How to Buy and Invest in Crypto

by Contributing Author

If you want to know how to invest in cryptocurrency successfully, or the best cryptocurrency to invest in, first you’ll need to be able to answer one question: what is a cryptocurrency?

The most basic answer is that a cryptocurrency is a digital asset made nearly impossible to forge or double-spend by cryptography. 

Cryptocurrencies are built using blockchain technology, which is a decentralized ledger that once written in cannot be altered or erased. All you can do is add a block of new information to the end of it, like adding a link onto a chain — thus the name, blockchain.

Let’s parse all that, starting with a digital or virtual asset. A $5 bill is an asset. The $5 you pay Starbucks on your debit card for a venti latte is a digital asset. The same thing applies to a stock certificate, a photograph or a contract to buy 50 bushels of wheat.

Blockchains are built around cryptography. Each block is a collection of digital information encrypted with two complex codes. One is a public key code, which anyone can see, looking at every time the token has been transferred to a different wallet. But it does not identify the owner. The second is a private key — a code that allows the cryptocurrency’s owner to transfer it from their wallet to another one. 

Blockchains are decentralized because, unlike normal databases controlled from a central server like your bank’s customer accounts, an entire copy of the whole blockchain exists on many separate, individually operated servers spread around the world, all updated in real-time. So putting false information on one server node will not affect or fool the others. 

What you should know before you buy cryptocurrency

Before you get to how to buy cryptocurrency and which cryptocurrency to buy, there are some things you ought to know if you want to invest in cryptocurrency for the long term. 

First of all, cryptocurrency prices are very volatile. Bitcoin goes up and down 5% or more in a day with some regularity, and periodic downturns can take tens of thousands of dollars off the price. Smaller cryptocurrencies can move far more than that — 10% to 20% or more in a day or week is not exactly rare. 

That means you must also ask yourself, “should I invest in cryptocurrency” before deciding on the best cryptocurrency to buy. If you’re investing for the long term, you MUST be able to ride out big paper losses over weeks or even months — emotionally and financially. Buying the dip is a big part of how to invest successfully; panic selling and buying on FOMO — fear of missing out  — is a great way to go broke.

It also means that if that investment is aimed at something with a set date like college tuition, or if it is your only financial cushion in the event of a midsize emergency — a lost job, a blown engine — putting every penny in crypto might not be the best choice. 

Then there’s day trading. Do you know the difference between a moving average and a relative strength index without clicking on these links? Or why No. 2 cryptocurrency Ethereum is moving from Proof-of-Work to Proof-of-Stake? No? Then stay away from day trading crypto until you’ve studied up on the basics. And when you’re ready, look for an exchange that offers plenty of research tools and charts.

Get your social media on. The cryptocurrency industry communicates on Twitter and YouTube, if you know where to look and who to follow — start with venture capitalists, blockchain protocol foundations, analysts cited by crypto news sites, and crypto evangelists. The cryptocurrency investor community communicates on Reddit. Start at r/Cryptocurrency and go from there to r/Bitcoin, r/Ethereum — there’s a subreddit for just about any coin or token.

Then there’s privacy. Cryptocurrencies are anonymous — everybody knows that. And like nearly anything that “everybody knows” it’s not true. Remember that stuff about public keys? It means that anyone can trace almost any cryptocurrency from one wallet to another. And there are a growing number of blockchain intelligence firms that specialize in connecting actual names to those wallets. 

These firms are good enough at it to have helped law enforcement and the taxman capture drug dealers and even more unsavory types, shut down terrorist funding sites, and track tax cheats. And they’re getting better every day. In the U.S., they have also gotten a lot of training contracts with federal agencies, ranging from the FBI to the DEA to the IRS.

Also understand security. Those private key codes are your crypto in many ways. Lose that code and that coin is gone. There’s a guy who threw out a hard drive with Bitcoin worth $280 million in 2013, and another who has an encrypted hard drive with $240 million in BTC that he can’t access because he forgot the drive’s password.

Then there’s cold storage versus hot storage. What that means is cryptocurrency stored on a driver that is (hot) or is not (cold) connected to the internet. Hot wallets can be hacked, and exchanges have been to the tune of hundreds of millions of dollars in several cases. 

Finally, there are a lot of sketchy players in crypto trading, so look for a regulated exchange, do your own research, and remember that cryptocurrency transactions cannot be reversed — there are no do-overs when sending bitcoins. And the opaque spot markets offer plenty of opportunities for price manipulation. Caveat emptor applies more strongly in crypto than just about any other field.

What is the cryptocurrency to buy now?

So how do you go about becoming a smart crypto investor? Start by learning the basics of the market, how blockchain and cryptocurrencies work, what their advantages and disadvantages are, and how to keep them safe. 

Then delve into the types of cryptocurrencies available, the features of individual tokens, and figure out what kind of an investor you are or want to be — a holder building up favored coins and tokens for the medium to long term, or a trader seeking to profit from the ups and downs of the market? Do you favor a particular class of token? Do you want to store your own crypto in a private wallet or keep it on an exchange? 

For the newest investors, Bitcoin is always the top cryptocurrency to buy, as it is easy to understand, has a long history, and has major banks, hedge funds, corporate treasuries, and Wall Street titans as investors. Its value is generally more than all other cryptocurrencies put together, and it can always be bought and sold easily. 

How to invest in cryptocurrency

The core answer to the question of how to get Bitcoin or any other cryptocurrencies is to sign up for an exchange, get your identity verified, create a digital wallet, put some money in your account, choose the best cryptocurrency to buy now, and press “Buy.” 

The process is more complex, of course. For one thing, virtually all purchases are done with stablecoins — which we’ll get to in a minute — or swaps, selling one cryptocurrency for another.

Some are easy, selling BTC directly for ETH, for example. But even if you look at just the top 100 cryptocurrencies, there are plenty of trading pairs that are not offered on every — or even any — exchange. That means you might have to make a three or four-stage swap. Each step will come with an exchange fee and a transaction fee from the blockchain. 

So, it might make more sense to sell one cryptocurrency for a stablecoin such as Tether or USD Coin and use it to buy the other. Stablecoins are just cryptocurrencies that use a variety of techniques to keep the value pegged to a national currency, most commonly the U.S. dollar. One way to do this is by keeping a big pile of dollars and securities that back each stablecoin dollar for dollar. 

Then you need to look at things like liquidity. Are there enough people who want to buy the token you want to sell, to quickly and successfully match seller and buyer?