How to Invest into Cryptocurrencies

Cryptocurrency has transformed the global financial market in only a decade. Crypto experts and novices alike have given diverging opinions, predictions, and expectations about cryptocurrencies over the years. Still, one thing is certain: cryptocurrencies are here to stay and threatening to take over.

This makes it critical for investment advisors to hone their crypto knowledge. They should be able to successfully invest in cryptocurrencies like Bitcoin and Ethereum without getting short-changed or blowing up their entire portfolio. Entering the cryptocurrency market without enough knowledge about the routine twists and turns of the crypto markets will likely lead to tears.

But don’t sweat it. This guide will break down how to begin investing in cryptocurrencies, to give the novice crypto trader a leg up. But, before digging into how to do it, let’s first discuss what cryptocurrency is and why it’s important to learn about.

What are cryptocurrencies?

Cryptocurrency is a digital currency supported by decentralized blockchain technology. It’s a digital medium of exchange whose transactions and records are verified and maintained online on an encrypted and decentralized blockchain system using cryptography.

Cryptocurrencies exist virtually on a blockchain as digital tokens. A global network of computers in a shared database verifies each transaction. This way, no one entity has a monopoly over the currency, unlike with fiat currency, where the central banks and governments retain control.

Why is crypto important?

The RIA Digital Assets Council says 80% of financial advisers field questions about bitcoin from their clients, but only 8% have the knowledge to answer them clearly. As such, there’s a lot of value in investors fleshing out their understanding of how cryptocurrency works. As long as the knowledge of the market isn’t very high, those who do understand it have the potential to make quite a bit from it.

How to start investing in cryptocurrencies 

Let’s break down the process step by step. 

Step 1: Choose a crypto coin

While Bitcoin is the most popular and valuable crypto coin globally, there are more than 6,000 other cryptocurrencies available at the moment. Bitcoin and Ethereum currently command the lion’s share of the market and are frequently the most in-demand crypto coins. Other top altcoins include Binance Coin, Tether, Solana, Cardano, Polkadot, XRP, and Dogecoin.

Because cryptocurrencies are so volatile, however, this list will not remain the same from day to day. Anyone looking to purchase cryptocurrency should check the current rankings on a price-tracking website, like CoinMarketCap.

How can I select a strong cryptocurrency to invest in?

With thousands of crypto coins out, picking a winner comes down to vigorous research and in-dept h value assessment. The ideal cryptocurrency will advance these core values:

  • Privacy
  • Scalability
  • Interoperability

Before making a purchase on any cryptocurrency, it’s best to read its whitepaper carefully, assess the coin’s tokenomics, and stay eagle-eyed to spot signs of a crypto scam. For example, a healthy amount of skepticism should fall on a coin that promises guaranteed interest rates or that has directors with little to no crypto experience.

Step 2: Buy cryptocurrency

Regulated financial institutions like banks and brokerage firms don’t sell cryptocurrency. Instead, cryptocurrencies are bought using fiat currency from centralized cryptocurrency exchange platforms, like Kraken, Coinbase, or Gemini.

The process is simple. A user must create an account on the platform, upload identity proof, wait for verification, and then they can transfer money to the exchange to buy crypto.

Another way to buy cryptocurrency is from other crypto holders, through peer-to-peer (P2P) transactions on decentralized cryptocurrency exchanges like dYdX.

Step 3: Choose a crypto wallet to store cryptocurrencies

In general, people may choose one of two ways to store their cryptocurrency: in a wallet connected to their account on a centralized cryptocurrency exchange like Coinbase, or in their private cryptocurrency wallet.

A crypto wallet stores the private and public keys that give access to the crypto tokens’ blockchain address. For a transaction to complete, the private key must match the public key. This makes crypto wallets a great way to securely store keys and unlock coins on the blockchain whenever the holder wants to make a transaction.

There are three major types of cryptocurrency wallets. These are:

  1. Software wallets: These include desktop wallets that can be installed on PC, online wallets stored on the cloud, and mobile wallets on a phone or tablet app
  2. Hardware wallets: These wallets store keys on a physical device, like a USB
  3. Paper wallets: These are paper printouts of the private and public keys

Since hackers could find security flaws that let them compromise a software wallet, hardware and paper wallets are far more secure ways to store keys.

Tips for buying cryptocurrencies

There are no concrete rules to guide investors on when to buy or sell cryptocurrency. However, there are a few rules of thumb to keep in mind. It’s generally best to avoid:

  • Buying at the height of a price bubble or a price crash
  • Buying based on fear or greed
  • Selling too soon, or reactive selling
  • Investing over 10% of a portfolio

Ideally, it’s good to buy in when prices are fairly low and the volatility rate is somewhat steady.

It’s important to remember, though, that the crypto market is extremely volatile, and market swings can happen very suddenly. But, with proper preparation for these swings and a clear, informed investment strategy, investors can make cryptocurrencies a potentially profitable chunk of their portfolio.

DISCALIMERS:

Qdeck is a registered Commodity Trading Advisor with the Commodity Futures Trading Commission (“CFTC”) and a Member of the National Futures Association (“NFA”).

Investment in any Qdeck program is speculative and involves significant risk of loss. There can be no assurance that the programs will be able to realize its objectives. Programs may not be available in all jurisdictions, and investments may not be suitable for all investors. Information is subject to change without notice. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

QDECK IS A MEMBER OF NFA AND IS SUBJECT TO NFA’S REGULATORY OVERSIGHT AND EXAMINATIONS. QDECK HAS ENGAGED OR MAY ENGAGE IN UNDERLYING OR SPOT VIRTUAL CURRENCY TRANSACTIONS IN A MANAGED ACCOUNT PROGRAM. ALTHOUGH NFA HAS JURISDICTION OVER QDECK AND ITS MANAGED ACCOUNT PROGRAM, YOU SHOULD BE AWARE THAT NFA DOES NOT HAVE REGULATORY OVERSIGHT AUTHORITY FOR UNDERLYING OR SPOT MARKET VIRTUAL CURRENCY PRODUCTS OR TRANSACTIONS OR VIRTUAL CURRENCY EXCHANGES, CUSTODIANS OR MARKETS. YOU SHOULD ALSO BE AWARE THAT GIVEN CERTAIN MATERIAL CHARACTERISTICS OF THESE PRODUCTS, INCLUDING LACK OF A CENTRALIZED PRICING SOURCE AND THE OPAQUE NATURE OF THE VIRTUAL CURRENCY MARKET, THERE CURRENTLY IS NO SOUND OR ACCEPTABLE PRACTICE FOR NFA TO ADEQUATELY VERIFY THE OWNERSHIP AND CONTROL OF A VIRTUAL CURRENCY OR THE VALUATION ATTRIBUTED TO A VIRTUAL CURRENCY BY QDECK.

Unique Features of Virtual Currencies. Virtual currencies are not legal tender in the United States and many question whether they have intrinsic value. The price of many virtual currencies is based on the agreement of the parties to a transaction. There are various risks associated with the unique features of virtual currencies, only some of which are explained herein. For instance, cryptocurrency exchanges have in the past been closed due to fraud, failure or security breaches. In many of these instances, the customers of such cryptocurrency exchanges were not compensated or made whole for the partial or complete losses of their account balances. Any of the assets that reside on a cryptocurrency exchange that shuts down may be lost.

Price Volatility. The price of a virtual currency is based on the perceived value of the virtual currency and subject to changes in sentiment, which make these products highly volatile. Certain virtual currencies have experienced daily price volatility of more than 50%. There are various risks associated with the extreme price volatility of virtual currencies and the possibility of rapid and substantial price movements, which could result in significant losses. For instance, the value of the Account relates directly to the value of the cryptocurrencies held directly or indirectly by the Account, and fluctuations in the price of cryptocurrencies could materially and adversely affect an investment in the Account. Several factors may affect the price of cryptocurrencies. Momentum pricing of cryptocurrencies may continue to result in speculation regarding future appreciation in the value of cryptocurrencies, inflating and making the market price of cryptocurrencies more volatile. As a result, cryptocurrencies may be more likely to fluctuate in value due to changing investor confidence in future appreciation or depreciation in the market price of cryptocurrencies.

Valuation and Liquidity. Virtual currencies can be traded through privately negotiated transactions and through numerous virtual currency exchanges and intermediaries around the world. The lack of a centralized pricing source poses a variety of valuation challenges. In addition, the dispersed liquidity may pose challenges for market participants trying to exit a position, particularly during periods of stress. In valuing virtual currency products, the Investment Manager will seek to take into account access to liquidity and the volatility of these markets. Liquidity risks are also major concern, as it may become difficult or impossible to retrieve funds that have been invested in cryptocurrencies. Client should be aware that there is no assurance that cryptocurrencies will maintain their long-term value in terms of future purchasing power or that the acceptance of cryptocurrency payments by mainstream retail merchants and commercial businesses will continue to grow. In the event that the price of cryptocurrencies declines, the Investment Manager expects the value of an investment in the Account to decline proportionately.

Cybersecurity. The cybersecurity risks of virtual currencies and related “wallets” or spot exchanges include hacking vulnerabilities and a risk that publicly distributed ledgers may not be immutable. A cybersecurity event could result in a substantial, immediate and irreversible loss for market participants that trade virtual currencies. Even a minor cybersecurity event in a virtual currency is likely to result in downward price pressure on that product and potentially other virtual currencies. Further, cryptocurrency transactions are irrevocable and stolen or incorrectly transferred cryptocurrencies may be irretrievable. Cryptocurrency transactions are not reversible without the consent and active participation of the recipient of the transaction. Once a transaction has been verified and recorded in a block that is added to the blockchain, an incorrect transfer of cryptocurrencies or a theft of cryptocurrencies generally will not be reversible and the Account may not be capable of seeking compensation for any such transfer or theft. As technological change occurs, the security threats to the Account’s cryptocurrencies will likely adapt and previously unknown threats may emerge. The Account’s and the cryptocurrency custodians’ ability to adopt technology in response to changing security needs or trends may pose a challenge to the safekeeping of the Account’s cryptocurrencies.

Opaque Spot Market. Virtual currency balances are generally maintained as an address on the blockchain and are accessed through private keys, which may be held by a market participant or a custodian. Although virtual currency transactions are typically publicly available on a blockchain or distributed ledger, the public address does not identify the controller, owner or holder of the private key. Unlike bank and brokerage accounts, virtual currency exchanges and custodians that hold virtual currencies do not always identify the owner. The opaque underlying or spot market poses asset verification challenges for market participants, regulators and auditors and gives rise to an increased risk of manipulation and fraud, including the potential for Ponzi schemes, bucket shops and pump and dump schemes. Cryptocurrencies are controllable only by the possessor of unique private keys relating to the addresses in which the cryptocurrencies are held. There is a risk that some or all of the Account’s cryptocurrencies could be lost, stolen or destroyed.

Virtual Currency Exchanges, Intermediaries and Custodians. Virtual currency exchanges, as well as other intermediaries, custodians and vendors used to facilitate virtual currency transactions, are relatively new and largely unregulated in both the United States and many foreign jurisdictions. Virtual currency exchanges generally purchase virtual currencies for their own account on the public ledger and allocate positions to customers through internal bookkeeping entries while maintaining exclusive control of the private keys. Under this structure, virtual currency exchanges collect large amounts of customer funds for the purpose of buying and holding virtual currencies on behalf of their customers. The opaque underlying spot market and lack of regulatory oversight creates a risk that a virtual currency exchange may not hold sufficient virtual currencies and funds to satisfy its obligations and that such deficiency may not be easily identified or discovered. In addition, many virtual currency exchanges have experienced significant outages, downtime, thefts and transaction processing delays and may have a higher level of operational risk than regulated futures or securities exchanges.

Regulatory Landscape. Virtual currencies currently face an uncertain regulatory landscape in the United States and many foreign jurisdictions. In the United States, virtual currencies are not subject to federal regulatory oversight but may be regulated by one or more state regulatory bodies. In addition, many virtual currency derivatives are regulated by the CFTC, and the SEC has cautioned that many initial coin offerings are likely to fall within the definition of a security and subject to U.S. securities laws. One or more jurisdictions may, in the future, adopt laws, regulations or directives that affect virtual currency networks and their users. Such laws, regulations or directives may impact the price of virtual currencies and their acceptance by users, merchants and service providers. It may be illegal, now or in the future, to own, hold, sell or use cryptocurrencies in one or more countries, including the United States. Although currently cryptocurrencies are generally either not regulated or lightly regulated in most countries, including the United States, one or more countries may take regulatory actions in the future that severely restrict the right to acquire, own, hold, sell or use cryptocurrencies or to exchange cryptocurrencies for fiat currency. Such an action may restrict the Account’s ability to hold or trade cryptocurrencies, and could result in termination and liquidation of the Account at a time that is disadvantageous to Client, or may adversely affect an investment in the Account.

Technology. The relatively new and rapidly evolving technology underlying virtual currencies introduces unique risks. For example, a unique private key is required to access, use or transfer a virtual currency on a blockchain or distributed ledger. The loss, theft or destruction of a private key may result in an irreversible loss. The ability to participate in forks could also have implications for investors. For example, a market participant holding a virtual currency position through a virtual currency exchange may be adversely impacted if the exchange does not allow its customers to participate in a fork that creates a new product. If an event should occur, the Account could be adversely affected by not being entitled to the benefits of such fork and the Account could be left holding a cryptocurrency that no longer has any value or a low value. The cryptocurrency network operates based on an open-source protocol maintained by the core developers of the cryptocurrency network and other contributors dedicated to cryptocurrency development. As the cryptocurrency network protocol is not sold and its use does not generate revenues for its development team. Consequently, there is a lack of financial incentive for developers to maintain or develop the cryptocurrency network and the core developers may lack the resources to adequately address emerging issues with the cryptocurrency network protocol. A disruption of the internet may affect cryptocurrency operations, which may adversely affect the cryptocurrency industry and an investment in the Account. Cryptocurrency networks’ functionality relies on the internet. A significant disruption of internet connectivity could prevent cryptocurrency networks’ functionality and operations until the internet disruption is resolved. Third parties may assert intellectual property claims relating to the operation of cryptocurrencies and their source code relating to the holding and transfer of such assets. Regardless of the merit of any intellectual property or other legal action, any threatened action that reduces confidence in a cryptocurrency network’s long-term viability or the ability of end-users to hold and transfer the relevant cryptocurrency may adversely affect the Account. Additionally, a successful intellectual property claim could prevent the Account from accessing the cryptocurrency network or holding or transferring their cryptocurrency, which could force the Account to terminate and liquidate the Account’s cryptocurrencies (if possible).

Transaction Fees. Many virtual currencies allow market participants to offer a fee. While not mandatory, a fee is generally necessary to ensure that a transaction is promptly recorded on a blockchain or distributed ledger. The amounts of these fees are subject to market forces and it is possible that the fees could increase substantially during a period of stress. In addition, virtual currency exchanges, wallet providers and other custodians may charge high fees relative to custodians in many other financial markets. As a result, these transaction fees may act to reduce and even eliminate any performance that has otherwise been achieved by the Account.

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