Key points
- Bitcoin and cryptocurrency are growing in popularity as alternative investments.
- Cryptocurrency exchanges are the most popular medium to buy cryptocurrency.
- Crypto prices peaked in 2021 when the market hit over $3 trillion in value.
During the crypto bull runs of 2020 and 2021, it felt like the most frequently asked question was “How do I buy cryptocurrency?”
These days in “crypto land,” things aren’t quite as rosy. Numerous scandals have rocked the industry. As a result, transaction volumes have been decimated, and explosive returns have been replaced by a seemingly endless stream of crypto firm bankruptcies.
Despite last year’s market meltdown, enthusiasts, such as Ark Invest’s CEO Cathie Wood, remain bullish on the innovation behind cryptocurrency and its growth potential.
If you want to follow the steps of those who invest in disruptive technologies, cryptocurrency is one avenue. But keep in mind that this type of asset is a speculative investment.
According to general client advice posted on discount broker Schwab’s website, “For those who already have a diversified portfolio and a long-term investment plan, we see ownership of cryptocurrencies as outside the traditional portfolio.”
What is cryptocurrency?
A cryptocurrency refers to a digital currency that exists outside the control of a centralized entity, such as a government or central bank.
Transactions are verified and records are maintained by a decentralized system using cryptography, rather than by a centralized authority. The core technology behind cryptocurrencies, known as the blockchain, where transactions are recorded into blocks, is complex.
“Cryptocurrencies operate on a distributed public ledger, normally referred to as blockchain, that holds a record of all transactions,” explains David Kemmerer, CEO of crypto tax software company CoinLedger.
More than a decade ago, the blockchain was a technological breakthrough when an anonymous character named Satoshi Nakamoto penned a 2008 white paper on bitcoin (BTC). The original crypto officially launched in January 2009, with more following, including litecoin (LTC) in 2011 and peercoin (PPC) in 2012.
Today, there are more than 22,000 cryptocurrencies on the market, according to CoinMarketCap data, in an industry worth more than $1 trillion.
How does cryptocurrency work?
Cryptocurrencies are entirely digital. While conventional money can be digital, it also exists physically in the form of cash and is issued by a central authority such as the government. The concept of a decentralized and digital form of money can be tougher to wrap your head around.
“Owners of cryptocurrency do not get any tangible assets,” Kemmerer says. “Crypto owners have a key that allows them to transfer the units of digital currencies from one user to another without a trusted intermediary.”
Advocates point to the fact that an increasingly digital world needs digital money. They also argue that a decentralized economy could be a more accessible and democratic version of the current financial world, which can be harder to access for citizens in less developed countries or under oppressive regimes.
Detractors argue that crypto is one massive get-rich-quick scheme, with illusions of grandeur but nothing of inherent value. It has also been criticized for facilitating illicit activity, such as money laundering, while hacks and scams are commonplace in the industry.
Types of cryptocurrencies
We can break down the thousands of cryptocurrencies into subsectors, with different coins striving to achieve different things.
While risk is present everywhere in crypto, it varies significantly between these subsectors. It follows that the return profile does too.
Bitcoin
Bitcoin is the crypto “OG,” the coin that launched thousands of imitations. When bitcoin launched, there weren’t many competitors around. The original crypto coin was designed to be independent of both central banks and governments. The peer-to-peer verification process was created to revolutionize currency, displacing intermediaries.
Because the currency is capped at a total supply of 21 million coins, many believe there could be value in its scarcity and that it could eventually achieve a store-of-value status akin to gold. Currently, there are slightly more than 19 million coins in circulation.
Altcoins
Altcoins are generally considered cryptocurrencies that are not bitcoin, although some would change this definition to exclude ethereum too.
While bitcoin is extremely volatile, altcoins are more volatile again. Looking at price charts, many trade like levered bets on bitcoin, with the bear market particularly harsh to many altcoins.
Stablecoins
Stablecoins are a blend of conventional money and cryptocurrency. They involve a cryptocurrency pegged to a fiat currency, such as the U.S. dollar.
In such a way, traders can transact in the decentralized world of cryptocurrency without swallowing the wild volatility of crypto by having their portfolios tied to currencies, such as the U.S. dollar.
The biggest stablecoins are tether (USDT), USD coin (USDC) and binance USD (BUSD). Certain central banks worldwide also have begun to research issuing their own stablecoins.
Meme coins
Meme coins are a joke. That’s not meant facetiously. Meme coins are, quite literally, a joke.
Meme coins refer to popular cryptocurrencies that enthusiastic online traders and crypto followers back.
“Even though the meme coins might be fun, they are volatile and risky, as they have minimal or no intrinsic value,” Kemmerer says.
During the pandemic, coins like Dogecoin captured the public’s imagination, with high-profile internet campaigns pumping prices to scarcely believable levels. Dogecoin was the most notorious, its market cap reaching a lofty peak of $88 billion in May 2021. For context, the minimum market cap a public company must reach to be considered for the S&P 500 is $12.7 billion.
How to buy cryptocurrencies
Cryptocurrencies are unusual assets, and purchasing them can be intimidating for new users. In truth, however, it can be done quite easily.
If you decide to step into the crypto storm, here are three steps to follow.
1. Select a platform to buy crypto
Selecting a platform to buy your assets is the first and perhaps most important step. It’s especially important in crypto. Security risks are high, and transparency has traditionally been low, with several firms folding over the years and customer assets going with them.
Generally speaking, you can choose between a traditional online broker and a cryptocurrency exchange, which we explain below.
Traditional online brokers
Not all traditional brokers offer crypto. Still, as the asset class has expanded into mainstream consciousness, some have moved into the space.
But more obscure altcoins are often not viable through this medium. Potential customers should also do their due diligence on fees and the types of investment products offered, as they can vary significantly from company to company.
Cryptocurrency exchanges
The most common way to buy crypto is through an exchange. Binance dominates the space following the startling collapse of FTX in November, for which founder Sam Bankman-Fried has since been arrested.
Coinbase is listed publicly in the U.S., while other big names include Kraken and KuCoin. But the FTX bankruptcy should tell investors all they need to know about the importance of being vigilant.
2. Fund an account
Funding an account can commonly be done by bank transfer or credit card (although fees tend to be high for the latter). The easiest way is to deposit crypto you already own, although you must deposit fiat to buy crypto in the first place.
3. Place an order
Placing an order should be straightforward, depending on the platform. Ensure that you are purchasing the right asset. That sounds obvious, but with many coins and ways of gaining exposure to them, traders often need to catch up here.
How to store cryptocurrency
Storage is another big decision facing users. Your preferred method will depend on how secure you want to be at the expense of convenience, the amount of crypto you want to purchase and the length of time you expect to hold it.
We outline some of your storage options below.
Hot wallet
A hot wallet is connected to the internet. That makes it convenient. But should proper security not be practiced, the wallet could be vulnerable to online attacks.
Exchange account
An exchange account is the most convenient option, but it comes with risks.
“This form of storing coins is a custodial solution, meaning that users depend on the exchange to hold their assets and trust that the platform is secure,” explains Veronica Wong, CEO of SafePal, a crypto wallet company.
“The string of black swan events, most notably the collapse of FTX, was a key catalyst in highlighting the risks of custodial solutions — which is why many crypto holders are switching to noncustodial solutions, such as decentralized wallets,” Wong adds.
Cold wallet
A cold wallet is an alternative to a hot wallet. It isn’t connected to the internet, meaning it stands less chance of being compromised. On the flip side, a customer must ensure they keep the wallet and their seed phrase, crypto’s version of a password, safe.
“As a tradeoff (to increased security), the users also bear full responsibility of managing their assets in these wallets (if the private key to the wallet is lost, access to the funds will also be lost),” Wong says.
Frequently asked questions (FAQs)
The most popular cryptocurrencies are, unsurprisingly, the ones with the largest market caps. Bitcoin is comfortably number one, while ethereum has long been second. But when it comes to the public interest, meme coins are tough to beat, dogecoin and shiba inu being the two largest.
There are many exchanges, all of which offer different products. Binance is the biggest, while Coinbase is the largest publicly listed exchange, having floated in April 2021.
The space has recently gone through a big upheaval. FTX collapsed in November, and layoffs have flooded the industry. Coinbase laid off 20% of its workforce in January, having already laid off 18% in June. Kraken announced in November it was cutting 30% of its employees, and Crypto.com shed 20% a few weeks later.
Throughout crypto’s brief history, many exchanges have suffered hacks, and the regulatory framework in the space is far from established. It is vitally important that customers research which companies they want to use and where they want to store their crypto.
The interesting thing about cryptocurrencies is that they run on open-source software. That allows many to be created, as coders can simply copy and paste the code of an existing crypto to create a new one through a process sometimes known as forking.
There is a downside to that, of course. During the bull market hysteria, many cryptocurrencies of questionable value popped up. But many ceased to exist as the market crumbled in 2022, with the value of crypto stalwarts like ethereum and bitcoin tumbling, too. Bitcoin and ethereum lost more than 60% of their value in 2022.
