Cryptocurrencies are a strange type of asset. Even some insiders will admit that they have no idea where they will go next, but most agree that they have a very bright future. With Bitcoin’s historic year, we can expect more people to start showing interest in cryptocurrencies, and they should. Everyone should have at least some level of exposure to the market. They could turn out to be real stores of value, and a good refuge against possible inflation. But there is more than one way to invest in them and plenty of different approaches that you can use.
Here are a few different ways that you can invest in cryptocurrencies.
Direct Investing
Let’s start with the simplest and most direct way to invest in cryptocurrencies.
Most people who get started with crypto do so through cryptocurrency exchanges. These are private exchanges where people can buy and sell cryptocurrencies on the open market. Since these are private, some may be more reliable than others and some have failed before. The infamous QuadrigaCX story is a good example. So, you have to do your research on any exchange before you spend a red cent on them.
What are the Top Exchanges Available to Canadians?
There are many exchanges where Canadians can buy and sell cryptocurrencies.
While they may all seem the same at the surface, some are better than others and some will have limitations. For instance, some exchanges will only allow you to exchange crypto against other cryptos, so you will have to be ready for that. We would also suggest you start doing your research on stablecoins.
Stablecoins are coins that replicate the movement of an established and stable asset, like the US dollar, for example. What this allows you to do is to have crypto that is very liquid and will be accepted on most exchanges without having to deal with the wild fluctuations of other cryptocurrencies.
You should also know the difference between centralized exchanges and decentralized ones. Centralized exchanges are run by a single authority that acts as an intermediary between you and sellers. These tend to be more popular as the user experience is much simpler. Since transactions are mediated, the price of coins remains stable. Transactions tend to be processed much faster as well.
Decentralized exchanges are for experienced traders, so we wouldn’t suggest them if you’re just starting out. They do have some advantages, however. The transactions are cheaper and they are less vulnerable to hackers. But that’s about it. They could be a good choice for the future, but we suggest you go for a good centralized exchange first.
If you’re looking for a great all-around exchange, BitBuy is your best option. It’s the most established exchange in the country and they go above and beyond to protect their users. It is one of the few exchanges to be registered with FINTRAC and they cold store 95% of assets offline.
The only issue with BitBuy is that it has a somewhat limited number of currencies you can trade. At the time of writing, you can only trade BTC, EOS, BCH, ETH, LTC, XRP, and XLM on there. These are all top cryptocurrencies, however, and investors don’t need to be involved in exotic projects at the beginning.
If you want to be involved in alternative cryptocurrencies, however, you can try an exchange like Coinsquare. It has one of the largest selections of cryptocurrencies you’ll find in any exchange in Canada. In addition to the top cryptocurrencies, you can also trade DOGE, DASH, and ETC, just to name a few.
Coinsmart is another great exchange that you could try. One of the best things about Coinsmart is how easily they allow you to exchange your fiat money for crypto. It allows instant credit card transactions and you can trade up to nine cryptocurrencies. They also allow you to pay through Interac e-Transfer, bank draft, or debit card.
A Word on Cryptocurrency Wallets
Before you trade on an exchange, you have to know about cryptocurrency wallets. Cryptocurrency wallets are not wallets per se and don’t actually store your coins. What they do is allow you to verify transactions on the blockchain and prove ownership by storing a copy of your private and public keys.
The public key is the key that people will use to send money. It has to be public for them to be able to find you, pretty much as a street address would. The private key acts as a key to access the mailbox, so it has to be safeguarded. Crypto wallets use advanced encryption methods to make sure that your private key is undecipherable.
Know that it’s possible to trade through exchange and leave your money there, but it’s very risky. You never know what could happen to an exchange and some have been attacked in the past. So, do yourself a favor and invest in a good wallet first.
How Should I Pick a Wallet?
The first thing you have to know is that there are multiple types of wallets. You have cold wallets that look like USB keys. These are a great way to store your money away from any network. Since people cannot connect to them, they are nearly impossible to hack. Some decide to use these and store them in a safe deposit box to make sure that their funds are secure at all times.
You also have software wallets, but these have severe limitations. Since they’re connected all the time, they can be accessed or hacked. There’s also the chance that you will lose or can’t use the device you had your wallet on, and recovery can be difficult. However, they can be convenient if you’re just getting started and allow for easier access to crypto. You can use them as your main wallet or store small amounts of money for easy transactions.
You should also know that a wallet can be nothing but a piece of paper with your private and public keys on it. While this is definitely not the safest option, it could still be helpful if you’re in a pinch.
Investing Through Derivative Products
Know that many derivatives will allow you to get exposure without investing directly in cryptocurrencies. While crypto ETFs have been talked about for a while, however, they are still not a reality.
If you want to know more about the state of crypto ETFs, we suggest you check out this Wealthsimple bitcoin ETF article. They explain exactly what bitcoin ETFs are and how they would work. They explain some of the roadblocks you might have to face along with some theoretical advantages and disadvantages. In addition, they speak about other options that are open to Canadians, like closed-end funds, for instance.
You may have also heard about contracts for differences for bitcoin and other cryptos, but you should know that they’re also not available to Canadians due to regulatory restrictions. You can still trade Bitcoin options and futures, however. These could allow you to profit from any movement in the market and bet on future prices, but you need to have some experience using these first.
Initial Coin Offering
Initial coin offerings, or ICOs, are a very interesting way to invest in crypto. In short, crypto start-ups will release tokens to support projects. These will be available to an initial group of investors who will be able to buy the token at a set price. This allows them to become earlier investors, but they can also use the coins to use the service in question.
The way they work is simple. The company will usually release a whitepaper outlining the project. It will explain what the project is trying to accomplish, how much will be needed in funds, how much the founders will keep in tokens, and how long the ICO will run for, among other things. This is when enthusiasts will start buying tokens using fiat or other forms of payment. Know that your investment is not always final. In some cases, money will be given back to investors if the fundraising target isn’t met. If it is, however, the money will be invested in the project.
If you want to invest in ICOs, you will first need to learn how to read whitepapers and not only go by the advice of people you find online. You also have to look for projects that have a true potential for disruption.
Another thing you have to look at is who is behind the project and what projects they were involved in before. If they were involved in big projects and actively worked on their development, this is a sign of people who know what they’re doing. You should also see what the general opinion of these people is in the community.
You also have to understand the technology behind the project and the target market they’re trying to reach. Look for projects with solid proof of concept and pilot case studies.
These are just some of the main ways in which you can invest in cryptocurrencies. The first thing you have to do is learn as much as you can about cryptocurrencies and investing in general before you start.
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