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Lesson 3: Cryptocurrency Investing

Lesson 3: Cryptocurrency Investing

Cryptocurrencies are more than just an alternative to the traditional financial system. They can be investment instruments offering new, exiting options. But how to invest in cryptocurrency?

Investing in cryptocurrency is more accessible than ever before. It only takes a few moments to register your account on a cryptocurrency trading platform. However, successful long-term investors take the time to understand what steps to take before investing and how to make well-informed crypto investment decisions.

By seeking answers to your questions about investing in cryptocurrency, you are more likely to avoid unwanted drawdowns in the future.

Understanding cryptocurrency investing

More investors got interested in the cryptocurrency market in the last few years, especially during bullish times.

Each investor has unique needs. You must consider these before investing in cryptocurrency. However, the cryptocurrency space can be intimidating for those new to cryptocurrency investing. Knowing the exact options to invest in a crypto is the very first step you need to take as a new investor.

For instance, hedge funds and pension funds are prohibited from investing in cryptocurrency directly. This is because it would violate their agreements with investors. Investors may not be able to access cryptocurrencies via these investment vehicles.

Some investors may not wish to invest in crypto directly for other reasons. That is because cryptocurrency is a highly volatile asset class and tokens are only worth what other investors assign to them. It would take only a sentiment shift to erase any cryptocurrency's value.

Some investors cannot handle the stress of investing in cryptocurrencies because of the market’s volatility. Some investors can't afford the risk of buying or trading cryptos, and they prefer more stable investments like stocks and ETFs with some crypto exposure. Regulating digital currencies is also an issue. Any new laws could have a significant impact on their valuations.

In the end, every new investor should start researching the projects behind the coins in their crypto portfolio. Warren Buffett advises investors not to invest in businesses they don't fully understand. Some investors may not want to invest in cryptocurrency because blockchain technology can be complex and difficult to understand.

If you are bothered by any of these concerns, there are some options and different ways to invest. Here are the most popular several ways to increase your crypto exposure.

  • Trade cryptocurrency CFDs through online brokers
  • Buy cryptocurrency directly through exchanges
  • Invest in companies with cryptocurrency exposure
  • Invest in cryptocurrency and blockchain-focused funds

Trade CFDs on Cryptocurrency

With CFDs (contracts for difference), you can speculate on cryptocurrency's price movement without taking direct ownership. The first benefit is that you can trade in either direction by going long (open buy position) if you think the price will go up or going short (open sell position) if you think the price will go down.

It’s essential to understand that CFDs are leveraged products. When you decide to trade crypto CFDs, you do not need to deposit the full value of that position, and you only need to deposit a margin.

However, this leverage can go both ways, turning into a profit or a loss. If you’re new to CFDs, you can practice on a risk-free demo account before you start trading real money.

  • Higher liquidity. Asset prices are sourced prices from multiple platforms, which helps us improve liquidity. As a result, trades are executed quickly and at lower costs.
  • Trade long or short. When purchasing cryptocurrency, it is an upfront purchase, and the trade can only be profitable if the value goes up. However, when trading CFDs, investors can also take advantage of falling prices.
  • Leveraged exposure. CFD trading can be leveraged - you can open a position on a margin equal to only a fraction of the trade's full value. This means that you can gain a large exposure to cryptocurrency markets while only holding a small amount of capital.
  • Faster account opening. You won’t need access to the exchange directly because we’re exposed to the underlying market on your behalf. You won’t need to set up and manage an exchange account, so you could be set up and ready to trade much more quickly. In fact, you could be trading in less than five minutes, with our simple application form and instant online verification.

>> Learn more about Cryptocurrency Trading and its benefits

Buy Cryptocurrency directly

If you decide to buy and hold cryptocurrency directly, then you have many options, from well-known digital currencies such as Ethereum or Bitcoin to newly released altcoins. You can buy crypto using your credit or debit card on centralized cryptocurrency exchanges.

When buying the actual cryptocurrency, you need to deal with adjacent services such as crypto wallets and exchanges to protect your portfolio. To make a profit means that the cryptocurrencies must go up in price.

If you are new to crypto, it is important to ensure that the chosen cryptocurrency exchange allows fiat purchases in U.S. dollars or Euros. This is especially important for your first investment since some crypto exchanges only offer crypto to crypto trades.

Using cryptocurrency exchanges to buy crypto will attract higher fees. Each exchange has different fees, and investors should research them before funding their accounts. You should look at the exact fees for deposits, withdrawals, transfers, crypto trades. Some of these fees can be percentual, while others are flat fees. There can be also a minimum amount required for deposits and transfers.

Over the years, numerous hackers attacked centralized cryptocurrency exchanges, which caused customers to lose funds. While parts of these funds were later traced and returned to the owners, the threat still exists. Other concerns to pay attention to when using a crypto exchange may be the available liquidity and complicated fee structure. Most crypto exchanges do not have a central office and exist in a legal grey area.

>> Learn how to buy Cryptocurrency

Public companies with cryptocurrency investments

Since cryptocurrencies are still new investment opportunities with little and unreliable history, many investors are cautious. The truth is that crypto is a highly volatile and speculative investment. However, there are still ways to invest for those interested in cryptocurrency if you don’t want to purchase or hold the actual cryptocurrency.

If you rather not buy cryptocurrency directly, the easiest way to invest in cryptocurrency is to buy stock in a company with a financial stake or future in cryptocurrency and blockchain technology.

These so-called cryptocurrency stocks can be broken down into a few broad categories:

  • Public companies that own cryptocurrency. It’s a known fact that MicroStrategy (MSTR) and Tesla (TSLA) own large amounts of Bitcoin.
  • Crypto exchanges. For instance, Coinbase (COIN) is a major cryptocurrency exchange. The company is listed on the Nasdaq exchange.
  • Cryptocurrency miners. RIOT Blockchain (RIOT) is a Bitcoin mining company.
  • Financial services firms. You can invest in CME Group (CME), which established the first bitcoin futures market, and Robinhood (HOOD), an online trading platform for stocks and crypto.
  • Payment processors. Square (SQ) and PayPal (PYPL) allow users to buy and store cryptocurrencies. Visa (V) and Mastercard (MA) handle payments for several crypto-linked credit and debit cards.
  • Tech companies. NVIDIA (NVDA) and Advanced Micro Devices (AMD) are the essential microchip producers for the blockchain hardware infrastructure. VMWare (VMW) is a leading cloud computing company that has blockchain-focused businesses. DocuSign Inc (DOCU), a platform that facilitates electronic signings and agreement processes, uses blockchain technology to secure signer identities and keep contract evidence.

>> Learn more about Investing in Stocks

With CAPEX you can trade most of these companies' shares as a single CFD product with the Blockchain Future ThematiX. The weight of each share (percentage allocation) to the ThematiX is determined based on their Market Capitalization.

Blockchain Future ThematiX is comprised of a group of shares as below:

  • IBM 4%
  • NVIDIA 21%
  • CME 3%
  • Square 4%
  • MasterCard 11%
  • DocuSign 2%
  • AMZN 55%

Cryptocurrency and Blockchain ETFs

However, investing in individual stocks could pose the same risks as investing in cryptocurrency. Suppose you want to avoid some of the risks associated with investing in individual stocks and cryptocurrencies. In that case, you may want to invest in diversified index funds or exchange-traded funds (ETFs) because of their track record of long-term value growth.

Many of the top index funds, such as the S&P500 and other market funds, are made up of publicly traded companies who have some involvement in the industry, including mining crypto or being involved with the development of blockchain technology.

More experienced traders might want to give a portion of their portfolio to certain companies, mutual funds, or more specialized index funds. As always, investors must research the companies they want to invest in.

A cryptocurrency ETF follows the price movement of more than one digital currency.

Most crypto ETF applications submitted to the Securities and Exchange Commission (SEC) have suggested that the price of bitcoin and other tokens be tracked using futures contracts that trade on the Chicago Board Options Exchange and the CME Group.

The first-ever Bitcoin ETF was launched in October 2021. The ProShares Bitcoin Strategy ETF (BITO) tracks Bitcoin futures contracts, and it is tied to the price of the cryptocurrency.

>> Learn more about Crypto ETFs

The cryptocurrency world is just not about the coins but also about the underlying blockchain technology. There are many ways blockchain technology can be used, and many companies have started to implement it in different industries.

Blockchain exchange-traded funds (ETFs) allow retail investors to buy into hundreds and thousands of companies using blockchain-based strategies. This is a great way to take advantage of blockchain technology’s potential.

Thematic exchange-traded funds called Blockchain ETFs own stocks of companies using or developing blockchain technology for their products. They are more likely to invest in a wider range of assets than crypto ETFs or Bitcoin ETFs, which tend to focus more on the price of individual cryptocurrencies.

The largest blockchain ETFs in terms of total assets are Amplify Transformational Data Sharing ETFs (BLOK), Siren ETF Trust Siren Nasdaq NexGen Economy ETFs (BLCN), First Trust Indxx Innovative Transaction & Process ETFs (LEGR), Bitwise Crypto Industry Innovators ETFs (BITQ), and Global X Blockchain ETFs (BKCH).

>> Learn more about Blockchain ETFs

How to Invest in Cryptocurrency

If you want to invest in cryptocurrency directly, then you can use a cryptocurrency exchange. However, if you want to speculate on the cryptocurrency’s price movements or invest in companies that are involved in the crypto space, you can use an online broker that offers crypto CFDs.

Here is how to buy cryptocurrency through an exchange or trade CFDs on cryptocurrencies with an online broker:

  • Choose which type of platform you want to use. Your first concern should be to find a reputable online broker that has a wide range of cryptos and other assets, including stocks and ETFs. If you want to withdraw your cryptos to a private wallet and keep it for longer, you should consider using a crypto exchange.
  • Create an account. Regardless of your chosen platform, you need to register and complete the KYC process to verify your identity.
  • Fund your account with fiat money. Before buying and trading any crypto, you need to fund your exchange account with U.S. dollars, Euros, or any supported fiat currency on that platform.
  • Select your cryptocurrencies. It’s time to decide on your first cryptocurrency investment. We strongly recommend that you thoroughly research the project behind the coins you want to add to your portfolio. You can invest in one or more cryptos.
  • Place a buy order for your chosen cryptocurrency. Follow the steps required by the trading platform to submit and complete a buy order for one or more cryptocurrencies.
Invest in Cryptocurrency with CAPEX
Source: CAPEX WebTrader

After your purchase is complete, the information that you need to access your cryptocurrency is held in a digital wallet. That crypto wallet can be hosted either by the cryptocurrency exchange or an independent wallet provider.

When trading crypto, the CFDs (contracts for difference) are stored in your account and are far more liquid.

With CAPEX, you can trade CFDs on 22 cryptocurrencies and other cryptocurrency assets like stocks, ETFs, and Blockchain Future TematiX.

What are the most popular Cryptocurrencies?

Bitcoin (BTC) is the first cryptocurrency ever created. To this day, we don’t know its true inventor. All we know is the pseudonym, Satoshi Nakamoto, used to release Bitcoin’s whitepaper and the nickname on BitcoinTalk, the first Bitcoin forum. With a few exceptions, the person running that account completely vanished. The one million Bitcoin mined by Nakamoto remains untouched to this day.

Ethereum (ETH) is the second most popular cryptocurrency. Thanks to its smart contract feature, the Ethereum blockchain can be used to run everything from financial tools to complex databases and games. According to the Ethereum Foundation, Ethereum is much more than a payment system.

Cardano (ADA) is the native currency of the Cardano network. Cardano was created as a rival to the Ethereum network. Cardano's main applications are traceability and identity management. Such applications can simplify and streamline processes that require data from multiple sources. This is useful for monitoring and auditing the manufacturing of a product from its origin to its finished products.

Stellar Lumen (XLM) is the native currency of the Stellar payment network, which aims to unite the world’s financial infrastructure, connecting banks, payment systems, and individuals with near-instant and secure transfers.

Dogecoin (DOGE) started as an internet joke, aiming to moke Bitcoin. It is commonly referred to as a meme coin but has become one of the most valuable cryptocurrencies.

Ripple (XRP) is a cryptocurrency created to power the Ripple money transfer network. Ripple was created to complement the services of traditional banks and aid international money transfers.

Litecoin (LTC) is a cryptocurrency created using the same Bitcoin code and brings some improvements. It is considered the first altcoin, but it lost some of its popularity over the last years.

Tron (TRX), or Tronix, is the native currency of the Tron network. Tron aims to become a decentralized global platform for digital content creators and consumers. Online content creators will be able to earn a living from posting their content to the network without needing any third party to facilitate their exposure.

Polkadot (DOT) is the cryptocurrency powering the Polkadot protocol. The network uses multi-chain technology and aims to address the scalability, interoperability, and governance issues of other existing blockchain networks.

Chainlink (LINK) is the native coin of the Chainlink decentralized oracle network. The protocol is bound to play one key role in implementing real-world blockchain applications. Chainlink uses oracles to translate real-life off-chain data to the network’s smart contracts.

Other cryptocurrencies worth mentioning and researching for potential future investments are AAVE, NEO, Tezos (XTZ), Monero (XMR), DASH, Compound (COMP), NEO, and Yearn.Finance (YFI).

Tips for investing in cryptocurrency

You should not hurry when you decide to invest in cryptocurrencies for the first time. By all means, new investors should take the time to research the market and properly understand how crypto investments work.

If you understand the project and the technology behind it, you’ll stand a much better chance of making a profit out of your crypto investment. Here are five tips to guide you through your crypto trading journey:

Do your due diligence

Don't listen to any random financial expert you find online. While they might have valuable information, you should verify that the advice you receive is right for you.

To determine whether a particular cryptocurrency is worth investing in, you should dig deeper into the coin's purpose and future goals. Understanding what the project stands for and the timeframe for its developments will set realistic profit expectations and help you devise an investment strategy.

However, keep in mind that investment strategies that work well for a friend might not work for you. This is because everyone has different risk appetites. It is essential to assess your risk tolerance.

Invest what you can afford to lose

This is one of the first advice given to new investors in the crypto space. Is it possible to lose all your investment? Probably not, but it’s easy to see a part of your portfolio shrinking in value.

To avoid any emotional involvement that may later encourage you to make the wrong call, you should not invest more than you are willing to lose. This is a warning to only invest the money you have. This is the money you have left after fulfilling all of your financial obligations, such as a mortgage or everyday expenses.

Now that you are aware of the potential expenses, you can plan your crypto investment accordingly. If you're a risk-taker, you can choose to invest in crypto investments to help you fund your long-term goals. You can also invest in other securities to help you finance your goals and then use any remaining funds for crypto investments.

Diversify your crypto portfolio

There’s an old saying that goes like this –” Don’t put all your eggs in one basket”. Diversifying your crypto portfolio is important, just like diversifying stocks and shares. The top cryptos are the most stable, as far as stability and crypto can go together. But having multiple cryptocurrencies in your portfolio reduces the risk of overexposure if one of those cryptos loses its value overnight.

To reduce risks, make sure you thoroughly research the cryptos you want to invest in.

Don’t go against the market

Embrace the trend! If the market is constantly falling and you aren’t certain about the market's future direction, you should not buy into such a trend. Wait for any signal that suggests a trend reversal. These signals could include two to three days' worth of upside movement or heavy buying volume. Learning chart patterns is a great skill to have if you want to be a long-term investor in crypto. This skill is known as technical analysis, and it will pay off in the long term.

Be active

Your work as an investor starts after you decide to invest in cryptocurrency. It is not enough to assume that your money will pay interest, while you simply relax. The crypto market is highly volatile, so you need to keep an eye on it. Your best selling or buying opportunity might be missed if you don’t keep a close eye on it. You will need to rebalance your investments if you are an active investor.

This means that you may want to decrease your stake in one cryptocurrency but increase it in another. To make a profit, you have to sell your crypto investments at the peak of the market and then buy it back when the market drops. Reacting to market news and indicators is the key.

Should you invest in Cryptocurrency?

Whether or not you should invest in cryptocurrency is something each investor has to decide for himself.

You might consider investing in crypto if you want to increase your portfolio's risk. Considering crypto’s volatility will add more risk to your portfolio. Crypto investors should have a high-risk tolerance. At the same time, it’s important to possess a wider perspective on how the underlying technology works and its utility. If you believe blockchain technology has a true real-world utility, then you might want to invest in it.

However, if you don’t feel comfortable with the risk that cryptocurrency investments come with, then you shouldn’t invest in cryptocurrency. The unpredictable market could make you feel anxious and let your emotions dictate your trading. At the same time, starting your investment journey with cryptocurrency may not be the greatest idea.

It’s important to remember that most cryptocurrency marketing campaigns use FOMO (fear of missing out) to influence and try to convince new investors to buy into their projects. Try to not get influenced by these voices. Remember that cryptocurrency isn’t the only investment class available.

Bottom line

Learning how to trade and invest in cryptocurrency takes time. It is well worth taking your time to understand the space and the technology behind it. That will reduce your investment risk. This will allow you to make better decisions. Although you will be tempted to panic-sell assets when the market goes down, the likelihood of that happening is much lower if you are more knowledgeable about trading and investment.

But in the end, cryptocurrency investment may not be for everyone. After you understand and assess the risks that come with crypto investing and trading, you can make the right decision for yourself.

Invest in Cryptocurrency with CAPEX

FAQ

Is cryptocurrency a good investment?

Cryptocurrency investments are not for everyone. The price of crypto can fluctuate, making it a bad choice for conservative investors. If you're interested in taking on greater risk as an investor, investing in one or more cryptocurrencies may be the right choice for you.

How much money do I need to buy cryptocurrency?

You don’t need a lot of money to start investing in cryptocurrency. Most cryptocurrency exchanges and online brokers have very low limits for deposits of up to a few dollars.

How can I invest in Bitcoin?

To invest in Bitcoin, you can buy crypto directly on a cryptocurrency exchange. However, if you want to speculate on Bitcoin’s price movement and invest in stocks simultaneously, you can open an account with an online broker, such as CAPEX. You can also buy shares in companies with significant Bitcoin exposure, such as Bitcoin mining companies. Another option is to invest in a Bitcoin-focused mutual fund, such as the exchange-traded fund.

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