How to Invest in Cryptocurrencies:

For most people, investing and trading in cryptocurrency is equivalent to sailing in uncharted waters. This article will guide you through those turbulent uncharted waters and show you how to make real money when investing and trading in the cryptocurrency world.

What is the Best Way to Invest in Cryptocurrencies?

There are numerous ways to invest in cryptocurrencies and make real money in the crypto world — for the most part, they fall under the umbrellas of Investment and Trading. Follow the six steps below to get started.

The Oxford English dictionary defines investing as the act of expending money “with the expectation of achieving a profit or material result by putting it into financial plans, shares, or property, or by using it to develop a commercial venture.”

The Binance Academy defines investing as, “allocating resources (such as capital) with the expectation of generating a profit.”

Six Steps for New Investors:

Experts in the field of cryptocurrency have identified six basic steps for new investors venturing into the cryptocurrency market.

Step 1: Define and Evaluate Your Cryptocurrency Options

There is a multitude of cryptocurrencies available for investors and some of the more popular and well-known currencies include Bitcoin (BTC-USD), Ethereum (ETH-USD) Litecoin(LTC-USD) Tether (USDT) Binance coin (BNB-USD) USD Coin (USDC), XRP (XRP-USD) and Solano (SOL-USD).

There are many Exchange-Traded Funds (ETFs) available that offer investors indirect exposure to the cryptocurrency market. Exchange-Traded Funds track either the price of a single currency/token or the price fluctuations of a “basket” of different currencies. 

Exchange-Traded Funds offer a lower cost of ownership, (which for the investor means a smaller initial outlay,) diversification, and outsourcing of knowledge. Exchange-Traded Funds also save investors time, particularly when picking which crypto tokens to invest in. In short, Exchange Traded Funds manage investors’ digital assets for them. 

The most common ETF is ProShares, Bitcoin Strategy (BITO) which tracks the price fluctuations of Bitcoin. Some other ETFs own futures contracts which give the fund access to Bitcoin without directly purchasing the cryptocurrency.

Learn How the Cryptocurrency is Managed

New investors need to learn how the cryptocurrency they have invested in, is managed. For example, most cryptocurrencies use a process called mining to create new units, and these new units are built directly onto a particular currency’s blockchain.

Most cryptocurrencies will have a limited supply of coins which helps create demand and support their perceived value. Most cryptocurrencies are created by mining, but some may use a different method to validate transactions. For example, the Ethereum network has a currency named Ether, and all Ether transactions are governed by Smart Contracts that are created by using decentralized applications (dapps).

Understand Crypto “Fundamentals”

As a new investor you won’t be expected to engage in thorough Fundamental Analysis but it certainly does help if you can understand the basic fundamentals. For example, cryptocurrency investors need to understand how to analyze certain valuation metrics such as the following:

The Market Cap: The market cap is the total value of a network and it is calculated by multiplying the total number of mined coins by the current price of a single cryptocurrency coin.

The Trading Volume: The trading volume is the number of coins that have been traded/exchanged during a given trading period.

Hash Rate: The Hash Rate is a measurement of the efficiency of mining (creating the currency) and processing transactions. Investors can use Hash Rate analysis to assess the health or the strength of a blockchain network.

Active Addresses: Each cryptocurrency transaction involves active addresses, and by measuring the number of active addresses at any given time, investors can measure the number of transactions and therefore the health of a particular network or strength of a particular currency.

Transaction Fees: Through analyzing the transaction fees paid to miners, investors can access how secure or how stable a cryptocurrency is.

Register with an Investment Cryptocurrency Exchange or Broker:

Arguably the first step any investor should make is to select an exchange or a brokerage firm that engages in cryptocurrency trading. An example of a popular cryptocurrency exchange is Coinbase (NASDAQ:COIN), and an example of a popular discount broker is Robinhood (NASDAQ:HOOD).

When selecting a crypto exchange or broker, investors should take into consideration what kinds of cryptocurrencies are available for purchase and the associated fees. The fees for trading cryptocurrency may vary but in general most exchanges charge between 0.1% to 1% or more per trade.

Purchase Your Cryptocurrency

Some of the more popular cryptocurrencies, can be purchased using US dollars, while others require that investors pay for their purchase with cryptocurrency. After buying their crypto coins from an exchange or broker, investors will usually store it in an online app called a crypto wallet.

Brokers and exchanges will normally offer wallet services in the form of hot wallets (wallets that are connected to the internet) or cold wallets (wallets that are not connected to the internet).

Financial Instruments

In the financial markets, including crypto, investments will take the form of putting money into Financial Instruments (traded assets or packages of capital,) aiming to sell them for a profit. Put another way, Financial Instruments are assets that hold capital and are tradable in the market.

Examples of financial instruments include cash money, precious metals, deeds of ownership and contracts. There are various types of Financial Instruments, as defined by how they are classified. For example, one type of classification is whether or not they are a cash-based instrument or a derivative based instrument.

Another way of classifying financial instruments is whether the financial instrument is debt based or equity based.

Financial Instruments in the crypto market place will typically include the following:

  • Futures: are standardized legal contracts that enable contract signees to buy or sell an asset at a predetermined price and a predetermined time.
  • Derivatives: Derivatives can take the form of a Financial Arrangement or a Financial Instrument and their value is derived from an underlying asset.
  • Currency: A currency is defined as a system of money, (in this case cryptocurrency.)
  • Crypto futures: This involves speculating on the future price of cryptocurrency
  • CFD’s A contract for differences is a financial contract that speculates on the difference of an assets price between the opening and the closing of trade.


The Spot Market

The Spot Market is where financial instruments are traded for “immediate delivery” or in other words, the Spot Market is where the financial instrument is exchanged for cash. This is an instantaneous transaction conducted “on the spot” as opposed to a transaction which speculates on the future price of an asset. In the Spot Market the trades are conducted instantaneously for the current market price which is also referred to as the Spot Price.

In terms of cryptocurrency, the Spot Market is where traders can instantly exchange crypto coins. For example, on the Spot Market traders can exchange BNB for BUSD or BNB for BTC instantaneously.

Margin Trading

Margin Trading is a trading method that uses borrowed funds from a third party. When trading margins a trader will borrow money from a third party such as a brokerage firm in order to carry out trades.

When trading margins, investors deposit cash which becomes collateral for the loan, and then pay ongoing interest payments on the money they have loaned.

Two commonly used terms in Margin Trading are margin and leverage. The term margin refers to the amount of capital a trader commits and the term leverage refers to the amount a trader “amplifies” the margin with. For example, if an investor opens a position that is 2x leverage this means the investor is opening a position that is double the amount of the margin. Put another way if an investor opens a position that is double the amount of the margin, the investor has amplified the initial investment by 2 times.

Margin trading is widely used in cryptocurrency trading and the margin funds are typically borrowed from a crypto exchange in return for a “funding fee.” However the margin loan can also be borrowed from other traders, incurring a variable interest rate / funding fee as determined by the open marketplace.

ROI Return on Investment

The core principle of investing is to achieve a return, often referred to as ROI or Return on Investment. When gauging Return on Investment, investors will usually take a long-term approach. Investors will look to build wealth and generate a higher return over an extended period.

Fundamental Analysis

When determining what makes a good investment, investors in crypto will mostly use Fundamental Analysis. Fundamental Analysis is an analytic method used by investors to determine the innate value of a particular asset or business.

Fundamental Analysis seeks to determine the intrinsic value of an asset by analyzing qualitative and quantitative factors that can affect the assets value. This can include macroeconomic factors such as the economic outputs, unemployment rates and industry conditions to microeconomic factors such as supply and demand, taxes and company management.

In the case of cryptocurrencies, fundamental analysis will also involve studying on-train metrics/data including the network hash rate, transaction details such as the number of addresses, the sending and receiving addresses, the transaction amount, the top holders, and the tokens or currencies being transferred.

Analysts apply Fundamental Analysis to the on-chain metrics and create technical indicators that measure the overall health of a network and determine whether a particular asset is undervalued or overvalued.

Technical analysis

Another commonly used form of analysis is technical analysis. Technical analysis analyzes market data such as price and volume to make a qualified prediction in regards to the future direction of prices.

Technical analysis will use charts and diagrams to identify trading trends and price patterns. Analysts utilizing technical analysis will study price history, charts and all the different types of market data in order to return the maximum profit.

Trading Cryptocurrency:

It is generally accepted that there are 5 defined steps to successfully trading cryptocurrency. These steps are as follows.

Step 1: Establish A Cryptocurrency Brokerage account.

When trading in cryptocurrency this will involve speculating on cryptocurrency prices. There are two main ways to speculate on cryptocurrency and these are by establishing a brokerage account or trade them through an exchange.

When engaging in cryptocurrency trades utilizing a brokerage, traders will be speculating on derivatives or put another way, they will be speculating on future price movements of specific cryptocurrencies.

Cryptocurrency derivatives include options futures and crypto CFD’s.

When utilizing a cryptocurrency brokerage, traders do not own the crypto coins – but rather they speculate on price movement.

There are many different brokerages but some of the most popular include Coinbase, Gemini, eToro, Webull, and Robinhood. All of these brokerage platforms, offer easy user interface and a variety of altcoins for investors to choose from.

To open an account, investors will be required to supply personal details such as a social security number, date of birth address and email address. personal details.

Step 2: Fund the Account

Once the Cryptocurrency account has been established it must then be funded which means connecting the crypto brokerage account to a fiat money bank account. The majority of crypto brokerages facilitate bank funding through debit cards and wire transfers. Wire transfers are the cheapest method and on Coinbase and Gemini they are free.

Step 3: Choose a Cryptocurrency You Want to Trade:

The two most popular cryptocurrencies which the majority of people choose to trade, are Bitcoin and Ethereum. Bitcoin and Ethereum are the biggest and therefore most predicable currencies, which makes them easier to trade in using technical indicators.

Many Crypto traders will diversify their portfolio and allocate a small amount for trading in smaller, lesser-known altcoins. In general, the smaller altcoins are more volatile, meaning they can rapidly gain and lose value. The smaller altcoins will typically represent greater risk for greater reward.

Step 4: Choose a Trading Strategy

There are numerous indicators that traders can choose from which means developing a consistent and successful trading strategy may be difficult, especially for those new to trading in the crypto field. Experienced traders recommend that newcomers undergo a cryptocurrency trading course.

One of the more commonly used trading strategies is named “Elliot Wave Theory.” Elliot Wave Theory concentrates on the mindset or the psychology determining market sentiment and it is particularly relevant for stocks like a cryptocurrency that is subject to a large amount of speculation.

Automated Crypto Trading

One way of conducting trades in cryptocurrency is to fully automate the trading process. Automated trading in cryptocurrencies involves trading bots enacting a strategy that is designed to give traders the best results. Automated trading can be conducted through specialized platforms like Coinrule.

Automated trading can be geared to take a conservative, neutral or aggressive approach which means traders can make money quickly, and they have the option whether to hold their coins or diversify their portfolio.

Automated trading can be mixed with active personal trading giving traders a more diversified approach.

Storing Cryptocurrency

For individuals actively trading cryptocurrency, it is necessary to store funds on the exchange in a cryptocurrency wallet. Cryptocurrency wallets come in two forms software and hardware, and of the two, hardware wallets offer the best security because they store crypto funds on a physical device, offline.

For a software wallet, there are many choices available including iOS, ZenGo, Google Chrome and Android. ZenGo is arguably the most popular wallet because it lets wallet holders to buy, sell and earn interest on digital assets.

The Difference Between Crypto Investment and Trading

Traders and investors both seek to generate a profit but their methodology differs. Investors will aim at generating a return over a longer period whereas traders try to make a profit in the short term. For example, an investor will look at a period of years or even decades whereas traders will try to take advantage of market volatility and look for short-term gains.


Related Links:

A Complete Guide To Cryptocurrency Trading For Beginners

How To Make Money with Bitcoin?

How To Trade Cryptocurrency?