A Beginner’s Guide to Investing in Cryptocurrencies

Over the last decade, cryptocurrencies have proven to be not only one of the best performing asset classes of our generation, but one of the best performing asset classes full stop.

Since their inception, major cryptocurrencies like Bitcoin and Ethereum have experienced practically parabolic growth, generating returns that would make traditional investors green with envy. Likewise, even less established cryptocurrencies and digital assets have gone on to generate impressive returns for speculators.

But the cryptocurrency space is growing fast and is fraught with risks that can make it difficult to safely navigate — doubly so for beginners.

If you’ve decided to invest in cryptocurrencies, but don’t know where to start, then this guide is for you. Here, we dive into some of the most important concepts and considerations you’ll likely need to get to grips with when investing, and provide some tips that will help you on your journey.

This guide is by no means exhaustive. There are new opportunities, platforms and cryptocurrencies emerging each day, many of which are of genuine value, while the majority are not. This guide should help give you the fundamentals needed to start off on the right foot before you progress to resources that cater to your individual needs and strategies.

Different Blockchains

Similar to the way there are different operating systems for programs and applications, like macOS, Windows, Linux and Android, there are also different blockchains.

Some of these blockchains are primarily designed for supporting cryptocurrencies and digital payments, like Bitcoin, Bitcoin Cash, Monero and Dogecoin, whereas others feature support for smart contracts and full-fledged decentralized applications (DApps) — these are essentially applications running on a distributed virtual machine.

Some of the more popular smart contract-capable blockchains currently include Ethereum, Binance Smart Chain, Solana and Avalanche. Each of these has its own array of popular DApps, many of which are genuinely useful and secure, while others are less so. You’ll also need a separate wallet to interact with each.

These can vary considerably in their form, function, purpose and utility, which means they each present different opportunities and risks.

New smart-contract capable blockchains regularly emerge and go on to achieve success, while many either fail to accomplish their goals, pivot to a new use case, or fail completely.

Tip for beginners: Early-stage blockchains often promise the world and then underdeliver. History has shown that delivering groundbreaking improvements often takes years. Nonetheless, it’s a good idea to familiarize yourself with the different platforms to maximize the number of opportunities available to you.

What Are Crypto Wallets?

Anyone wishing to interact with or invest in cryptocurrencies is going to need a wallet of some kind to manage and store their digital assets. Much like the wallet where you store your cash and cards, cryptocurrency wallets can vary considerably in their form, function and security.

Broadly, wallets can be divided into two categories: custodial and non-custodial:

Custodial wallets: These are wallets that are held with a third party — such as an exchange like Binance, or a platform dealing with digital assets such as Nexo. They generally have the advantage of being relatively easy to use, connected to a variety of products and services, and support a large variety of cryptocurrencies, but they come with a major drawback in that they do not provide access to your private keys. This means if the platform goes offline for maintenance or gets hacked, your assets will be either temporarily or permanently lost.

Non-custodial wallets: These are wallets that do not rely on centralized third parties to hold or secure your private keys. As a result, non-custodial wallet holders are in full control of their assets at all times and are responsible for their safekeeping. These include many mobile and software wallets, as well as hardware wallets. They have the benefit of being accessible at all times and many support multiple assets and blockchains but can be more challenging to use and have a great chance of suffering from user error. Some of the more popular non-custodial wallets have been covered here.

Tip for beginners: Every wallet has its pros and cons. We recommend prioritizing security above all else, particularly if you’ve got a substantial portfolio. Opting for a cold wallet over a hot wallet is a good start.

Crypto Exchanges

In order to invest in cryptocurrencies, you’re probably going to need to use an exchange platform. These typically allow you to purchase, sell or trade a variety of cryptocurrencies in a safe, accessible environment.

Broadly, exchanges can be divided into two main types: centralized (CEX) or decentralized (DEX). Centralized exchanges are generally faster, cheaper to use and easier to access, but come at the cost of privacy and custody of your assets. Decentralized exchanges typically feature better asset selection and allow you to retain full control of your assets at all times, but are usually more difficult to use and expensive.

Most professional cryptocurrency traders will leverage both as part of their trading strategy and may use exchanges to go long, short or both to maximize the number of opportunities they capture.

As a beginner, odds are you’ll want to start with either a broker like Coinbase or a spot trading platform like Binance to get started with cryptocurrency investments and basic trading. From here, you can then move on speculating with more complex financial instruments, like futures, options, prediction markets and leveraged tokens.

Tip for beginners: Whether centralized or decentralized, you will almost certainly need to use a range of cryptocurrency exchanges as part of your investment strategy. Because of this, we recommend trying out a few of the major platforms to see which ones best fit your needs — taking into consideration security, asset selection, trading options, liquidity, reputation etc.

An up-to-date list of the most popular exchanges can be found here.

What Are Crypto Launchpads?

Throughout 2021, launchpads have rapidly grown to become one of the most popular ways to gain exposure to new projects — through a process known as an initial DEX offering (IDO).

Briefly, these platforms hand-select early-stage projects and then open up a funding round for these projects for their users before they list on a third-party exchange platform. These tokens are generally sold at a relatively low price, and may be subject to a vesting schedule, which essentially means the tokens are unlocked periodically.

The vast majority of this year’s best performing projects conducted a raise via one or more launchpads, but that doesn’t necessarily guarantee success. A huge number of low quality projects also find their way onto a launchpad — though the highest caliber platforms tend to have an excellent track record.

Launchpads can differ considerably in the way that they work, but the vast majority have the following three properties in common:

Participants are required to hold and potentially stake at least a fixed minimum quantity of the platform’s native token.
Users are divided into tiers based on the number of tokens held or staked. Higher tiers typically get larger allocations, better access to projects and fewer secondary requirements.
Projects are manually selected by the launchpad team, with the goal of selecting only high-quality projects that will generate a positive return for investors.

As with most things in the cryptocurrency space, the launchpad landscape is incredibly diverse and there are now dozens of different platforms available. Many of these focus on projects launching on a specific blockchain (e.g. Solanium focuses on Solana whereas Terraformer focuses on Terra), while others focus on specific sectors or niches — such as NFT, DeFi, gaming or metaverse projects.

We’ve compiled a brief list of some of the more dominant launchpads here, but bear in mind that this list can (and likely will) change with time.

Tip for beginners: Not all launchpads are built equal. Likewise, even the best launchpads sometimes fail. That said, top launchpads have historically generated excellent returns for investors, whereas less established launchpads can be extremely hit or miss. Due diligence is advised before joining any launchpad.

Decentralized Finance (DeFi)

Decentralized finance, or DeFi, is quickly emerging as one of the most prominent use cases for blockchain technology and is often considered the next generation of financial infrastructure.

In short, these are the tools, platforms, protocols, layers and services that allow users to utilize their cryptocurrencies in a financial setting and often replicate traditional financial tools and services — like banks, loan providers, exchanges, insurance markets, and more.

As a rapidly expanding landscape of services, DeFi presents a huge number of potential investment opportunities, many of which turn out to be genuinely lucrative, while others turn out to be less attractive than they first appear.

Want to delve further into DeFi? Check out our full deep dive on the subject.

Many would argue that as a cryptocurrency investor, you would be doing yourself a great disservice if you neglect to gain at least a basic understanding of the DeFi landscape and the opportunities/risks it presents.

Some of the more popular DeFi kinds of DeFi infrastructure include:

Decentralized exchanges (DEXs): These allow users to trade cryptocurrencies without relying on centralized platforms. Some of the more popular platforms include Uniswap, Curve, PancakeSwap and TraderJoe.
Aggregators: These aggregate the offerings of multiple DeFi products to help users access the best rates and/or offerings through a single interface, e.g. 1inch, which aggregates prices from multiple DEXs.
Open lending protocols: Used to borrow and lend cryptocurrencies through decentralized asset pools. Popular options include Aave, Compound and Venus.
Synthetic assets: Blockchain-based assets that replicate the properties and/or price action of other real-world or digital assets, such as Mirror Protocol’s synthetic stocks or Synthetix “synths.”
Decentralized marketplaces: Used to trade digital assets, including NFTs and cryptocurrencies in a peer-to-peer marketplace setting, e.g. OpenSea and HoDooi.
Yield farms: Primarily used to earn a yield on cryptocurrency or liquidity provider token deposits. Examples include PancakeSwap, Pangolin and WagyuSwap.
Decentralized derivatives platforms: These are platforms that enable the creation, trading or usage of decentralized derivatives, including Augur, Injective Protocol and BarnBridge.
Insurance: These platforms allow users to take out insurance plans over their cryptocurrency positions to protect against a variety of risks — such as hacks or smart contract bugs. They can also be used to earn yields by providing liquidity to insurance protocols like Nexus Mutual.
Collateralized stablecoins: These are stablecoins that are not directly backed by fiat, but are instead collateralized with volatile assets. These include DAI and TerraUSD (UST).
Launchpads: Many launchpads can be considered DeFi infrastructure in that they offer trustless, permissionless access to IDOs.
Savings/investment accounts: These platforms enable users to deposit funds to earn a yield, often using multiple strategies. Examples include Orion Money, Bitlocus and Yearn Finance.

As we touched on before, each blockchain has its own DeFi infrastructure, though many platforms opt to deploy on multiple different blockchains. For this reason, the DeFi landscape is somewhat of a rabbit hole, and it can be difficult to stay on top of every new development and innovation.

Nonetheless, there are a huge number of opportunities to invest and profit through DeFi products and platforms — whether that be by speculating on their native assets, leveraging them for passive income, providing liquidity or something else.

Tip for beginners: As a rapidly emerging industry, the DeFi space can be a risky place to invest or park your funds. Hacks, thefts and protocol failures are relatively commonplace — particularly among less-established platforms. Because of this, it’s important to be well-versed in the risks associated with DeFi so that you know what to avoid.

Non-Fungible Tokens (NFTs)

Although non-fungible tokens have been around for almost as long as cryptocurrencies, they’ve only recently gained mainstream attention.

Nowadays, they are generally used to represent works of art, in-game items, digital collectibles and other kinds of ownership rights. Some may go on to appreciate considerably in value over time, while others will only lose value.

You may have heard one of the myriad overnight millionaire stories, which typically involve an individual that went from rags to riches by simply buying and selling NFTs.

While some have indeed gotten incredibly wealthy thanks to their NFT investments, these individuals are the exception — most NFT investors will not get rich off their investments. That said, it’s often quite possible to do very well, but it’s usually somewhat more involved than simply buying a couple of NFTs and holding for a while before selling for 100x your entry price.

Overall, there are a variety of factors that determine whether an NFT will appreciate in value, these include:

Rarity: Rarer NFTs within an individual collection tend to be (but aren’t always) more valuable than more common NFTs. This typically only applies to NFT collections that are generally considered desirable.
Entry price: The closer you pay to an NFTs original price (i.e. its mint cost), generally the more likely you are to see your token grow in value. That said, undesirable collections can fall below their mint price, and many never recover.
Hype: Many NFT collections see gradual price growth over an extended period of time, while others experience a sudden surge in value as a result of a rapid change in the amount of hype surrounding the asset. This appreciation may be as transient as the wave of hype.
Utility: Some NFTs, including those associated with blockchain games and interactive experiences, can have utility. NFTs with excellent utility can be more attractive investments than those with little to none.
Designer/creator: In the case of NFT works of art, pieces created by a specific artist can go on to achieve incredible value. For example, an NFT created by the renowned digital artist Beeple can potentially fetch millions of dollars at auction.
Supply and demand: An oversupply of NFTs in an individual collection can drive down the value, whereas overdemand can drive it up. As a result, your NFT is likely to be more valuable if you sell it when the market is hot.

As with many assets, success with NFT investment typically boils down to asset selection, entry/exit strategy, long-term focus and oftentimes a pinch of luck. In any case, the better informed you are about the NFT space, the better your odds of recognizing a genuinely attractive opportunity.

Tip for beginners: There are a huge number of tools that can be used to track popular and upcoming NFT collections, including our own NFT tracker and Nansen’s NFT Paradise tools. Consider leveraging the latest tools as part of your NFT investment strategy.

Stablecoins

As their name suggests, stablecoins are a type of price-stable cryptocurrency. They are designed to maintain their value at a fixed peg and are primarily used by those looking to temporarily opt out of volatility.

Stablecoins aren’t generally considered a speculative asset; however, the slight variations in stablecoin valuations can be a source of profit for arbitrageurs. Likewise, many algorithmically stabilized stablecoins have mechanisms in place to reward those that help these stablecoins maintain their peg.

As of writing, there are stablecoin versions of several popular fiat currencies, including the US dollar (USD), euro (EUR) and Turkish lira (TRY).

The three most popular USD stablecoins are Tether (USDT), USD Coin (USDC) and Binance USD (BUSD), whereas the most popular EUR stablecoins are STASIS EURO (EURS) and Tether EURO (EURT).

These can be stabilized in several ways, such as being pegged 1:1 with real fiat currency held in a custodial account by the stablecoin issuer or being algorithmically stabilized, using overcollateralized volatile asset reserves or oracles to maintain the price at as close to their peg as possible.

Tip for beginners: Though it's unlikely you’ll want to “invest” in stablecoins per se, you will likely want to familiarize yourself with how they work and how they are traded. Stablecoins can vary considerably in their accessibility, stability and liquidity.

Investment Strategy

As an investor, you’re going to need an investment strategy — there’s really no two ways about it. That is, unless you plan to trade like the late Mr. Goxx, a beloved hamster that outperformed the stock market by unwittingly trading cryptocurrencies at random.

Depending on the character, starting capital and risk tolerance, and a myriad of other factors, investment strategies can vary considerably from person to person. Some prefer to day trade to secure quick wins without much consideration of the broader picture, while others prefer the long game and will sit on assets for months or even years before taking profits.

If you’re in it for the long haul, consider using dollar-cost averaging to limit your exposure to volatility.

But in general, you’re going to be using technical analysis (TA) and/or fundamental analysis as part of your asset selection process and entry/exit decisions. Or at the very least, you’re going to need some way to determine attractive investment opportunities and some understanding on when to take profits or cut your losses.

Interested in learning about the differences between TA and FA? Click here!

Though we can’t tell you exactly what to invest in or how to manage your funds, there are a huge number of tools and information sources that can help you make smarter investment decisions. But in general, the more informed you are about the market, the better you can predict it.

Below, we’ve listed a range of tools and resources that could help you on your investment journey:

Create and track your portfolio with this tool;
Track upcoming ICO/IEO/IDOs with the CoinMarketCap ICO Calendar;
Learn about trading theory on CoinMarketCap Academy;
The market won’t always go up, learn how to short to trade downtrends;
Trade like the pros with data analytics from Nansen.

Tip for beginners: If you’re struggling to profit, consider investing with a crypto fund instead. These are platforms that manage funds on behalf of their clients and use a team of experienced traders, analysts and experts to invest in cryptocurrencies. Some of the more well-reputed funds typically have excellent track records and have historically generated impressive yields for investors.

Nonetheless, always do your due diligence, including checking the reputation, team and past performance of the fund. Bear in mind that not all funds are genuine and that profit is never guaranteed.

Risk Management

Managing your risk is absolutely critical if you want to survive in the cryptocurrency investment space, and it’s one of the best ways to ensure you stand a good chance at netting a profit.
Practically, this means controlling the size of your positions as well as carefully choosing your investments based on the right indicators. As with all investments, never invest more than you can afford (and are willing) to lose, and never put all your eggs in one basket.

The cryptocurrency landscape is becoming increasingly diverse and competition within each fragment of the industry is mounting. Because of this, while it was once a viable strategy to simply throw all of your money into practically anything and wait for a profit, there are now more duds than winners — but those winners often still perform incredibly well.

Maintaining a diverse portfolio will help you average out exposure to volatility, while also giving you a greater number of shots at selecting a big winner.

Unlike many other markets, the cryptocurrency market poses several unique risks that must be acknowledged, considered and ideally mitigated. These include a much higher potential for exit scams, protocol failures, government crackdowns, hacks and breaches. Understanding and avoiding these can be an important part of managing risk.

Tip for beginners: For the truly risk-averse, there is a rapidly blossoming lineup of decentralized insurance products that can be used to defend against certain risks such as a protocol hack or smart contract failure. Some of the most popular options currently include Nexus Mutual, InsurAce and Etherisc — but bear in mind, these come with their own set of risks.

A Word of Caution

Unfortunately, like many primarily financial industries, the cryptocurrency industry is rife with scams. These primarily target less experienced investors, but there is a range of more sophisticated or nuanced scams that may dupe even experienced investors on occasion.

Successfully recognizing and avoiding these scams often requires a broad understanding of the cryptocurrency space and a basic technical understanding of how major cryptocurrencies work.

That said, simply avoiding certain hot spots for scam activity can minimize the risk of being targeted. Social media and messaging apps like Twitter, Telegram, Reddit and Discord are riddled with scammers.

Broadly, cryptocurrency scams will typically follow one or more of these basic structures:

Fake websites/applications: These are fake versions of websites or applications that closely mimic the original, but are actually designed to steal your seed phrase or private key. Alternatively, they may ask for you to send a payment manually.
Email scams: Scammers frequently fire out emails to users from leaked databases. These typically mimic a genuine company or person but will contain some means to defraud you — such as a fake investment “opportunity” or request to reset your password on a specific platform so they can take over your account.
Direct messages: Scammers pose as trusted members of a community or company and then directly reach out to you and other potential marks through a PM/DM, either feigning help for an issue the user is facing or providing a discount or offer. At some point in the scam, they will try to steal your funds.

Scammers can be incredibly clever and many scams aren’t all that simple to recognize. Nonetheless, scammers often employ a few different tricks to increase their success rate. These include:

Time urgency: offers that sound too good to be true often have a time limit associated with them. This is an attempt to force you to act without properly assessing the risks or doing your due diligence. For example, you may be attempting to participate in a highly sought-after IDO, and then a scammer DMs you with a special investment opportunity that is only open for five minutes.
Identity theft: Scammers will pose as well-known, trusted or influential persons in a community to reduce the odds of the mark challenging the offer or trick and increase legitimacy. This might include duplicating a person’s profile photo, email address, username, etc, or potentially even falsifying entire accounts, groups and more. This is particularly common on Telegram.
False reviews: Many common cryptocurrency scams will also include dozens of fake reviews and testimonials from other people who supposedly benefited from the offer. For example, a Bitcoin doubler scam (common on Twitter) might include a huge number of responses from other fake accounts claiming to have doubled their Bitcoin in an attempt to quell any doubts in the target.

Though not a scam per se, there is a major problem of misinformation in the cryptocurrency industry, which can make it difficult to navigate for new investors. One of the best ways to avoid this is to simply stick to official sources of information and trustworthy news sources. Relying on opinions or word of mouth can be a recipe for disaster.

Tip for beginners: Most cryptocurrency scams rely on you manually providing your seed phrase, log-in details or private keys to the scammer. If anybody ever asks you for any of these, consider it an immediate red flag and an almost certain scam that warrants extensive due diligence.

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