Cryptocurrencies such as Bitcoin and Ethereum seem like they’re always trending, but understanding how they work can feel like a daunting task. If you’re trying to figure out when to buy cryptocurrency, you might be struggling to understand the ins and outs, and, more importantly, whether it makes sense for you.
Let’s take a look at the basics of cryptocurrencies and when it might make sense to buy a digital currency.
What is cryptocurrency?
A cryptocurrency is a digital form of money that is available only electronically. Sometimes a cryptocurrency is also called a coin or a token.
In general, cryptocurrencies exist on a decentralized digital platform called a blockchain. Because of the decentralized nature of most cryptocurrencies, it’s possible to send and receive cryptocurrency tokens without the need for a bank or some other intermediary. They’re also not subject to the regulations traditional currency experiences.
To use cryptocurrencies, you need a digital wallet and a way to connect to the blockchain in question. If you want to use cryptocurrencies to make purchases and complete other transactions, you also need to find someone willing to accept the cryptocurrency as a payment.
Cryptocurrency enthusiasts believe that using this type of decentralized finance (DeFi) will be the way most people handle business in the future. Additionally, they also think that the next version of the internet will be built using blockchain technology, which is powered by tokens that can be used as cryptocurrency.
Although there’s no telling what might be next for the evolution of money and the internet, many people are interested in considering its potential.
Types of crypto
There are thousands of cryptocurrencies. Part of trying to decide when to buy cryptocurrency is figuring out which tokens you’re most interested in and then buying those.
If you’re looking for interesting tokens to start with, here are some well-known cryptocurrencies to explore.
- Bitcoin (BTC): The first cryptocurrency, bitcoin is also the highest-priced and has the largest market capitalization, according to CoinMarketCap. Bitcoin is also one of the most widely accepted cryptocurrencies, and some people refer to it as “digital gold.” One of the reasons it’s seen as a digital store of value is because it will be limited to 21 million tokens, after which no more will be produced. For many, when they talk about how to buy cryptocurrency, what they actually want to know is how to buy Bitcoin.
- Ethereum (ETH): The cryptocurrency with the second-largest market cap, Ethereum is built on a blockchain technology that focuses on smart contracts and apps. In fact, Ethereum is often used for decentralized finance because of the way it can execute contracts. There is no limit on the circulating supply. For more on Ethereum, check out our guide on how to invest in Ethereum.
- Dogecoin (DOGE): Dogecoin started out as a joke and is now the 10th-largest cryptocurrency available. It’s even possible to use Dogecoin to make purchases at the Dallas Mavericks stadium and other venues. Learn more in our guide on how to buy Dogecoin.
- Solana (SOL): Although the Bitcoin blockchain has come under fire for using a lot of electricity and being bad for the environment, Solana is an altcoin that is “minted” using energy-efficient means. It’s positioning itself as a sustainable alternative to other cryptocurrencies. Solana can execute smart contracts and allows for apps.
- Polkadot (DOT): Polkadot is designed to be a blockchain that connects blockchains. For those interested in Web 3 technology, Polkadot is supposed to be able to help out by allowing transfers across blockchains, connecting them, and allowing seamless transfer of data and assets.
- Uniswap (UNI): Not only is this a token, but it’s also an exchange for cryptocurrencies. However, Uniswap goes beyond enabling cryptocurrency exchanges. It’s also being used for a variety of different DeFi apps to create a marketplace that enthusiasts believe can supplant the current financial system.
- Chainlink (LINK): Another blockchain that’s working in smart contracts is Chainlink. This token and platform are meant to bring off-blockchain assets onto the blockchain so they can be connected for smart contract purposes.
There are thousands more cryptocurrencies, not all of which have the same type of use case. When reviewing cryptocurrencies, it’s important to understand the reasoning behind them and consider whether you think they will be viable in the future.
Who should buy cryptocurrency?
Whether you should buy cryptocurrency depends on your individual financial goals and investment strategy. It’s also important to think about your risk tolerance. Because cryptocurrency prices can be volatile, it’s important to be somewhat comfortable with risk, as well as have a basic understanding of cryptocurrency and how it works.
It might also make sense to invest only after you have an established portfolio with more traditional assets. For example, if you already have a retirement portfolio with index funds, and maybe some individual stocks in a taxable account, you might want to diversify with cryptocurrency. Other investments, such as learning how to buy gold or getting started in real estate, might also make more sense before you diversify with cryptocurrency. Take a step back and make sure you learn the basics of how to invest money and build a diversified portfolio before you decide to buy cryptocurrency.
Finally, make sure you can afford to lose the money you invest. You should think twice about buying cryptocurrency if you don’t have a lot of disposable income or can’t afford to lose what you put into a crypto.
When to buy cryptocurrency
Trying to figure out when to buy cryptocurrency can be tricky because it’s such a new asset class. Prices are volatile, so it’s hard to figure out whether a cryptocurrency will be higher or lower on any given day.
Rather than trying to time the crypto market — which is difficult even with an established asset class like stocks — you might be better off researching your choices and buying and holding. Review available cryptocurrencies to find something that seems viable to you. Consider the following items as you move forward:
- Is it available on a major exchange? This can be an indication that it’s relatively liquid and easy to sell if you need to later.
- Does the blockchain platform the token is associated with have an underlying use case? Cryptocurrencies that power solutions for the future are more likely to remain viable later.
- Can you get a partial token? Being able to buy a smaller unit can be useful if you don’t have a lot of money. This is similar to buying fractional shares of stocks.
In some cases, it can make sense to use a dollar-cost averaging strategy to buy cryptocurrency. With this strategy, you decide how much money you can afford to use on cryptocurrency each month. Then, on a regular day, you make a purchase. This approach is similar to making automatic investments into a retirement account or some other investment account.
You can use many of the same strategies that you would with individual stock or fund investing to buy cryptocurrencies.
How to buy crypto
There are different choices available once you decide when to buy cryptocurrency. No matter how you proceed, though, you will need a crypto wallet to store your digital assets. You can use an online wallet, such as those offered by major crypto exchanges, or you can use an offline wallet that looks similar to a flash drive.
When learning how to buy cryptocurrency, getting a digital wallet with strong protections against theft is the most important first step. Cryptocurrencies aren’t insured by the Federal Deposit Insurance Corp. (FDIC) like bank accounts, so it’s critical to keep your crypto secure.
A major exchange is the easiest place to buy crypto. Exchanges like Coinbase, Binance, and Gemini will help you store your cryptocurrencies by providing wallets. When you have the wallet address, you can move your coins in and out of the account with relative ease. For beginners, using an exchange can make sense for crypto trades. It’s easy to connect your bank account and some exchanges let you buy cryptocurrency with a debit or credit card.
It’s also possible to gain exposure to crypto with an online brokerage app such as eToro. For more info, check out our eToro review. PayPal and Cash App also allow you to buy, sell, and hold cryptocurrencies.
Another option for exposure to bitcoin specifically is buying a bitcoin ETF. An ETF is a pool of assets traded on the stock market and there are some ETFs that specialize in bitcoin futures. A futures contract is an agreement to buy or sell an asset in the future, and you make (or lose) money depending on how bitcoin prices perform.
Finally, it’s also possible to get crypto assets directly from others. Platforms like Uniswap make this easy. You can also have someone send a token directly to your wallet. Exchanges like Kraken don’t provide you with a place to store your cryptocurrency long term, so you need your own wallet to proceed. A useful tool for those who don’t want to buy on exchanges is the MetaMask software wallet and browser extension. You can connect other wallets, including those specialized for a specific currency, using MetaMask.
When is the best time to buy cryptocurrency?
As with any investment, the best time to buy cryptocurrency is when you have the money and you’re ready to invest. Trying to time the market can be difficult and ineffective. Although it’s nice to buy when cryptocurrency is low, don’t let trying to get the best price stop you from investing altogether.
Is it best to buy bitcoin when it’s low?
If you can buy bitcoin when it is experiencing a price drop, that is the ideal approach. However, bitcoin is currently the most expensively priced cryptocurrency, so it’s hard to determine when it is low. It’s possible to buy partial bitcoins, so you don’t need to buy an entire token at once.
Which cryptocurrency should you invest in?
There’s no one right cryptocurrency to invest in. There are thousands of choices, so carefully consider what is likely to help you meet your portfolio and financial goals. Look for a cryptocurrency you believe has staying power. Also consider whether the cryptocurrency is liquid and frequently traded, so you can determine whether you’re able to sell it later.
There is no specific time to buy cryptocurrency. Rather than trying to time the market, you’re likely better off treating cryptocurrency like the other assets in your portfolio. Carefully consider where crypto might fit as an alternative asset that can bring additional diversity to your portfolio. Once you decide to invest, consider starting with our list of the best cryptocurrency exchanges.
Disclosure: The author owns bitcoin, Ethereum, Dogecoin, Polkadot, and Solana.