How to Invest in Cryptocurrency (2021) & Best Exchanges

Bitcoin, the first cryptocurrency came out in 2009 and since then has been on a meteoric rise firmly placing it as the best asset class to hold over the past decade. However, holding Bitcoin and other alternative cryptocurrencies over this period hasn’t been all plain sailing.

How to invest in cryptocurrency in 2021

This market often sees huge corrections that can wipe over 80% off the price in short periods of time, although with that risk comes the potential for massive rewards which is what is drawing more and more investors into this space.

Knowing how to invest in cryptocurrency the right way can make all the difference which is why I’ll run through what to look out for and common pitfalls to avoid.

What is Cryptocurrency

At its core, each cryptocurrency is effectively a store of value that can be exchanged for goods and services. They work using a technology called blockchain which is effectively a chain of digital information based on a set of defined rules. One of these rules will be the total number of tokens or coins, which for example with Bitcoin is 21 million coins.

There are thousands of different cryptocurrencies, each with its own specific use cases trying to solve a multitude of different problems. When investing, the more you can understand what problems each cryptocurrency is looking to solve, or is currently solving and the potential for growth in this area, the better the predictions you will be able to make on potential price fluctuations.

Choose a Platform to Buy Cryptocurrency

To start investing in cryptocurrency you’ll effectively need two things, somewhere to buy it and then somewhere to store it. The most popular place to buy cryptocurrencies are through exchanges. There are two types of exchanges, centralised and decentralised.

Centralised exchanges are effectively a company that facilitates the buying and selling of cryptocurrencies for its users, allowing you to send fiat currency (dollars, pounds, euros etc) to your account, trade and store cryptocurrency directly on the platform.

Decentralised exchanges, often referred to as DEXs, are platforms that have been created that allow direct peer-to-peer cryptocurrency transactions without the need for an intermediary. This does come with a number of benefits, although most notably being an increase in the number of cryptocurrencies you have available to invest.

This is because each centralised exchange selects which cryptocurrencies they want to offer through their platform, meaning some aren’t available. This can be due to a number of reasons, such as when the coin was released, the size of the project or other conditions that help protect investors from potential scams.

For beginners, centralised exchanges are definitely the best place to start as they’re much easier to use and there are fewer places for things to go wrong. Using a decentralised exchange is a lot more complicated and does come with a number of risks if you don’t know what you’re doing, although definitely something to consider once you have more knowledge in the cryptocurrency space.

Best Cryptocurrency Exchanges

Some of the most popular centralised exchanges are:

  • Binance
  • Coinbase
  • Kraken
  • Bitfinex

Any of these large centralised exchanges are a good place to start as a beginner, although my favourites are Coinbase and Binance mainly due to their intuitive platforms.

Best Decentralised Exchanges

As highlighted above, decentralised exchanges are a lot more complicated to use and for beginners should be avoided until you’re more knowledgable or practice with small amounts of money first that you’re willing to lose.

Decentralised exchanges allow you to swap coins from one coin to another that are built on the same blockchain. So for example, with Uniswap, you can swap coins that are based on the Ethermium blockchain. In order to do this, you need to pay a fee known as a “gas fee” in order to process your transaction, which is paid out to the network.

There are also aggregators, like 1inch that actively search through other decentralised exchanges to find you the cheapest rates to make your trade.

The top decentralised exchanges are:

  • Uniswap – Etherium chain
  • PancakeSwap – Binance Smart Chain
  • 1inch – Aggregator
  • MDEX – Huobi Eco-Chain & Ethereum
  • Sushiswap – Etherium chain

Best Way to Store Your Cryptocurrency

If you’re using a centralised exchange, the easiest way to store your cryptocurrency is directly on the platform. Doing this you’ll also be protected by the multiple levels of security put in place by the exchanges and you’ll also have the added benefit of easily being able to sell your cryptocurrency assets.

The next way to store your cryptocurrency is in a cryptocurrency wallet. This topic can get quite complex with the number of different options, although to keep it brief, a wallet allows you to store your private and public keys that when connected to the blockchain give you access to your crypto assets.

The wallet itself doesn’t actually contain the cryptocurrency, just the public key, which is your cryptocurrency address and the private key, known only to the owner. Both of these keys are required in order to complete a transaction, which is why it’s extremely important to keep both of these pieces of information as safe as possible.

Losing these keys or letting them fall into the hands of an attacker could put all of the cryptocurrency stored on that wallet at risk, which is why as a beginner a centralised exchange is probably the safest place, especially for smaller portfolios until you have time to properly research using wallets in detail.

Types of Cryptocurrency Wallets

Cryptocurrency wallets can be divided into 3 groups; software, hardware and paper wallets. The majority of wallets are based on software, although the best one for you will depend on your own desire between security and convenience.

  • Software wallets are usually stored on your personal computer or mobile device, although you can also have online software wallets often issued directly from exchanges.
  • Hardware wallets allow you to store your keys on a hardware device such as a USB stick which are considered as more secure as they aren’t stored online where they could be accessed by an unauthorised party.
  • Paper wallets are just a wallet printed out onto a piece of paper with your keys that you store in a safe place, although with the increasing adoption of hardware wallets these are becoming more obsolete.

Best Cryptocurrency Wallets

The best cryptocurrency wallet for you will depend on what you need to use it for, however to get you started I’ll list some of the most popular wallets below.

  • Exodus – great for beginners
  • Ledger Nano X – hardware wallet
  • Coinbase Wallet
  • Binance Wallet
  • Electrum

Staking Your Cryptocurrency (Effectively Earn Dividends)

Cryptocurrency staking is rapidly gaining in popularity as it enables you to earn cryptocurrency from your portfolio.

Previously the only way to earn cryptocurrency on a blockchain network was to mine it. This requires a lot of computing power to verify transactions on the ledger using a proof-of-work consensus algorithm, with Bitcoin being the most popular.

Not all cryptocurrencies allow you to stake, although you can think of staking as a less resource-intensive alternative to mining. It works using a proof-of-stake consensus algorithm, which instead of competing to solve complex mathematical problems like with mining, the network allows you to lock (stake) coins and the protocol randomly assigns one of them to validate the next block of transactions on the ledger.

The probability of being chosen is proportional to the number of coins you stake, although you usually connect to a staking pool which helps to keep your returns consistent.

You can stake your coins directly from your wallet and also some of the popular exchanges allow you to stake through their platform, such as Binance.

Staking allows you to maximise your investment gains so you can benefit from both the capital appreciation when the value of the cryptocurrencies rise, and also earn passive income through staking. Typically staking offers a return between 5-7%, with some newer, more volatile coins offering much more.

It’s also worth highlighting that staking does come with added risk so if you’re considering doing this please do your own research and make sure to use high quality, secure wallets.

To learn more about staking, make sure to read this post on what is crypto staking to maximise your investment returns.

Why Market Cap is the Metric You Need To Focus On

When people start investing in cryptocurrency, a lot of them seem to get fixated on the price of the coin and completely ignore arguably the most important metric, the market cap.

I’ve seen this countless times where people compare the price of two cryptocurrency coins and ask when will one be higher than the other, thinking that the price of a coin is related to its value and I want to make sure you avoid this common pitfall when starting to invest.

Using an example:

  • Coin A has a price of £2 and 2 billion coins in circulation
  • Coin B has a price of £1 and 10 billion coins in circulation

The common question asks when will Coin B have a price of £2 making it equal to Coin A in value.

The first thing to do is understand what is market capitalisation. This is the total market value of the price per coin multiplied by the total coins in circulation. So continuing the example, the market capitalisation of each coin will be:

  • Coin A market capitalisation = £2 * 2 billion = £4 billion
  • Coin B market capitalisation = £1 * 10 billion = £10 billion

As you can see, Coin B is actually at a higher valuation than Coin A, and in order for the price of each Coin B to equal £2, it will need to have another £10 billion added into its market. If this happens, Coin B will then be worth 5 times as much as Coin A even though they have the same coin price.

From an investment standpoint, if you were looking into both of these projects and you concluded that they were both excellent choices for long term growth and you could see them both being equal in the future, then Coin A would be the best investment choice.

In order for Coin A to equal the same value as Coin B it would need to increase by 150%, giving a price per coin of £5 and a market capitalisation on £10 billion with 2 billion coins in circulation.

Looking at market capitalisation when viewing your investment will allow you to more easily see potential for growth when compared to other coins as price per coin can often be misleading.

The best place to find the market capitalisation of each coin is using the popular website CoinMarketCap.com that lists coins in rank order based on their market cap.

Know the Cryptocurrency Market Cycles

Like all markets, the cryptocurrency market is cyclical.

  1. Accumulation – prices slowly increasing
  2. Mark-up – prices rising more quickly
  3. Distribution – prices reaching to a peak
  4. Mark-down – prices correcting after an over-optimistic valued price peak

For smart money, the accumulation phase is the best time to buy, when prices are just starting to pick up and arguably the asset class is still undervalued. Investors can still make money if they enter during the second mark-up phase, however are more at risk if they fail to properly calculate the potential downside risk in the mark-down phase where the price corrects after the over-optimistic distribution phase.

With the cryptocurrency market, this market cycle has happened every 4 years since 2010 and has historically been driven by a phenomenon known as the bitcoin halving. This is an event that takes place every 4 years where the reward for mining Bitcoin transaction is cut in half and also the number of new bitcoins added into circulation is also cut in half.

The most recent Bitcoin halving happened on May 11, 2020, and historically this event has then triggered a bull run in the cryptocurrency market.

This event usually triggers a bull run due to something known as Bitcoin market dominance, which is the percentage of the cryptocurrency market cap allocated to Bitcoin. As Bitcoin is so dominant in this space, currently holding around 60% of the total cryptocurrency market cap, any large events or movements in Bitcoin are usually replicated in the rest of the market, known as altcoins, or alternative coins to Bitcoin.

Please remember that past performance and previous trends are not a guarantee and due to the volatile nature of cryptocurrency investing there is a high risk in this space. However, knowing these historic market cycles is something useful to know as an investor and my hope is that this will help prevent you from investing during the peak and losing money.

How News Affects Cryptocurrency Prices

As an investor you’re probably well aware of how much the news can impact the value of an investment, although this is even more prevalent in the cryptocurrency space.

Coins that seem to be excellent investments can go unnoticed for months or even years, whilst coins that have no underlying value or utility can suddenly surge out of nowhere so it’s good to keep your eye on the news wherever possible.

Ultimately the coins that have utility and strong market growth prospects are usually the best long term investments, however as the market is based on human perception this sometimes isn’t always the case.

Also, be aware that some coins that come out can be outright scams looking to profit from overzealous investors aiming to make a quick profit. This is happening more frequently as decentralised exchanges are becoming more mainstream and giving more investors access to purchase a wider array of cryptocurrencies.

Conclusion – Should You Invest in Cryptocurrency?

I just want to highlight that this is not investment advice and you should do your own research before making any investment decision. This is even more important in the cryptocurrency space as a large number of coins that have been released over the past decade have either drastically reduced in value or even disappeared completely, so your money is at risk.

That said, with cryptocurrency being the asset class producing the best returns over the past decade it’s definitely worth considering adding it to your portfolio. Now you’re aware of the places you can buy cryptocurrency and some things to watch out for when investing, hopefully you’ll now be more knowledgeable in this space.

Good luck on your investing journey and if you jump in, be ready for a wild ride!