Cryptocurrencies are among the most attractive alternative investments for those seeking new opportunities. These digital currencies allow people to transfer funds online to purchase goods or services. They can also function as investments.
Just like with traditional currencies, investors can acquire digital currencies and hold or trade them when the market makes such a move advantageous. Of course, the digital currency market is always changing — sometimes dramatically — so those seeking to own cryptocurrencies as an investment should watch the markets carefully and with the assistance of a certified financial planner or fiduciary.
If you’re interested in getting involved, here’s a short list of what you need to do to invest in cryptocurrencies.
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The journey to keeping cryptocurrency begins with obtaining a digital version of the very thing we all use to hold our traditional, print money: a wallet. Owning cryptocurrency requires owning a crypto wallet. Its primary job is to store information on the amounts and kinds of digital currencies that a person holds.
A crypto wallet is a program or a small hardware device that stores a user’s currency keys, which are required to give investors access to their coins.
In technical terms, cryptocurrency keys are characters in an encryption algorithm that hold cryptocurrency data. These keys encrypt and decrypt data to ensure that only investors have access to their own currency. Similar to how Apple’s FileVault allows users to easily encrypt and decrypt their entire hard drive for safety, cryptocurrency keys work as a security measure.
A wallet includes two separate keys. The first is a public key, consisting of the wallet’s identifiable address. The second is a private key, which is required to sign crypto transactions.
There are three different kinds of wallets:
In addition to the three kinds of wallets, there are two varieties of each: hot and cold. A hot wallet connects to the internet and is easy to use, but requires protection to keep it safe. A cold wallet stays offline and is much easier to protect, as it’s unavailable to everyone except the owner.
After obtaining a crypto wallet, investors choose an online exchange. Crypto exchanges are the digital versions of traditional stock exchanges; they’re platforms where customers can trade currencies and other assets. The main difference is that cryptocurrency exchanges only manage digital assets and currencies.
Cryptocurrency exchanges list prices for each digital currency and track them as their prices change according to the market. With that information, users make their purchases. They do so by using traditional money, also called fiat money, to purchase their digital or cryptocurrencies. Exchanges also allow investors to trade one crypto asset for another.
There are many crypto exchanges. In order for consumers to make the most educated choice, they should consider the following questions before deciding which exchange is right for them:
Although investing money is the main method of gaining cryptocurrencies, they can also be acquired via crypto mining. This process, either carried out by an individual or as a team, requires a sizeable investment either in fast computers to do the mining work or as a financial “stake” in the cryptocurrency. For their efforts, miners receive a percentage of a cryptocurrency as a reward for the complex mathematical work of their computers.
While this process sounds simple, it’s not. Mining requires extensive electricity, computer power, and data memory. In most cases, miners need access to a mining pool in order to work as a team and maximize profits.
Miners receive rewards via two systems: proof of work and proof of stake. A proof of work system rewards the miner who completes the mining process the reward. A proof of stake system rewards people who first invest in the digital currency, meaning their financial stake, and then employ their computers to participate in the blockchain validation effort. A crypto wallet is necessary for storing any digital currency one earns. For proof of stake systems, the wallet also secures the currency one already has when mining.
Traditional exchange-traded funds allow investors to invest in one or more traditional, or fiat, currencies. The digital equivalent is called a crypto exchange-traded fund. But there’s a difference: Crypto ETFs not only allow investors to invest in one or more digital currencies but also in stocks of companies that operate in blockchain or cryptocurrency-related technology.
One example of this is the Bitwise Crypto Industry Innovators ETF, which trades on the New York Stock Exchange.
Just like a traditional, Roth, or SEP IRA, a crypto IRA is an individual retirement account where investors can store investments like stocks and bonds for the future. Unlike traditional IRAs, crypto IRA funds are stored as one or more cryptocurrencies. BitcoinIRA and CoinIRA are two examples of crypto IRAs.
Crypto IRAs provide tax benefits like an IRA. A traditional IRA offers tax-deductible contributions, while a Roth IRA lets people who reach retirement age withdraw funds without taxes or penalties.
As always, education is key. Anyone looking to invest in a crypto IRA should ask the following questions:
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Cryptocurrency, like all investments, carries risk and is affected by world markets. High-risk investors may prefer the rollercoaster ride of investing in individual crypto coins like Bitcoin or ETH. Other investors may prefer the more stable route of having a diversified portfolio that includes both traditional and digital currencies and funds. Investors, as always, should not only find the options that fit their needs best but also work with a knowledgeable financial planner or fiduciary with experience in digital currencies.
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