First Steps In Crypto
A guide for those that are interested in crypto but don't know how to start
Several of my friends have recently asked me for advice on how to get started investing in crypto. My crypto journey started during the summer of 2020 with my first Bitcoin purchase. That sparked my curiosity, leading me to go down the “crypto rabbit hole” and I continued investing and working in blockchain related jobs ever since. In this post I share advice and information that I learned along the way that I think will be valuable as you start your own crypto investing journey.
Tips For Getting Started
Here are a few best practices worth taking into account before getting started in crypto investing.
Only invest what you are willing to lose
Crypto is risky, even though the technology has high potential it is still risky, you shouldn't put in what you can't afford to lose. A proper position size will allow you to tolerate crypto’s high price volatility. On the other hand, make sure that you have enough skin in the game to move the needle.
Have a long term investment mentality
I believe that the best way to profit from crypto is by having a long term investing mindset. I believe that one should buy crypto planning to hold it for at least 5 or even 10 years. Crypto goes through bull and bear cycles, where investor sentiment goes from peak euphoria to near despair. Investing for the long term allows you to “forget” about your crypto holdings and helps you to not get caught up in the changing market sentiment.
Educate yourself
The more you learn about crypto the more you increase your chances of success. Crypto has a lot of haters out there, as a crypto investor you will often read posts saying that crypto has no value and is going to zero. The more one learns about the value crypto has to offer the greater the chance he will have the conviction to hang on during downturns. Some of the different aspects I suggest learning about are: how crypto works technically, crypto's history and how it evolved over the years and the many different use cases that crypto enables
Stick to Bitcoin and Ethereum
There are thousands of different coins out there. At least 90% of them are worthless, many of them are meme coins and many others are scam tokens. Don’t get me wrong, there are still many interesting tokens out there but choosing the winners is difficult. That is why I suggest sticking to the 2 biggest tokens: Bitcoin and Ethereum. They are by far the two largest tokens by market cap. They also have the largest developer communities and are the foundation layer that all other tokens build upon. I personally only invest in these two tokens and think that they offer the best risk-reward.
How to Invest in practice?
You did your homework and now it is time to invest! 🎉
The next question to ask is..how?
In Bitcoin’s early days it was very difficult to get your hands on it, you would have to either mine it yourself or you had to somehow find someone to sell it to you. Over the years as the industry matured it became simpler, here is how I suggest to buy crypto today:
Buy a Bitcoin ETF
This is the simplest option for most investors, recently the SEC approved several spot Bitcoin ETFs (Exchange Traded Funds), these are investment vehicles that allow ordinary investors exposure to bitcoin using a regular brokerage account. Unlike bitcoin futures ETFs, a spot bitcoin ETF invests directly in Bitcoins as the underlying asset, not derivatives contracts based on their prices. The ETFs are regulated and trade one-to-one with the actual Bitcoin price and most have low management fees. The downside is that only Bitcoin currently has an ETF, investors that are interested in buying Ethereum or any other crypto token will need to use the following approach.
Use a Crypto Exchange
While buying and storing crypto tokens on crypto exchanges involves added risk they offer a wide variety of different crypto tokens and allow for advanced trading. The main risk is losing access to your crypto stored on an exchange. Over the years due to faulty exchange management or even outright malicious exchanges have resulted in billions of dollars worth of crypto being stolen. The first large exchange to collapse was called Mt. Gox, which at the time facilitated ~70% of Bitcoin trading volume. It was hacked and around 850K Bitcoins were stolen, there was real belief that Bitcoin wouldn’t make it. Another recent exchange to go under was FTX, which at the time was considered to be one of the most reputable exchanges, its flamboyant CEO Sam Bankman-Fried was recently sentenced to 25 years due to charges of fraud. It is important to have these stories in mind when deciding to store your crypto tokens on an exchange.
Coinbase is considered to be one of the most reputable exchanges and is regulated, additional well known exchanges include Kraken, Bitstamp (which I personally use).
It is important to compare exchange fees and it is crucial to store your tokens only on reputable exchanges. An additional downside is that your crypto related taxes need to be calculated manually as opposed to an ETF where the brokerage platform automatically generates a 1099 form with the required taxes.
Advanced Investors
A core crypto value is “self custody” encouraging individuals to own their own crypto assets instead of trusting a third party. As described before, keeping your funds on exchanges has associated risk, withdrawing the funds to a user owned wallet is a safer option. Users can generate a wallet address using a mobile or desktop app - the wallet is called a hot wallet - since the private keys that control the wallet are on a non-secure device. Crypto has the saying “not your keys not you crypto”, if a hacker gets hold of the private key he can drain the funds.
For that reason it is crucial to use a hardware wallet to store substantial crypto funds. I personally use Trezor and I highly recommend using them. Ledger is also a good option. The hardware wallets are safe since they keep the private key isolated and can't be accessed by a hacker.
Self custody isn't simple and the idea of being responsible for your own funds can be daunting, a mistake like pasting the wrong address can result in losing your funds forever. Despite this, I think that the idea of having permissionless access to my crypto is liberating and once you set it all up you can rest assured that your crypto is safe.
I hope you found this guide as a helpful starting point for your crypto investment journey. Happy investing!