How to invest in cryptocurrency
Learn how to get started investing in cryptocurrency with our comprehensive guide.
Estimated reading time: 2 min
Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.
What are the key risks?
1. You could lose all the money you invest
- The performance of most cryptoassets can be highly volatile, with their value dropping as quickly as it can rise. You should be prepared to lose all the money you invest in cryptoassets.
- The cryptoasset market is largely unregulated. There is a risk of losing money or any cryptoassets you purchase due to risks such as cyber-attacks, financial crime and firm failure.
2. You should not expect to be protected if something goes wrong
- The Financial Services Compensation Scheme (FSCS) doesn't protect this type of investment because it's not a 'specified investment' under the UK regulatory regime – in other words, this type of investment isn't recognised as the sort of investment that the FSCS can protect. Learn more by using the FSCS investment protection checker.
- The Financial Ombudsman Service (FOS) will not be able to consider complaints related to this firm or Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA regulated firm, FOS may be able to consider it. Learn more about FOS protection here.
3. You may not be able to sell your investment when you want to
- There is no guarantee that investments in cryptoassets can be easily sold at any given time. The ability to sell a cryptoasset depends on various factors, including the supply and demand in the market at that time.
- Operational failings such as technology outages, cyber-attacks and comingling of funds could cause unwanted delay and you may be unable to sell your cryptoassets at the time you want.
4. Cryptoasset investments can be complex
- Investments in cryptoassets can be complex, making it difficult to understand the risks associated with the investment.
- You should do your own research before investing. If something sounds too good to be true, it probably is.
5. Don't put all your eggs in one basket
- Putting all your money into a single type of investment is risky. Spreading your money across different investments makes you less dependent on any one to do well.
- A good rule of thumb is not to invest more than 10% of your money in high-risk investments.
If you are interested in learning more about how to protect yourself, visit the FCA's website here.
For further information about cryptoassets, visit the FCA's website here.
With more and more people buying cryptocurrency, you may have wondered how you could diversify your investment portfolio and take advantage of the high-risk, high-reward crypto market.
You can hold cryptocurrencies as an investment over the medium to long term, or you can actively trade them over a shorter period.
Here we outline six ways you can expose your current portfolio to the cryptocurrency sector, and how to store your crypto investment safely.
How do cryptocurrencies work?
A cryptocurrency is a digital currency that’s encoded using cryptography and based upon blockchain technology. A blockchain is a distributed ledger contained on a network of public computers that anyone can join, which means that no one entity controls it. The network is kept secure thanks to decentralisation, cryptography and economic game theory.
The first cryptocurrency was Bitcoin, which has grown to be the most valuable. Since Bitcoin, thousands of protocols and entities have generated their own native cryptocurrencies. They range in utility from governance to payment, but they’re all transferred using blockchain technology and can be used to pay for goods and services or for investment purposes.
Buying cryptocurrencies directly
The most popular option for buying crypto directly is through a dedicated cryptocurrency exchange.
As cryptocurrency adoption has increased, so has the security and efficiency of exchanges, with many allowing you to buy crypto through simple debit card transactions. Some of the most popular exchanges currently include Coinbase, CoinSpot and Binance (bear in mind that Binance offers cryptocurrency derivatives which the regulator banned from sale to UK consumers in January 2021).
Order types when buying crypto directly
After selecting an exchange and a cryptocurrency to buy, you’ll then need to choose between a market order and a limit order.
A market buy order is when the digital asset is bought at the current market value. This is often favourable for those starting out in the market. Some exchanges also offer an “instant buy” service which does the same thing – although the fees may be a little higher.
In comparison, for experienced investors, a limit order may be more suitable. A buy limit order is when a set purchase price is specified. This would be applied if the current market value is above the price at which you would like to enter that market, allowing you to set a lower price and wait for the market to drop.
Dollar cost averaging
If you’re investing for the long term, remember that dollar-cost averaging is one of the best techniques for evenly distributing your capital.
Dollar-cost averaging is the process of making small investments regularly, rather than in one lump sum. The idea is to spread your capital over a longer time frame in order to take advantage of fluctuations in the market (i.e. when the price drops). Sticking to a regular schedule also helps eliminate the emotional side of investing – such as buying after seeing a big rally in price – which can be a trap for new investors.
This could mean making a series of small investments weekly, monthly or quarterly, depending on what’s best for you.
This allows you to ignore short-term changes in price and eliminates the need for you to try and “time the market”. Over time, if the underlying cryptocurrency has increased in value, your average purchase price will be much less than the current market price.
If you don’t fancy organising this yourself, you could use a recurring buy service through exchanges such as Coinbase, Gemini or Crypto.com. Although keep in mind that the fees are usually a bit higher here than through buying on the spot market. Alternatively, you can use a round-up app such as Bamboo to make regular microinvestments.
- Instant access to cryptocurrencies
- Convert straight from local currency to cryptocurrency
- Ownership over the coins and how they’re stored, spent and used
- You can use cryptocurrency in things like DeFi or staking to earn additional income
Compare cryptocurrency exchanges
If you’d rather a more indirect route, funds can provide a method of access to cryptocurrency markets without the hassle of cryptocurrency storage. Although initially slow to start due to regulations, several investment vehicles are now directly related to cryptocurrency assets. These investment options can be broken down into exchange-traded funds (ETFs), index funds, hedge funds and 401ks.
ETFs and index funds
A cryptocurrency ETF is a fund that tracks the price of the underlying cryptocurrency or group of cryptocurrencies. It, therefore, allows exposure to cryptocurrencies without the need for holding the digital asset. You can also trade them on a traditional stock exchange.
ETFs that focus on groups of cryptocurrencies, rather than individual coins, can quickly diversify your risk. That’s where index funds shine.
Index funds give broader exposure, which theoretically should lessen the risk. Cryptocurrency index funds track different groups of cryptocurrencies or blockchain-related companies. One of the first cryptocurrency index funds was the Bitwise 10 Index Fund, which tracks the 10 largest cryptocurrencies by market cap.
In comparison, Reality Shares Nasdaq NexGen Economy ETF tracks companies innovating in the blockchain technology sector. Some people view an investment with a collection of publicly traded companies, rather than a single entity, as less risky.
- ETFs and index funds can be accessed through trusted and regulated brokerages
- There’s no requirement for learning how to use a cryptocurrency exchange or digital wallet
- It provides a form of passive investment
- Some funds will rebalance the portfolio based on changes in the market, saving you the hard work
- You’re not directly in control of underlying assets, meaning you can’t spend or use them in things like DeFi
- You have to pay ongoing management fees or a premium on the underlying asset price
- Limited access to cryptocurrencies – only a small handful are represented by ETFs and index funds
If you’d like your cryptocurrency investment to be actively managed by investment professionals, hedge funds offer the clearest choice. Hedge funds are large investment bodies that pool capital to actively trade in order to make a profit from market movements. Several hedge funds now actively trade cryptocurrencies, which you can invest in for a management fee. Alpha Sigma Capital and Blue Block Group are just a couple of examples.
Hedge funds are often applicable to higher net worth individuals and can require a larger upfront investment in comparison to the other fund options.
- Expert management
- Funds engage in active management strategies on your behalf, which can be much more lucrative than passive investing vehicles
- Funds take advantage of leveraged trading for potentially larger profits
- They require a larger upfront investment
- High management fees
- May only be available to high net worth individuals
You may also want to investigate adding cryptocurrency to your retirement fund. Depending on where you live, local laws may allow you to add cryptocurrency to your retirement fund through a self-managed scheme. Alternatively, look for a fund provider that offers exposure to digital assets.
- Diversification of retirement portfolio
- Easy way to invest and hold cryptocurrency in the long term
- Set-up and maintenance fees may be higher
- Long-term viability of the cryptocurrency market is still unproven
Many companies that trade or develop cryptocurrency technology have shares that are actively traded on traditional stock markets such as the S&P 500 and Nasdaq. Due to integration with the cryptocurrency markets, these shares can provide a proxy investment for the cryptocurrency industry.
- Proxy investment to cryptocurrencies protects against immediate market volatility
- No need to sign up to a cryptocurrency exchange
- Company stocks can be accessed via traditional stock brokerages
- Proxy investment – doesn’t immediately benefit from growth in specific cryptocurrencies
- Access to US markets is required, which can be expensive in certain regions
Investing in crypto exchanges
Decentralised crypto exchanges (DEXs) often process transactions utilising a native cryptocurrency token. If the number of transactions increases on an exchange, the value of that token usually increases. Buying the underlying cryptocurrency means the investor can indirectly invest in the exchange. Although it’s important to note that tokens don’t confer ownership of the platform the same way that stocks do.
Unlike DEXs, centralised exchanges such as Coinbase, Kraken and Bitstamp work based on a conventional brokerage system and therefore have no underlying token. However, centralised crypto exchanges are beginning to list on traditional stock markets, with Coinbase leading the group with a listing in April 2021. These listings provide a direct way to invest in the exchanges.
- Buying shares can be completed via traditional brokerage firms
- Shares can provide a proxy investment to the wider cryptocurrency market
- Exchange tokens are based on the success of the exchange, which has historically seen a lot of fluctuation in which exchanges dominate
- Decentralised exchanges are considered high-risk and for advanced users, although they’re becoming more user-friendly over time
- Exchange tokens are only a proxy investment and don’t give ownership rights the same way that stocks do
Cryptocurrency mining (also known as proof-of-work, or PoW) is the process by which new transactions are verified and added to the blockchain (ledger) by specialised computers that compete to solve complex algorithms. In return for this, the miner who solves the algorithm and adds the new block of transactions is rewarded with newly minted cryptocurrency. Bitcoin is the most popular cryptocurrency that uses PoW mining to verify transactions.
While Bitcoin mining requires specific equipment such as an Application-Specific Integrated Circuit (ASIC), other cryptocurrencies require less specific tools and can be completed using the average computer. There are also mining networks you can join for a fee, where several participants work together to mine and split the profits.
Instead of setting up your own mining rig, which is costly and time consuming, you could invest in companies that solely focus on cryptocurrency mining activity. The largest mining companies include Riot Blockchain, Hive Blockchain and Marathon Patent Group and trade on traditional stock market exchanges.
- Pools make the process of mining cryptocurrency easier and ensure a guaranteed income
- Some jurisdictions view mining as a business, which may reduce your tax obligation
- There’s the potential to mine low cap cryptos with a regular gaming computer
- You can buy crypto mining shares via traditional brokerage firms
- Mining company shares display higher volatility than cryptocurrency assets
- Specific equipment is required for mining high cap cryptos such as Bitcoin
- It’s typically expensive and difficult to remain profitable depending on the cost of electricity in your area
- Many new cryptocurrencies are opting for proof-of-stake, which will reduce the demand for mining equipment over time
Staking is the process by which users lock up tokens in order to earn additional tokens as income.
The concept originated from proof-of-stake (PoS), which involves locking up coins in return for the privilege of being a validator node. Validator nodes verify transactions, and are rewarded with freshly minted crypto for doing so. If a validator submits false transactions, then their staked coins are destroyed – creating an economic incentive to do the right thing. Proof-of-stake has become the new norm across the industry as it eliminates the massive energy requirement involved in proof-of-work mining used in coins like Bitcoin.
Staking has since evolved to include any process by which users deposit coins in return for income.
One of the most popular vehicles for staking is through DeFi – an umbrella term for decentralised finance. This often involves lending the cryptocurrency you own to liquidity pools in return for additional cryptocurrency – either the same token you deposited or a different one.
Other ways to invest in cryptocurrency
With broad adoption comes broad innovation, and there are now plenty of niche opportunities to acquire cryptocurrency.
There are also plenty of options if you’d like to perform small tasks in return for cryptocurrencies. Brave, a decentralised browser, rewards users for allowing advertisements with its native basic attention token (BAT). Coinbase promotes cryptocurrency education through its Coinbase earn initiative, which rewards users with a small amount of crypto after each lesson.
Airdrops – free giveaways of cryptocurrency – provide an opportunity to receive digital assets for free. Airdrops can be awarded for anything, although they often involve registration or promoting a new service, or they’re awarded retroactively for certain actions (such as using a particular DeFi protocol).
Video games are also exploring the integration of cryptocurrency allowing you to earn cryptocurrency or NFTs while you play. Virtual worlds such as Decentraland, which combine elements of gaming, art and social media, even let users buy and trade virtual plots of land, artworks, buildings and clothing. If you’re a digital designer, this could be a great way for you to earn a bit of extra income.
How to choose cryptocurrencies to invest in
Cryptocurrency investment requires due diligence and research just like any other form of investment. You need to weigh up the rewards against the risks. Consider the following when choosing a cryptocurrency:
- Fundamental research of the cryptocurrency’s tokenomics (i.e. what makes the token valuable) and its associated protocol
- The crypto’s historical price chart – in order to determine a fair market price and previous fluctuations
- Any upcoming events or news releases
- Remember that cryptocurrency is highly volatile, and prices constantly fluctuate
How to store cryptocurrency safely
If you’ve bought cryptocurrency, storing your digital assets safely should be your next priority. Storing via an online exchange is very convenient and lets you easily transact and access your cryptocurrencies – however, as with anything online, there’s always a vulnerability of being hacked.
One of the safest options is a cold (offline) hardware storage wallet, which protects your private keys (similar to a password).
These devices work by never sharing your private keys on the Internet. Instead, transactions have to be transmitted to the device, which are then “signed” and sent back to the Internet.
How to learn the basics of cryptocurrency investing
Thanks to the Internet, there is plenty of information on cryptocurrency investing right at your fingertips. Standout resources include courses by Udemy, Blockgeeks and Trader Cobb.
Finder, of course, has a huge range of cryptocurrency guides, which you can access through our cryptocurrency homepage.
Many exchanges, such as Coinbase, also provide guides and educational content to help you navigate this new field. Coinbase even rewards you with cryptocurrency through its Coinbase Earn programme.
Risks of investing in cryptocurrency
Cryptocurrency markets are one of the most volatile markets that can be traded. Double-digit price swings occur regularly.
The wider crypto market has gone through several periods where prices fell consecutively for months or years on end, and may do so once again. As such, investing in cryptocurrency should be planned on time horizons spanning several years to account for periodic downturns.
Like any good investment, the key to mitigating risk is diversification. It’s always advisable to spread the risk across multiple cryptocurrencies, which means that your portfolio isn’t overly weighted by an individual token. Your cryptocurrency investments should also be part of a large portfolio of assets.
Frequently asked questions
Can you invest in cryptocurrency if you’re under 18?
You can invest in cryptocurrencies at any age. However, the age limit varies from service to service – for example, you must be over 18 to use Coinbase.
How can you invest in altcoins?
Altcoins are offered by many of the major cryptocurrency exchanges. While you can buy some using fiat currency (GBP, USD, AUD, EUR), many require Bitcoin or Ethereum to complete the exchange.
How much money do you need to invest in cryptocurrency?
There’s no set amount required in order to invest in crypto – in fact there are even services that let you buy it for as little as £1.
Cryptocurrencies are speculative and investing in them involves significant risks - they're highly volatile, vulnerable to hacking and sensitive to secondary activity. The value of investments can fall as well as rise and you may get back less than you invested. Past performance is no guarantee of future results. This content shouldn't be interpreted as a recommendation to invest. Before you invest, you should get advice and decide whether the potential return outweighs the risks. Finder, or the author, may have holdings in the cryptocurrencies discussed.
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