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It’s been a hot year for cryptocurrencies, and 2021 isn’t even halfway over. The total value of cryptocurrencies briefly surpassed $2.5 trillion in May as a plethora of new investors jumped in, and now approximately 14% of American adults own cryptocurrencies.
Cryptocurrencies are digital assets that are exchanged online on exchanges like Coinbase (the largest U.S. crypto exchange) and Gemini or via online brokers like Robinhood and SoFi Invest. Cryptocurrencies are hardly new. Bitcoin, the first and largest cryptocurrency by market capitalization, was created in 2009 and has been followed by more than 7,700 others. You may have also heard of ethereum, tether, or even dogecoin, which began as a joke and now sits among the 10 largest cryptocurrencies.
While some people are investing purely to speculate, others look at cryptos as a way to store value or hedge against inflation. Here’s how to invest in crypto now, whether you should get into it, and what to know before you do.
How to invest in cryptocurrencies
While investing in cryptocurrencies has gone mainstream, it’s not an option at many traditional online brokers — yet. Here are a few brokers that allow you to directly hold cryptocurrencies alongside other assets like stocks and bonds, but fees vary and it’s key to do your homework:
- Robinhood: Robinhood is 100% commission-free, and it landed on Bankrate’s list of best brokers for cryptocurrency trading, with the site noting that its easy-to-use app is a big plus. Note that the firm did get into some hot water this year with some of its customers when it halted trading during the GameStop trading frenzy. Check out Robinhood here.
- SoFi Invest: SoFi landed on Nerdwallet’s list of best crypto exchanges and platforms. It is not commission free — it charges a markup of up to 1.25% on crypto transactions — but does have a promotion going on now where if you trade $10 or more in crypto, the company will give you $10 in bitcoin. Check out SoFi Invest here.
- TradeStation: Like Robinhood, TradeStation is a Bankrate pick for crypto trading, and the site notes that it is best for “active or advanced traders.” It’s not commission free though, charging 0.3% per trade for accounts with less than $100,000, with the fee dropping as your balance goes higher.
TD Ameritrade, Interactive Brokers, and Charles Schwab offer bitcoin futures trading.
If your broker doesn’t offer cryptocurrencies, you might consider signing up for an account with a crypto exchange, such as one of the following:
- Coinbase. This is the largest U.S. crypto-only exchange, and offers trading for 60+ different cryptocurrencies. Crypto transactions come with a spread of about 0.5%, in addition to a fee of at least $0.99, and fees for making transactions with digital tokens. Check out Coinbase here.
- Gemini. This exchange offers 40+ digital tokens for trading, and charges fees up to 1.49% depending on the trading platform used. Check out Gemini here.
- eToro. This social trading platform supports more than 20 cryptocurrencies, as well as other assets for non-U.S. customers. The spread varies by cryptocurrency, but starts at 0.75% for bitcoin. Check out eToro here.
Prepare for risk and volatility
Not all cryptocurrencies are created alike, and each token has unique characteristics that help dictate its price swings. That’s why it’s important to learn as much as possible about a specific token before investing, including why it was created (what problem it’s trying to solve) and by whom (the governance structure), recommends Chris Kupier, vice president of equity research at CFRA Research.
“The more you understand it, the more you’re going to approach investing in the ‘right’ way,” Kupier says. For example, he likens bitcoin to “gold 2.0” because the digital coin has a finite supply and is seen by some as a way to store value and hedge against inflation — characteristics that don’t apply to ethereum, for example. (Note that this bitcoin-is-the-new-gold take is certainly not shared by everyone, as this MarketWatch column reveals).
Cryptocurrencies fall under the umbrella of alternative assets (like commodities or real estate) because they offer a way to diversify your portfolio and have a low correlation to other assets, like stocks and bonds, Kupier notes. But cryptocurrencies are volatile, and because trading occurs 24/7, 365 days a year, that allows traders to react immediately to news — or even tweets. Indeed, this year, tweets from Elon Musk, CEO of Tesla, caused crypto prices to both jump and slump.
“Look, this is the Wild West, so you have to be ready for it,” Kupier says. While bitcoin has experienced average annualized returns in excess of 200%, that’s come with huge price slumps, he adds. “You need to embrace the volatility if you want those gains.”
Consider risk-reward dynamics
Investing in crypto is not for everyone. Those who do dive in should remember this: Given the extreme volatility, moderation is key, notes Matt Schwartz, senior advisor and a certified financial planner with Great Waters Financial. Just as you shouldn’t invest all of your money in one asset — like a stock or bond — cryptocurrencies should have a limited impact on the risk-reward dynamics of your overall portfolio, he adds.
“If you have 2%-5% of your portfolio allocated to any asset class, that isn’t going to move the needle on your overall portfolio that much,” Schwartz says, adding that the exact allocation is unique to each investor. “It’s important to think about your own situation and how it may or may not help you accomplish your goals.”
Some investing pros say that if you do want to dive into crypto, a smart way to do it may be through dollar-cost averaging, which simply means investing a fixed amount at regular intervals. And be sure to consult an accountant about the tax implications of trading (it can get pricey).
Finally, be mindful of how investment decisions affect you. “Don’t take on so much risk that you can’t sleep at night,” Kupier says. “But the opposite is true: If you’re constantly watching bitcoin because you have 0% invested and you’re watching it go up, you probably need to buy a little of it for peace of mind.”
About the author: Anna-Louise Jackson is a financial journalist with more than a decade of writing and editing experience. She was a reporter for Bloomberg News, covering the U.S. economy, U.S. stock market, and corporate finance. Her work has also appeared in/on NerdWallet, CNBC, The Associated Press, USA Today, Forbes, Fortune, and Money.