Ways to invest in crypto

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.

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. Note that crypto may be more susceptible to market manipulation than securities, and crypto holders do not benefit from the same regulatory protections applicable to registered securities. Also, the future regulatory environment for crypto is currently uncertain.

Crypto is also not insured by the Federal Deposit Insurance Corporation or protected by the Securities Investor Protection Corporation, meaning you should only buy crypto with an amount you're willing to lose.

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 complete custody over the coins, which allows 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 ETPs or crypto-related ETFs

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 later years by setting aside money the investor doesn'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 emotional and financial stress.

Given the ups and downs, its important to invest an amount you can afford to lose. This could help you avoid catastrophic financial consequences in the event investments go south.

Finally, it's important to remember that crypto may be more susceptible to market manipulation than securities, and crypto holders do not benefit from the same regulatory protections applicable to registered securities. Also, the future regulatory environment for crypto is currently uncertain. Crypto is not insured by the Federal Deposit Insurance Corporation or protected by the Securities Investor Protection Corporation, meaning a person should only buy crypto with an amount they're willing to lose.

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 later years by setting aside money the investor doesn'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 emotional and financial stress.

Given the ups and downs, its important to invest an amount you can afford to lose. This could help you avoid catastrophic financial consequences in the event investments go south.

Finally, it's important to remember that crypto may be more susceptible to market manipulation than securities, and crypto holders do not benefit from the same regulatory protections applicable to registered securities. Also, the future regulatory environment for crypto is currently uncertain. Crypto is not insured by the Federal Deposit Insurance Corporation or protected by the Securities Investor Protection Corporation, meaning a person should only buy crypto with an amount they're willing to lose.