Ways to invest in crypto

Learn how crypto investment vehicles work.

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Key takeaways

  • There are currently 3 main ways retail investors are gaining exposure to crypto: buying crypto directly, buying a crypto-related ETF, or buying crypto stocks.
  • Because cryptocurrencies are relatively new, consider prioritizing risk management when deciding if crypto makes sense for your portfolio.
  • Not all strategies are created equal, so it's important to understand the nuances of each investment option before jumping in.

Despite the dramatic ups and downs of the crypto market, interest in crypto is growing. And that growth has helped increase the diversity of investment options in the market.

Retail investors looking to enter the market can now choose between buying crypto outright or buying a crypto-related asset. Those interested in the full experience of crypto ownership may opt for the former, while others may prefer indirect exposure through the latter.

In both cases, the market now offers multiple ways to get in on the emerging crypto markets. Let's discuss the basics of how they work.

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What is cryptocurrency?

Before you invest, consider making sure you understand what cryptocurrencies are and how they work.

In a nutshell, cryptocurrencies are digital assets that can be bought and sold in the same way as stocks or collectibles. Unlike stocks, however, owning crypto does not give you legal ownership of a company. Instead, you are buying a digital asset you are betting will rise in value. Some cryptocurrencies may also offer some practical utility, like the ability to exchange them for goods and services.

In general, crypto is highly volatile, so make sure you understand the implications of a potential investment before jumping in.

Ways to invest in cryptocurrency

If you understand the fundamentals, know the risks involved with investing, and have decided to enter the market, there are a few ways to gain exposure.

1. Buying crypto outright

The most straightforward way to gain exposure to cryptocurrency is by investing in the coins you're interested in. This is most commonly done via a traditional investment platform or crypto exchange.

There are some unique aspects to this strategy. For example, buying crypto outright gives you exposure to the industry in as little as minutes. Entering an order on a traditional investment platform or an exchange can also provide hands-on experience on the buying process, which can be useful for better understanding how crypto works.

Buying crypto outright may give you complete custody over your coins, which allows you to transfer coins between wallets (i.e., personal crypto accounts). This may make it easier to understand how blockchain technology works. And because the markets are open 7 days a week, there's more flexibility to decide when you want to invest compared to traditional assets like stocks and ETFs.

However, there are also risks to be aware of. Before buying crypto outright, consider learning the basics of crypto cybersecurity first. Like any digital asset, crypto is vulnerable to online theft. Transferring coins is also a multi-step process where even small errors could mean losing access to investments forever. And remember crypto is highly volatile, and that there's a possibility that the value of any cryptocurrency can drop to zero.

2. Buying crypto-related ETFs on a brokerage platform

Crypto-related exchange-traded funds (ETFs) give you exposure to a diversified basket of cryptocurrency values without actually owning any cryptocurrencies. Note that these ETFs are based on crypto futures and crypto stocks, and are not direct crypto ETFs.

ETFs that track the broader industry may offer less volatility compared to buying individual coins. Investors who believe blockchain technology may become an economic force might find it easier to invest in a single ETF, as opposed to buying individual coins and companies.

With that said, ETFs don't give you ownership of actual cryptocurrencies, which means they can't be used to pay for goods and services. Also, because ETFs are portfolios made up of multiple investments, the upside associated with individual cryptocurrencies or associated companies can be diluted. If a specific coin or company appreciates in value, you may not be able to capture the same level of growth by holding an ETF.

3. Buying cryptocurrency stocks

Another way to invest in crypto is by buying individual stocks of companies in the crypto industry. Examples include crypto exchanges, bitcoin mining companies, and banks that provide solutions for crypto companies.

Crypto stocks offer a way for investors to bet on which companies will lead the industry. And while buying crypto on an exchange incurs trading fees, most major brokerages offer trading for both stocks and ETFs with zero commissions (note that ETFs may still have management fees).

However, inexperienced investors should be aware this strategy has its risks. Crypto's inherent volatility, poor earnings reports, negative industry trends, and other factors, can all cause a stock's value to plummet.

Less-experienced investors may not want to put all their eggs in the same basket, in which case crypto-related ETFs may be a preferable option.

A note about holding crypto in IRAs and crypto 401(k)s

As the market matures, more brokerage platforms and financial services companies are offering the option to hold crypto in retirement accounts.

Those who can buy cryptocurrency in a Roth IRA account may have a potential advantage if the value of crypto continues to appreciate: Tax-free withdrawals on any earnings after age 59 if you've held the account for at least 5 years.

On the other hand, investors should also think critically about the risks. The goal of a retirement account is to provide financial stability for your later years by setting aside money you don't plan on touching for decades. For this reason, portfolio allocation is often built around index and mutual funds, which offer diversification and lower risk than many other options.

In contrast, cryptocurrencies are high risk. They're an emerging investment and their longevity is still uncertain, which may not align with the goal of a retirement account.

What to consider when investing in crypto

Because the industry is still young and volatile, prioritizing risk management over upside may save you emotional and financial stress.

Ultimately, inexperienced investors who understand the risks may want to consider sticking to the largest cryptocurrencies or crypto-related ETFs rather than go all in on crypto stocks. Given the ups and downs, they may also want to consider only investing an amount they can afford to lose. This could help them avoid catastrophic financial consequences in the event investments go south.

Next steps to consider

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