If you’re one of the 20% of crypto-curious Americans who want to buy their first cryptocurrencies, you might feel a little overwhelmed at first. Not only is there a vast number of coins (over 13,000 of them according to CoinMarketCap), but the logistics of opening a cryptocurrency account and depositing money can also be daunting. With that in mind, let’s take a look at some advice to get you started, as well as three cryptos that could be your steppings stones into the market.
Minimize the risks
I don’t want to scare you by starting with the risks that are part and parcel of cryptocurrency investing, but it’s better to be prepared. So before we get to the best cryptos for your starter portfolio, let’s touch on some of the ways to protect yourself.
- Only invest money you can afford to lose. Cryptocurrencies are extremely volatile, so your assets could easily gain or lose 20% or more in a single week. Not only that, but many coins will fail. If you only invest money you can cope without, you won’t be so affected if the market crashes.
- Top up your emergency fund and retirement savings first. It’s easy to get caught up in the hype around cryptocurrency investments and feel like you’ll miss the boat if you don’t invest now. But your emergency savings and retirement account have to take priority. They are what will sustain you, either in your old age or in any financial crisis you face before that.
- Limit your crypto investments to 5% of your overall portfolio. Another common mistake is to go all in on crypto. Instead, ensure your digital assets are a small part of a more balanced portfolio, so you won’t be overexposed to fluctuations in the crypto market.
- Use a good cryptocurrency app or exchange. Look for a cryptocurrency platform that will keep your investment safe by storing assets offline in what’s called cold storage. It’s a bonus if it also has third party insurance to give additional protection against hacking.
- Never stop researching. You don’t have to become a blockchain expert, but you do need to know the basics. Otherwise, how can you pick out the worthwhile investments from the sea of pretenders? It’s crucial you do due diligence on any crypto before you invest.
- Invest for the long term. Rather than looking for quick gains, a long-term investment approach will help you avoid panic buying or selling. It makes it easier to ride out the volatility and focus on cryptos with real-world utility that are likely to perform well over time.
- Understand the tax implications. You need to keep track of all crypto transactions, as you’ll need to pay capital gains tax on any profits. Crypto taxes can be complicated, so make sure you know what you need to report.
Without further ado, let’s look at the three best cryptos for first-time investors.
1. Bitcoin (BTC)
Bitcoin is the grandaddy of cryptocurrencies — the world’s first digital currency and still the leader by market cap. It may not feel exciting, but Bitcoin has already survived several market crashes. The more established cryptocurrencies have the best chance of surviving any future crashes. Plus, the price of Bitcoin already influences the prices of smaller cryptocurrencies, so it’s a solid first buy.
SEC Chair Gary Gensler was not far off when he described crypto as the Wild West. This is a relatively new industry with very little regulation, so there’s not a lot to stop people from manipulating the markets or to prevent outright lies. If you invest in smaller cryptocurrencies, there’s a higher risk of falling prey to shady actors, which is another reason to stick to the big boys.
In case you’re concerned, you don’t have to buy a whole Bitcoin. All cryptocurrency exchanges let you buy fractions of cryptocurrencies. So if you only want $10 worth of BTC or any other major coin, that’s all you need to buy. Though if you’re only investing $10, make sure your investment won’t get swallowed up by trading fees.
2. Ethereum (ETH)
Ethereum is the second biggest cryptocurrency, and its technology powers a large amount of the decentralized finance (DeFi) industry. It was the first to introduce smart contracts, which are tiny pieces of self executing code that live on the blockchain. These are what developers use to program applications on the Ethereum network.
No cryptocurrency is perfect, and Ethereum does have issues with scalability — it suffers from network congestion and high fees. As a result, it is working on a major upgrade to Eth2, which is expected to be finished in 2022.
A number of so-called Ethereum killers have grown in popularity, many of which are faster and cheaper. But Ethereum still hosts the lion’s share of applications, and that first-mover status remains a significant advantage.
3. Cardano (ADA)
Cardano is the newest cryptocurrency on this list, making it potentially the riskiest of the three. However, it’s a great way for new investors to learn more about what blockchain technology can do. It already has partnerships in several countries in Africa, such as a deal with the Ministry of Education in Ethiopia to record students’ academic records on the blockchain.
Cardano has taken a slow-and-steady approach to development. Its founders went back to the drawing board and built a new blockchain. The idea is that the solutions to the issues Ethereum faces are baked in from the outset, so once the new system is finished, it won’t need major upgrades.
The challenge for Cardano is that a number of other cryptocurrencies that also solve Ethereum’s problems are already operational and attracting developers and investors.
Don’t get seduced by articles about the latest must-buy cryptocurrencies when you first invest. Take time to understand the industry and get used to the volatility and other aspects of crypto investment. Cryptocurrency investments are already risky enough without getting burned right out of the gate, so stick to the big ones — at least until you feel confident branching out.