How to invest in cryptocurrencies
Cryptocurrencies, though originally designed to be used as digital currencies, have become attractive to investors because some of them have risen in value with extraordinary speed. At the beginning of 2017, the cost of a single Bitcoin was $1,000 and by the end of the year it was $14,000.
However, if you are going to invest in cryptocurrencies then you should proceed with caution. Unless you understand investing, it is sensible to seek advice from someone who does. An article such as this one, for example, does not constitute investment advice.
The volatility of prices means that they can go down as well as up. It’s easy to see your investment wiped out when a bubble bursts or eaten up by exchange fees and taxes. Therefore, the old rule applies: don’t invest any money that you aren’t prepared to lose.
The first thing you need to do is consider your portfolio. You could invest in just one cryptocurrency, but it is more sensible to spread your investment across several currencies, with different degrees of risk. A website like CoinMarketCap will allow you to compare rates for the best-known examples like Bitcoin, Ethereum and Ripple, and lesser known coins.
One option is to invest without actually buying coins; you are effectively betting on the price. This can be done through mechanisms like the Bitcoin investment trust at Grayscale in the US, in Germany through Bitcoin ETI, or in Germany and Sweden via the XBT Tracker. This is less risky than buying coins yourself but comes with investment fees.
Finding an exchange
If you want to buy coins, then you need an exchange, such as Coinbase in the USA and the UK, BitPanda in Europe, or Huobi in China. Look for one that has been running for a long time, has a good reputation and is transparent about ownership. You will also need your own wallet to store your currency. Some exchanges offer them, but having your own – especially a hardware wallet – is more secure.
You also need to be aware of any taxes that might apply to your cryptocurrency profits and transaction fees as you buy and sell.
There are two other ways to invest in cryptocurrencies but both come with drawbacks. First, you could try your hand at ‘mining’, which is the process of operating computers that verify transactions for the network. If your computer verifies a transaction then your reward will be new coins. However, mining is mostly the province of large, well-financed operations and it is very hard for smaller players to make anything.
The other option is to invest in an ICO (Initial Coin Offering). This usually means paying a cryptocurrency to a business in return for tokens that will increase in value if the business achieves its goals. However, this is more akin to investing on the stock market than currency trading.