Updated April 15th, 2024
Key Takeaways:
- There are many ways to invest in crypto, from exchanges to managed crypto funds and even individual retirement accounts (IRAs).
- Many crypto funds are available to investors both as brokerage accounts or by way of a tax-advantaged, self-directed IRA, like The Alternative IRA® from Alto.
- Alto’s CryptoIRA offers real-time 24/7 trading with integration with Coinbase.
Before investing in a certain coin or token, it’s important that you do your homework. You might also consider talking to a financial advisor. And as always, never invest more than you can afford to lose.
Remember: Crypto is a highly volatile asset class. While the value of cryptocurrencies like Bitcoin and Ethereum have grown tremendously, others have failed, and past performance is just that. It is by no means a guarantee of how a certain asset or the overall market will perform in the future.
Now, with that all said, let’s talk about ways to invest in crypto as a beginner.
Where can I invest in crypto?
From exchanges to managed crypto funds and even individual retirement accounts (IRAs), you have options when it comes to where to invest in cryptocurrency.
Here are three easy ways to invest in crypto. Keep in mind though that there is no one best way to invest in crypto, and this is by no means an exhaustive list.
1. Centralized Cryptocurrency Exchanges
When most people think about buying and selling crypto, it’s via a centralized exchange (CEX) like Coinbase, Binance.US, or Kraken. And these are often good places to start due to their relative ease of use.
Think of a CEX as a marketplace where you can purchase investment opportunities. Centralized exchanges allow you to buy and sell cryptocurrencies in much the same way you would stocks. But they also hold your funds for you, as well as make it easy to send and receive crypto, and add and withdraw USD funds.
Perhaps most important to the newly cryptocurious, most of these exchanges allow small investments. That means you won’t need to commit a large sum of money to dip your toes. (Note: You do not need to buy, for example, an entire Bitcoin to gain exposure to BTC. Instead, you can buy a fraction of a given crypto asset.)
Additionally, with a CEX, you don’t need to worry about holding your own personal digital wallet or private keys like you would with a decentralized exchange. (More on DEXs in a moment.)
Be aware, though, of your tax-reporting obligations. The IRS requires that you report any sales of crypto on your taxes. To do that, you need to know the price(s) you paid—called the cost basis—and the sale price. Depending on the exchange, that’s not always the easiest process.
To invest in crypto using a CEX, you simply:
- Set up an account.
- Complete the required Know Your Customer (KYC) verification.
- Add funds from your bank account and/or connect your debit/credit card, PayPal, etc.
- Start trading.
Decentralized (DEX) and Hybrid Exchanges
Because first-time investors will likely find them easier to use, we chose to focus on centralized exchanges. However, you should be aware of the two other types of crypto exchanges: decentralized and hybrid.
A DEX is a peer-to-peer exchange that facilitates secure, direct transfers of crypto. Decentralized exchanges don’t require you to verify your identity. You aren’t even required to use your name.
As a result, a DEX offers the greatest level of anonymity, keeping in line with the original vision behind Bitcoin. The downside is that these exchanges also require more technical savvy. They also give you access to a lot more cryptocurrencies—thousands rather than hundreds—which can be overwhelming. Not to mention, just about anyone with the right know-how can add a cryptocurrency to a DEX, increasing the risk of fraud.
As the name suggests, a hybrid exchange blends elements of centralized and decentralized exchanges.
It should also be noted that regardless of the type of exchange, you are still personally responsible for reporting crypto transactions on your taxes.
Pros and Cons of Centralized Exchanges
Pros:
- Easy to use and fund
- Require only small investments
- Offer considerable selection
- Don’t require you to hold private keys or a personal wallet
Cons:
- Taxes can be complicated
- Lack the anonymity of decentralized exchanges
- Some exchanges charge higher fees than others
2. Individual Retirement Accounts (IRAs)
Though many people don’t yet know about them, IRAs are becoming a popular way to invest in crypto due to their enormous tax benefits.
With a traditional crypto IRA, it’s possible to defer taxes until you take distributions, which are allowed free of penalty six months after turning 59. This also means you can invest using pre-tax money.
Conversely, with a Roth crypto IRA, you’ll never pay any taxes on your investment gains so long as you have had your account open for five years and wait until six months after turning 59.
But that doesn’t really tell the full story. Regardless of the type of crypto IRA you choose, gains and individual trades are not taxed. So you can sell crypto holdings within your IRA free of the hassle of reporting them on your taxes.
Operating a lot like a centralized exchange, setting up a crypto IRA is easy, though it does involve a few additional steps due to the tax-advantaged status of retirement accounts. Additionally, you should be aware that you can only contribute up to $6,000 a year to an IRA ($7,000 if you’re 50 or older), though it is possible to fund your account by rolling over funds from another retirement account.
To set up an Alto CryptoIRA, you:
- Sign up for an account.
- Complete the required KYC verification and execute account opening documents.
- Add funds via a contribution from your bank account or by rolling them over from an existing IRA or 401(K).
- Wait seven days to begin investing as mandated by the IRS. (This is called a revocation period and intended to provide you the opportunity to change your mind.)
- Start buying and selling crypto.
Considerations for Selecting a Crypto IRA
When shopping for crypto IRAs, there are a few considerations you need to be aware of, starting with investment minimums. Many cryptocurrency IRAs require large investments, which might be okay for someone who’s already heavily into cryptocurrency. However, for the novice, a minimum $500 investment might seem a bit steep.
Additionally, with a lot of crypto IRAs, trades are not executed in real-time. That’s a big issue if you’re trying to buy the dip (meaning, either the entire market or just a certain coin is down). Imagine buying $100 of a particular coin or token based on one price and then finding out the transaction didn’t go through until several hours or even days later, when the price was significantly higher.
Finally, there’s the issue of choice. From DeFi and decentralized apps (dApps) to NFTs and the metaverse, there’s a lot happening in crypto. Unfortunately, some offer just a handful of big-name coins and tokens—for example, Bitcoin, Ethereum, Litecoin, and that’s it!
In line with Alto’s mission to make alternative investing accessible to everyone, Alto CryptoIRA offers:
- Real-time 24/7 trading
- 135+ coins and tokens
- $10 investment minimums
- No monthly account or setup fees
- A low, 1% trading fee
- Integration with Coinbase
Pros and Cons of Crypto IRAs
Pros:
- Easy to use and fund
- Offer tax-advantaged investing
- Allow you to avoid many of the tax hassles of an exchange
- Operate much like centralized exchanges
- Don’t require you to hold private keys or a personal wallet
Cons:
- Have to wait until 59-½ years old to take distributions without penalty
- Some crypto IRAs require large minimum investments
- Not all crypto IRAs offer the kind of selection provided by Alto CryptoIRA
- If not rolling over money from another retirement account, you’re limited by the yearly contribution amount
Pros and Cons of Crypto Funds and Trusts
3. Bitcoin Trusts and Other Managed Crypto Funds
So, far we’ve talked about how centralized exchanges are arguably the most common entry point for crypto investors—though they can be a hassle from a tax standpoint. We also talked about how crypto IRAs offer considerable tax advantages. However, early withdrawals may come with tax penalties. So what if you want crypto in your portfolio but would rather rely on dedicated financial analysts to decide the allocation for you and tax experts to handle the nuances of crypto taxes? Enter crypto funds and trusts. Though not all of these investment vehicles are accessible to all investors due to income requirements or large investment minimums, crypto funds and trusts offer exposure to either individual crypto assets or small, curated portfolios of crypto without requiring you to manage a wallet or deal with exchanges. Others offer exposure to both crypto and other digital assets or tech-based stocks. Not only that, the managers of these investment accounts are typically quite savvy when it comes to minimizing tax implications. As mentioned previously, though, many but not all of these funds and trusts are exclusive to accredited investorsPros and Cons of Crypto Funds and Trusts
Pros:- Provide exposure to crypto with limited involvement on your part
- No need to set up a wallet or hold private keys
- Professionally managed
- Fund managers are typically savvy in tax minimization strategies
- Typically require significant investment capital and even accreditation status
- Offer limited control over investments and allocations
- Cannot buy and sell any time you’d like
Managed Crypto Funds and Trusts in an IRA
It should be noted that many crypto funds are available to investors both as brokerage accounts or by way of a tax-advantaged, self-directed IRA, such as The Alternative IRA® from Alto. Considering that $7.2 trillion is invested in 401(k)s and $13 trillion is invested in IRAs, it only makes sense that people should be allowed to leverage this funding source for investing in alternative assets, such as crypto funds. Alto offers investors a dozen tax-advantaged managed crypto fund options with investment minimums ranging from $10,000 to $100,000. And our crypto fund investment partners include major players such as Eaglebrook Advisors, Grayscale, Skybridge Capital, and Valkyrie. To invest in one of the crypto funds available through an Alto IRA:- Sign up for an account.
- Complete the required KYC verification and account opening paperwork.
- Add funds via a contribution from your bank account or by rolling them over from an existing IRA or 401(K).
- Wait seven days to begin investing as mandated by the IRS. (Note: Rollovers generally take about two weeks, though the time to funding varies by transferring custodian.)
- Within Alto IRA, navigate to the crypto fund and follow the steps to create an account.
- Make your tax-advantaged investment.
Pros and Cons of IRA-Based Crypto Funds and Trusts
Pros:- Provide exposure to crypto with limited involvement on your part
- No need to set up a wallet or hold private keys
- Professionally managed
- Investments are tax-deferred or tax-free depending on IRA type
- Require significant investment capital and often accreditation status
- Offer limited control over investments and allocations
- Cannot buy and sell any time you’d like
- Have to wait until 59-½ years old to take distributions without penalty
- Typically require you to rollover funds from an existing retirement fund due to significant investment minimums
What about Bitcoin ETFs?
You may have noticed that we didn’t mention Bitcoin exchange-traded funds (ETFs) in this post. Because Bitcoin ETFs as currently allowed by the SEC are futures contracts, they don’t provide “physical” ownership of crypto assets. That’s not to say you won’t profit from a Bitcoin futures ETF. It just means you’ll never gain exposure to actual Bitcoin.
The bottom line
There are many ways to get into crypto as a first-timer, whether you’re ready to dive in headlong or want to start small.
By doing so within a self-directed IRA, you can get an experience not unlike that of an exchange or managed fund or trust, only with the substantial tax benefits of a retirement investment account.
To learn more about how to invest in crypto tax-deferred or even tax-free, check out Alto IRA and CryptoIRA.