6 Things Every Beginning Crypto Investor Should Know

Cryptocurrency has exploded in popularity in recent years, attracting millions of new investors.

However, investing in crypto isn’t as straightforward as buying stocks or bonds. The market is volatile, the technology is often complex and the regulatory environment is shifting fast. If you’re new to crypto investing, understanding the basics can help you make informed decisions and avoid costly mistakes.

6 things every beginner crypto investor should know

1. Decide if you’re an investor or a trader 

Before jumping into the crypto market, you need to decide whether you want to be a long-term investor or an active trader. 

Investors buy and hold crypto for the long haul, hoping it appreciates over time. They typically believe in the future of blockchain technology or the potential of digital assets in general. They’re prepared to ride out market swings, often using a simple risk management strategy — never sell, no matter how volatile the price gets. 

Traders, on the other hand, take a short-term approach. They actively buy and sell cryptocurrencies to capitalize on price swings. Trading can be highly lucrative, but it also comes with a greater risk of loss. To prevent small losses from spiraling into bigger ones, traders may set clear sell rules, such as exiting a position if it drops 10 percent, 

“Trading sounds sexy, but without serious skills in technical analysis and risk management, it can lead to fast losses, especially when emotions take over,” says Corey Roun, senior director of trading and derivative strategies at Lyons Wealth Management.

For most people, a patient, long-term approach works better. Plus, it’s less stressful than watching price charts all day.

If you’re wondering how to incorporate cryptocurrency into your portfolio, speaking with a financial advisor can help.

2. Don’t invest more than you’re willing to lose

Crypto is one of the most volatile asset classes out there, meaning prices can skyrocket or plummet within hours. Unlike stock exchanges, which operate during regular weekday business hours, crypto is tradeable 24/7. 

Many new investors are lured by the possibility of high returns with cryptocurrency, but it’s vital to invest only what you can afford to lose.

Money needed for essential expenses, emergency savings or a down payment for a home should be kept in secure accounts — not tied up in speculative assets. If you’re looking for a guaranteed return, paying off high-interest debt is a smart move because the savings on interest are a guaranteed win.

If you’re new to crypto, consider starting small while you’re learning the ropes. Setting aside a trading budget and using only a portion of it in the beginning helps prevent a single bad trade from wiping you out. Keeping cash in reserve also means you’ll always have funds available when the right buying opportunity arises. 

Finally, it’s smart to keep cryptocurrency as a small portion of your overall portfolio. Experts generally recommend limiting crypto investments to 5 percent or less of your total holdings. Doing so can help manage risk and cushion the impact of sharp downturns in the crypto market.

3. Watch out for sneaky exchange fees

Crypto exchanges charge different fees, and some platforms have hidden costs that can eat into your profits. 

Some platforms charge flat fees while others take a percentage of every trade. Regardless, both fee structures can add up quickly, especially if you’re working with a smaller account balance. 

“If you’re trading frequently, fees can wipe out most, or even all, of your gains,” says Roun. “It’s like running on a treadmill — you’re working hard but not getting anywhere.” 

Another fee structure to note is spread fees. Instead of charging direct commissions, some exchanges set higher buy and sell prices, meaning you may be paying more for your crypto than you realize. 

Always compare fee structures at different exchanges before opening an account, and be wary of hidden fees buried in wide bid-ask spreads. Roun also recommends using limit orders to cut costs. 

4. Where you hold your crypto matters

After buying crypto, you need a safe place to store it. There are two main options: keeping it on an exchange or using a dedicated wallet.  

Keeping crypto on an exchange is convenient because it’s easy to access and trade. However, if the exchange is hacked, undergoes a system failure or goes bankrupt, you could lose access to your coins. The collapse of FTX in 2022 is a prime example. So don’t overlook the security of any exchange or broker you’re using. 

A more secure option is storing your crypto in a dedicated wallet. 

Hot wallets are software-based and connected to the internet, making them more convenient but also more vulnerable to hacking. Cold wallets, such as hardware wallets, store crypto offline and offer the highest level of security. If you’re holding crypto as a long-term investment, using a cold wallet is the safest option to protect your assets from cyber threats.

“Make sure you’re using a wallet where you control the private keys,” says Roun. “Whether it’s a hardware wallet or a secure app, if you don’t control the keys, you don’t control the crypto.”

However, be aware that transferring crypto comes with fees. Every time you transfer coins between wallets, you’ll pay a network fee, often called a “gas fee.” 

The cost of the gas fee depends on the blockchain and how busy the network is. For example, Ethereum gas fees can spike during peak times, sometimes costing more than the transaction itself if you’re not careful. 

“Think of it like paying wire transfer fees at a bank: It seems minor until you realize how much you’ve spent over time,” says Roun. 

To save money, Roun suggests limiting how often you move your coins and try to make transfers when network traffic (and fees) are lower.

5. Crypto is highly speculative so prepare for volatility 

Unlike traditional assets like stocks or real estate, cryptocurrencies often have no intrinsic value and their prices are heavily influenced by speculation. And unlike stocks, the performance of crypto isn’t tied to earnings reports, dividends or other business fundamentals.

“Prices swing wildly based on hype, news cycles and sometimes just tweets from influential people,” says Roun. “Some projects soar, others disappear overnight.”

That means extreme volatility is the norm, not the exception. Volatility can be measured as the range of annual returns, says Keith Black, a chartered financial analyst (CFA) and author of “Investing in Cryptocurrencies and Digital Assets.”  And when it comes to crypto, those swings can be massive. 

“Bitcoin has historically experienced a number of years with losses of 55 percent to 73 percent and gains of 300 percent or more,” says Black. 

Market manipulation is another major risk. Crypto prices can be influenced by large investors, known as “whales,” or by pump-and-dump schemes that artificially inflate prices before crashing them.

Memecoins, such as Doge, Shiba Inu, Pepe and Bonk are especially prone to quick losses in value because there’s no business rationale for these coins to hold their value, says Black. 

“By number, the majority of crypto assets likely have no long-term value,” says Black.  

Regulatory uncertainty is another big risk in the crypto market. Governments around the world — including the United States — are still wrestling with how to regulate crypto, and new laws or restrictions could impact the value of your digital assets down the road. 

6. Watch out for scams

Scams, hacks and fraudulent projects have cost investors billions of dollars over the years. In September 2024, the FBI reported that Americans lost $5.6 billion to crypto scams in 2023 — a 45 percent increase from the previous year.

In 2023 alone, the FBI received over 69,000 complaints about cryptocurrency-related fraud. While crypto scams made up only 10 percent of all financial fraud reports, they accounted for nearly 50 percent of the total losses.

Crypto’s decentralized nature, lightning-fast transactions and global crossover make it extremely appealing for scammers. Criminals often move stolen funds overseas and cash out quickly, so once a payment is sent, it’s nearly impossible to reverse.

To avoid falling prey to a crypto scam, take the time to research the technology behind any new project — or better yet, stick with established cryptocurrencies like Bitcoin or Ethereum. Only put in money you can afford to lose and avoid going all in on the next “sure thing.” 

While even the most cautious investors can fall for sophisticated scams, staying level-headed is key. Don’t let the promise of huge returns cloud your judgment. At the end of the day, the golden rule of investing still holds true: If it sounds too good to be true, it probably is.

How do I invest in crypto?

If you’re looking to invest in cryptocurrency, you have several options.

• Crypto exchanges: These platforms offer a wide selection of cryptocurrencies and typically have competitive pricing. Popular exchanges include Coinbase, Kraken and Binance, among others.
• Traditional brokers: Some brokerage firms also allow crypto trading, though their selection is usually limited to Bitcoin and a few others. Brokers like Interactive Brokers, eToro and Public provide an easy way for beginners to access crypto alongside other investments.
• Financial apps: Many financial and payment apps now support crypto trading, often focusing on Bitcoin and a few major coins. Robinhood and Webull are big players in this space, while apps such as PayPal, Venmo, and Cash App also let you buy, sell and hold crypto.

Other ways to invest in crypto

While investing directly in cryptocurrency is a popular choice, there are other ways to gain exposure to the market — some more directly than others.

• Crypto ETFs: In 2024, the SEC approved spot Ethereum and Bitcoin ETFs, making it easier for investors to gain direct exposure to these cryptocurrencies through traditional brokerage accounts. These ETFs trade like stocks and provide a simplified way to invest in crypto without dealing with wallets or exchanges.
• Crypto exchange and broker stocks: Investing in companies that benefit from the growth of cryptocurrency, such as Coinbase or Robinhood, offers indirect exposure to the market. These companies generate substantial revenue from crypto trading, making them a potential way to profit as the industry expands. 
• Crypto futures: Futures contracts allow traders to bet on Bitcoin’s price movements using leverage, amplifying both potential gains and losses. This fast-moving market can heighten the already intensely volatile nature of crypto.
• Blockchain ETFs: A blockchain ETF invests in companies involved in blockchain technology, giving you exposure to the broader industry. However, since many of these companies operate in other sectors as well, the crypto-related upside (and downside) may be weaker. 

Each option carries different levels of risk and crypto exposure, so it’s important to understand what you’re investing in and how it aligns with your financial goals.

Bottom line

Cryptocurrency offers exciting opportunities for new investors, but it also comes with significant risks. Whether you’re investing for the long haul or actively trading, make sure to understand the market’s volatility and security concerns. Start small, diversify your portfolio and never invest more than you can afford to lose.