How to Invest in Cryptocurrency

If you know how to buy things online, you can figure out how to buy cryptocurrency pretty quickly. But making smart investing decisions about cryptocurrency, or any other asset class, requires more than pushing a “buy” button. It means first incorporating crypto into your larger investment plan — the same step you’d take when investing your money in anything else, but with crypto-specific details.

Review, or create, your personal investing plan

An investment strategy is a high-level overview of your investing outlook for assets of any type. Tethering individual investment decisions to a larger, comprehensive plan ensures they are working in concert as you work toward your goals.

Common questions you should answer in your investment strategy include:

• What are your goals, and what’s the time horizon associated with each? Crypto is a risky asset and is best suited for investors who won’t be relying on that money in the next decade or so. Age can be a factor when determining your time horizon for investing, but it’s not everything. Most people generally have a mix of short- and long-term goals, which require a blend of asset types. Your mix of investment types is called your asset allocation, and it can have a big impact on your portfolio. One rule is to limit your investments in high-risk assets like crypto to no more than 10% of your portfolio.

• What’s your risk tolerance? Understanding your risk tolerance is similar to understanding your goals and time horizon, but it’s more specific to your personality. Investing in risky, volatile assets like crypto or stocks of individual companies can be rewarding, but quick, steep drops can put a big dent in your plans. You can’t eliminate risk, but if higher-risk options make you uncomfortable, you can skew your overall mix of investments to something more conservative.

• Are you going to take an active or passive approach? Active investors buy and sell investments regularly and often base investment decisions on the day-to-day movements of the market. Passive investors take a more hands-off approach, opting for an investment routine that doesn’t take into account the market’s short-term movements and that prioritizes keeping costs to a minimum. Do you plan to buy and sell your investments frequently, or do you plan to hold — or HODL — your investments for a long time once you buy them? Committing to a strategy can bring you clarity and confidence.

• When and how much will you contribute? Remember that you don't have to be a high roller to get started investing. Many crypto platforms have minimums of $10 or less, and even a small sum can help you get acquainted with the process to see if it's for you. You can use an investment calculator to see what various recurring contributions, when paired with your expected investment returns, will look like. Instead of guessing whether prices are low before you buy, make routine contributions and investment purchases using a strategy called dollar-cost averaging.

Choose your crypto portfolio carefully

Before investing in cryptocurrency, take time to understand what you’re getting into:

• Cover the basics. Before putting money into a cryptocurrency — or any other asset — do your due diligence. Some questions you might want answered: How does the cryptocurrency work? What are the downsides? Is there a compelling use case that will attract other users or investors? Is it at the center of controversies or lawsuits? The answers can help you shape your investing hypothesis.

• Consider the larger context. Crypto doesn’t exist in a vacuum. Changing government regulations or industry trends, like proof of stake competing with proof of work, could alter the long-term outlook for a cryptocurrency.

Choose where you’ll buy and store your crypto

When you’re ready to buy cryptocurrency, you’ll need to choose an exchange. Bitcoin and a handful of the biggest altcoins are nearly universally available, but if you are eyeing a niche investment, you’ll want to double-check its availability on your exchange of choice. If you see high fees — anything above 1% per transaction — know that you can typically get the same crypto for less elsewhere.

It’s important to think about where you want to store your crypto before you choose where to buy it: Storage options vary from exchange to exchange, and the presence or absence of your preferred storage method could be a reason to choose one service over another.

Generally, you can store crypto with the exchange where you bought it. But most exchanges let you move the digital assets you buy to your own crypto wallet. Some personal wallets are connected to the internet, which make them easy to use. Or, for protecting against online hacks, you can use a cold wallet — the most secure option — which looks like a thumb drive and stores your crypto offline.

Most popular crypto exchanges offer taxable accounts. This means you’ll pay taxes on any price appreciation when you sell. To avoid this tax hit, you can hold cryptocurrency in a Roth IRA. You’ll face limited options and likely higher fees, but if you expect big gains and have a long time horizon, it might be worth it.