Is crypto investing a potential wealth-builder for you? Let’s talk about the basics of cryptocurrency investing so you can decide for yourself.
The number of people who work more than one job in the United States increased significantly between 1996 and 2018, according to the most recent report from the Department of Labor. Currently, multi-job holders make up between 7% and 8% of the workforce. Working multiple jobs has typically been driven by economic necessity. Employers across the country have caught on to the fact that employing people part-time is cheaper for them. They can deny basic benefits like health insurance and pay less competitive wages to part-time employees. Workers have to make up the deficit somewhere and many have turned to second jobs and side hustles to make ends meet.
But if you take a look at the world around you personally, you may notice that friends and family are taking on multiple jobs by choice. They’re investing energy in doing the work they love. They’re working not just to make a living wage, but for their own satisfaction and as a way to get ahead. Statistics, perhaps, simply haven’t caught up with the trend we’re seeing with our own eyes.
How about you? Have you started your own small business to supplement your traditional income—perhaps finally pursuing your passion? Then you’ve probably discovered how much time it takes to make a go of it. That’s why you might want to consider another, more passive strategy to build wealth: investing. There’s a wide variety of asset classes you can choose to invest in—some very traditional and some considered less conservative. Buying and trading cryptocurrency is one investment alternative that’s been getting a lot of press recently. While not exactly mainstream yet, investing in cryptocurrency is slowly becoming the norm. Recent estimates suggest that about 16% of Americans have, at some point, invested in or traded crypto.
Not surprisingly, younger generations are leading the charge. Millennials and members of Gen Z make up about 94% of cryptocurrency owners and traders. But Latinos are also leading the pack of early crypto adopters. Some 24% of Latinos have stepped into cryptocurrency investing, compared to just 16% of non-Latino investors.
So is investing in crypto a potential wealth-builder for you? What do you need to know before you join the growing number of crypto investors? Let’s talk about the basics of cryptocurrency investing so you can make an informed decision for yourself.
First Things First: Cryptocurrency is Considered Risky
It’s a funny paradox. As a distinct asset class, cryptocurrencies have performed pretty phenomenally over the years. No doubt you’ve heard numerous rags to riches stories in the media. If you’d purchased a single Bitcoin in 2013, it would have been worth over $62,000 if you’d sold it this past February.
But here’s the kicker. On May 3, 2022—the day this article was written—that Bitcoin was worth just about $38,000. That’s a shocking decline over such a short period. That’s why investing in cryptocurrency is considered risky: its volatility when compared to other asset classes. Large swings up and down in the value of crypto coins may make crypto investing unsuitable for investors who are hell-bent on limiting risk.
Before you decide to invest in crypto, take an honest inventory and define your level of risk tolerance. Most financial advisors agree that the time to invest in riskier asset classes is when you’re young and still have plenty of time to save money for your retirement. If you’re nearing retirement age, you may want to think twice before converting your dollars, mutual funds, and government bonds to crypto.
Getting Started in the Crypto Market
You won’t be surprised by our first recommendation: read up! There are more than 12,000 cryptocurrencies available for purchase. You may be familiar with some of the oldest, more famous ones, including Bitcoin, Ethereum, Dogecoin, and Litecoin. But it’s worth exploring the full range of coins available. You can start simply by Googling “top-performing cryptocurrencies.” Stick to reliable resources, including the Wall Street Journal, Bloomberg.com, and Money.com. You may also want to read a little about the history of cryptocurrencies and the technology behind it, blockchain, too. Cryptocurrency turns a lot of what we know about money on end, so it might be a little mind-blowing. But soldier on and get your basic crypto education.
Crypto Exchanges: How to Buy Cryptocurrency
Once you’ve decided which cryptocurrencies you want to purchase, you need a place to shop for them. Crypto stores are called exchanges and there are about 600 of them worldwide. Most crypto exchanges are like supermarkets, where you can choose from a broad range of crypto brands. Financial advisors often recommend that investors build a “diversified portfolio.” In that context, the word “diversified” means a variety of asset classes, such as stocks, bonds, and life insurance. But you might apply the same principle when building a crypto portfolio. Investing in multiple currencies can mitigate risk by spreading it around. “Don’t put all of your eggs in one basket” is a phrase you’ve probably heard before. That’s the idea behind investing in a diversified portfolio. Given how volatile the cryptocurrency market can be, it’s pretty pertinent advice.
When you convert your cash to cryptocurrency, you’ll pay a dollar amount equivalent to the value of the crypto you’re buying. You’ll also pay a fee to your crypto exchange. That’s how they make money. Exchanges calculate their fees using various methods. Some charge a flat fee per transaction, while others base fees on a percentage of the volume of trading you do over a 30-day period. The more you trade, the lower that percentage will be. Interestingly, exchanges also consider the time of day of your transaction. Unlike the stock market, which shuts down every evening, the crypto market is awake 24/7. Exchanges charge higher fees during periods of peak activity when digital networks are clogged with transactions. So timing your trades to coincide with lower network activity can save you some money. Analysts have figured out what time of day, day of the week, and day of the month is best to buy crypto, but the patterns may change from month to month. So do some timely research to learn about the most current trends and figure out which is the best crypto exchange for your crypto shopping list and budget.
Crypto Wallets: How to Spend Your Cryptocurrency
When you first purchase cryptocurrency, it’s stored with the exchange you buy It from. But most crypto traders move their assets to something called a crypto wallet, to give them more convenient access to their funds.
When you buy cryptocurrency from an exchange, you’ll be issued a “private key” to your funds: a complicated, encrypted number. Your private key to yourself at all times. Otherwise, the people who know your key can completely control your funds.
Needless to say, you wouldn’t want to give your private key to Amazon, Starbucks, or any of the growing number of stores that accept crypto for purchases. So how do you buy a box of K-pods on Amazon or an expresso at Starbucks with crypto? For that, you need a public key: a number that allows other businesses to withdraw a specific amount of crypto to cover your purchase, at a single moment in time. Crypto wallets are like key rings. Their function is simply to hold your keys together in one place.
The Two Types of Crypto Wallets
Crypto wallets come in two basic forms: the hard wallet (also called a cold wallet) and the soft wallet (also called a hot wallet.) The best crypto wallet for you depends on how and how often you intend to transact crypto business.
The Pros and Cons of Hard Wallets
If you expect to use your crypto funds rarely—for example, if you adopt a buy-and-hold crypto investment strategy and you’re content to use your debit card for purchases—a hard (cold) wallet may be your best choice. A hard wallet is a small piece of equipment—often about as small as a thumb drive—that stores your crypto keys. To use a hard wallet, you have to have it with you. You can buy one in the $50 to $100 range.
It’s generally not advisable to carry your hard wallet around with you. It’s too vulnerable to being lost or stolen. Most people keep their hard wallets in a safe place: hidden at home or in a safe deposit box. So it’s tough to make crypto purchases on the fly with a hard wallet. On the other hand, many experts consider hard wallets more secure than soft (cold) wallets. That’s because the data they contain isn’t housed on the internet. Arguably, that makes them less vulnerable to hacking. But they’re simply not as convenient to use as soft wallets.
The Pros and Cons of Soft Wallets
Soft wallets aren’t physical devices. They’re entirely digital. The data you store in a soft wallet is housed on the internet. That means you can access it at any time, from anywhere by using your smart phone, tablet, or other digital equipment. Soft wallets are usually free and they’re available through many resources. Bear in mind that there are fees associated with crypto wallet transactions, too. These fees vary so shop around before selecting one.
If you intend to make a lot of crypto transactions—for example, if you expect to frequently trade cryptocurrencies and make frequent purchases using crypto funds, soft wallets are more convenient. Public keys make it possible for you to receive crypto funds by creating a wallet address, which connects to your crypto account. They also allow you to share your wallet address with the people or companies you want to give your crypto. Wallet addresses are one-time codes and you can create as many of them as you need.
The downside of soft wallets is that they’re more vulnerable to hacking. The same thing that makes them more convenient—the fact that they store your data digitally—is what makes them riskier.
Taking the Plunge
If you’ve decided that earning passive income through crypto investing can help you reach your financial goals, the next question you might have is how much to invest. The short answer is only to invest as much as you can afford to lose. That may sound pessimistic, given the way cryptocurrency has performed since it was first created. But it’s the prudent approach.
Some experts advise that you should never invest more than 5% of your net worth in crypto. And again, diversifying your investments across multiple asset classes can limit your financial exposure. But take the basic steps toward securing your financial future. Be sure you have an emergency fund equal to three to six months of your basic expenses—housing, food, transportation, insurance, and other fixed costs—before investing. If you’re paying a lot of interest each month to support debt, pay down any high-interest credit cards and loans you have. Look at what you have left over after you’ve taken those steps. That’s a good way to calculate what you can safely afford to invest in cryptocurrency.
Susan Doktor is a journalist and business strategist who writes about a wide range of personal finance subjects. Her contribution comes to us courtesy of Money.com.