft. Options include:
- Hardware Wallets: Devices like Trezor and Ledger Nano S.
- Paper Wallets: Printable, offline keys.
- Cold Storage Providers: Services like Xapo or Swiss Crypto Vault ensure maximum protection by storing private keys in secure offline facilities.
Those actively trading may store assets on an exchange, prioritizing liquidity over security. However, this exposes assets to hacking risks. Choosing a storage method involves balancing accessibility and safety.
Monitoring Investments
To track cryptocurrency prices and portfolio performance, tools like CoinMarketCap or apps like Blockfolio provide real-time updates. Staying informed on the rapidly evolving crypto space requires engagement with platforms like Twitter, Reddit, and Medium, following relevant hashtags and commentators. Technical tools like Bitinfocharts.com offer insights into blockchain transactions and hash rates.
Understanding Tax Regulations and Compliance
Cryptocurrency taxation remains a murky area with varying treatment across jurisdictions. In the U.S., the IRS considers cryptocurrencies as property, meaning capital gains or losses apply to transactions. States like New York impose additional regulations requiring licensing, while others like Arizona recognize blockchain-based contracts.
To remain compliant:
- Keep detailed records of all transactions.
- Consult a tax professional familiar with cryptocurrency.
- Monitor updates from regulatory authorities.
Final Thoughts
Venturing into cryptocurrency investing can seem daunting, requiring both research and caution. The crypto market represents a new asset class rife with opportunities and risks, appealing to those willing to navigate a steep learning curve. As in traditional investing, the best approach will depend on your goals, risk tolerance, and investment strategy.
Whether you start by investing in mainstream cryptocurrencies like BTC or explore altcoins and futures, educate yourself and proceed cautiously. Avoid ignoring the crypto space altogether; even a small allocation can broaden your portfolio in meaningful ways. As always, due diligence is key—good luck!
Disclaimer: The content in this article is for informational purposes only and does not constitute financial or investment advice.