Crypto Investing 101

Three questions to ask yourself before you invest in crypto.

donut chart with three cryptocurrency coin symbols listed on a whiteboard

If you’re taking your first steps into the world of cryptocurrency investing, we recommend asking three questions to gain your footing. Don’t worry, we have some answers to get you moving when you’re ready. And remember, to invest in crypto you don’t have to be an expert. We’re here to be your guide so you can make the best decision for you.

Question 1: What is crypto?

A simple question with a not so simple answer. To date, there are over 17,000 types of crypto in existence.1 Bitcoin and Ethereum may be household names but the world of crypto extends far beyond their influence. In order to understand crypto, it helps to understand its underlying technology: blockchain.

Blockchain is a technology that, in the context of crypto, provides recordkeeping through five foundational features: 

  • Immutable: The data can’t be changed.
  • Decentralized: Controlled by a large network of computers instead of a central authority.
  • Distributed: Many parties hold public copies of the ledger.
  • Cryptographically Secure: Makes tampering or changing the data basically impossible.
  • Permissionless: Open to anyone to participate.

If you don’t remember any of the five features above, here’s the big idea:

The internet enabled the digital flow of information. Blockchain technology enables the digital flow of almost anything of value.

What does that mean? It means we can create systems to record ownership without the need for third parties. And we can transfer ownership—using blockchain—between each other without a third party. This creates potential for new economic and business models, which is why there are more than 17,000 types of crypto. Crypto use cases span from art (for example, you can bid on a bored looking ape for only a few hundred thousand dollars) to banking (making financial services available to marginalized groups) to gaming (better grab that plot of land in the metaverse before Snoop Dogg does). All of this is made possible because crypto, built on blockchains, creates new ways to transact in a growing digital economy.

Question 2: Why should I invest in crypto?

If you want to invest in crypto, reflecting on why can help guide your investments. Crypto is an emerging asset class and is transforming the financial industry. However, you should be careful to understand the risks of cryptocurrency, which can be highly speculative and volatile and can experience sharp drawdowns. Like all investing, this is personal and not without risk, and we encourage you to invest in crypto only when you are comfortable bearing the risk of loss. 

One of the things that excites us about crypto is the diversity of the ecosystem that is being created. Crypto is far more than simply a digital currency used to buy NFT art or “digital gold” as we see in the headlines. The use cases are creating global investment opportunities available to anyone who chooses to participate. Keep in mind, across the thousands of crypto projects, you do have to look out for scams and fraud. For example, Squid Game may have been a TV show worth binge watching but ended up being a crypto worth almost nothing. But that’s not to say that crypto can’t be used for good. (Fun Fact: Did you know that you can donate crypto to charity? GiveWell, one of Betterment’s partner charities, accepts many different types of crypto!)

Here are a few common reasons people invest in crypto:

Make Money

Crypto investing comes with risks. There can be extreme price fluctuations compared to traditional asset classes. With that said, there is the potential for crypto to rapidly increase in value both over short and long periods of time. Based on Betterment’s research, this is the #1 reason people invest in crypto. And that’s perfectly fine—we invest to create wealth for ourselves and loved ones.

Decentralization

Many of the projects that create crypto tokens are considered decentralized, which means they aim to remove the control banks and large institutions have on financial services and other business models such as advertising. When applied to traditional finance, this sector of crypto is called Decentralized Finance, or DeFi. Blockchain technology, including digital wallets and smart contracts, can be used to replace banks and other third parties. In theory, this can put users in control, reduce fees, and speed up transactions. (You can send crypto almost instantly to another digital wallet.) Oh, and did we mention that crypto transactions can occur 24/7/365? Another benefit of its decentralized nature.

Invest in the Future

As we’ve mentioned, crypto spans a broad spectrum of our lives, and it's changing the future, even if we don’t know how yet. By now, you’ve likely heard the term metaverse being casually used, whether by Facebook’s (sorry, we mean Meta’s) CEO Mark Zuckerberg or by a family member at a holiday dinner. It’s everywhere we look. And one way or another, many investors believe the metaverse will be part of our future. Similarly, the concept of Web 3.0, which is a broader evolution of the internet, offers investors many forward thinking investments to consider. The best part? It’s generally accessible to anyone, not just angel investors and venture capitalists.

Stepping back, a more general reason for investing in crypto, especially if you are completely new to it, is diversifying your broader investment portfolio. If done correctly, including a small amount of crypto in your overall portfolio may help prevent you from being overly exposed to concentrated risks. Depending on what crypto investments you select, you’ll gain exposure to advancements in the metaverse, decentralized finance, and Web 3.0 technologies, among others. 

Question 3: How should I invest in crypto?

There are many ways to invest in crypto but we’ll boil this down to two categories for you to choose from: Do-It-Yourself Crypto and Managed Crypto Portfolios.

Do-It-Yourself Crypto

DIY crypto investing involves navigating digital wallets, selecting crypto exchanges, and safekeeping keys (so important!). Before you do any of that, don’t forget you need to research which of the 17,000-plus cryptos you want to invest in while navigating the crypto ecosystem yourself 24/7/365. Particularly because cryptocurrency is so varied and prone to speculation, DIY crypto involves significant upfront research to understand which crypto is the right fit for you.

Managed Crypto Portfolios

Crypto managed portfolios function similarly to managed equity portfolios. The technology and investment experts that manage the crypto portfolio do much of the heavy lifting (the nitty gritty research of which cryptocurrencies may be appropriate for you based on your financial situation and preferences, the rebalancing and reallocation, and the managing of your account, including wallets/keys) while you can focus on the bigger picture like creating the life you want through your investments. There is still risk with this method of investing in that the underlying cryptocurrencies may experience losses, but it can help you invest in crypto based on your needs and interests, creating a personalized crypto investing experience. Plus, you’ll save time and not have to stress about remembering your digital wallet’s password for fear of losing your Bitcoin forever

Are you ready to invest in crypto?

Before you step into crypto investing, make sure you know what you are investing in and why it’s important to you, and try to understand the risks involved. Remember, you don’t have to be an expert. If you reserve the term DIY for weekend trips to the Home Depot, not crypto investing, consider a managed crypto investing portfolio.