A cryptocurrency is a virtual payment method that makes it easy to transfer (digital) money between two parties without a bank. Investing in cryptocoins is immensely popular, since the crypto market is constantly moving. There are ways to make it less risky and more long-term investments.
Please note: trading in a cryptocurrency is associated with great risks, you can (partially) lose your investments.
What is crypto?
Crypto or cryptocurrency is a digital means of payment. Bitcoin and Ethereum are the most well-known cryptocoins. Instead of physical money, a cryptocurrency is a line of code based on new technology called blockchain. In short, this is a network distributed across a lot of computers used to keep a virtual ledger of all transactions conducted. This makes it almost impossible to counterfeit or double-spend.
Blockchain makes it almost impossible to counterfeit.
What makes a cryptocurrency unique is that it is decentralized. To buy, trade or sell cryptocurrencies there is no central authority like a bank involved. Therefore it is easier to safely transfer money between two parties without a third mediator. Moreover, crypto is not sensitive to government interference or inflation.
Unfortunately, this also makes cryptocoins a popular currency for illegal activities. In the future a cryptocurrency can potentially replace physical money and is even more popular as an investment, because cryptocurrency prices are constantly moving. Experts believe cryptocurrencies will disrupt many lines of business including finance and law, for example with regards to safe online voting and crowdfunding.
Online trading platforms that trade in crypto
There are a lot of ways to trade in cryptocurrencies. You could use mobile apps, special usb sticks to store your digital currencies, or by trading through exchanges. Some well-known online platforms are:
If you want to trade and invest all by yourself eToro is currently Europe’s online brokerage champion. eToro is a large international platform with millions of users from over a hundred countries. You can trade in stocks, but also in commodities, crypto or currencies. Templates also allow you to invest directly in a variety of sectors.
Via Bitpanda you can easily invest in well-known stocks such as Apple, Microsoft, or Tesla or invest in the larger ETFs. In addition, it offers many cryptocurrencies such as bitcoin, ethereum and solana and you can invest in commodities such as gold and silver via the platform. It is headquartered in Vienna and was Austria's first unicorn in 2021.
The American Coinbase is one of the oldest and most well-known brokers for cryptocurrency transactions. The exchange became listed in the US in 2021, and offers the bigger cryptocurrencies.
Crypto market in Europe
Europe is a leading cryptocurrency economy in the world. To illustrate: the continent received more than 870 billion euros of digital currencies in 2021, according to blockchain datafirm Chainalysis. This is around 25 percent of global activities. The United Kingdom was the European market leader when it comes to cryptocurrency trading in that year, followed by France, Germany, the Netherlands and Spain.
Risks and returns
The market for cryptocurrencies is continuously in flux. This makes it an interesting investment opportunity to buy, but at a high risk, as some digital currencies are extremely volatile. Cryptocurrencies can surge in value and collapse again in a matter of hours. Therefore it is wise to spread your investments in more than just one cryptocurrency and only invest money that you can spare. There is a good possibility that you will lose your investment.
Investing in a cryptocurrency can potentially offer high returns.
The fluctuating market also means investing in cryptocurrencies can potentially offer high returns. The return rate of cryptocurrencies can be more than a thousand percent if you bet on the right horse. And if a cryptocurrency is accepted as a worldwide currency in the future, there may be a scarcity and coins will become even more valuable.
Determining the value of a cryptocurrency
Even though the value of cryptocurrencies fluctuates a lot, there are ways to better inform your investment decisions and mitigate risks. First of all, you can look at the market capitalization (market cap for short) to compare the total value of cryptocurrencies.
Similar to a company’s value in shares, a cryptocurrency market cap is calculated by the total number of circulating coins multiplied by the price of a single coin at that time. Usually older currencies that are more established, such as Bitcoin and Ethereum, will have a bigger market cap. A big market cap means a more stable investment, while crypto with a smaller market cap is more sensitive to the market’s ups and downs.
A big market cap means a more stable investment.
In addition, some coins will have a so-called capped supply that impacts their value. This is the maximum amount of coins that can ever be created. For example: Bitcoin, the most well known and first ever cryptocurrency, has a capped supply of 21 million. A capped supply is considered better, as it rules out the negative effects of inflation.
Most cryptocoins are dependent on the ebbs and flows of the market, which makes them interesting investment opportunities, but also unpredictable and risky. Alternatively, there are stablecoins. These coins have a pre-set value or are based on the value of strong currencies like the euro and american dollar. They are less volatile, but still offer benefits of crypto such as privacy and safety.
You can make a profit of stablecoins when their value changes, like with coins that are based on an amount of gold or even oil. There are also stablecoins that provide interest for lending them to others, since these coins are very popular. Not a lot of people invest in stablecoins, however. More often, these coins are used to invest in other market-based coins.
Investing in Bitcoin
Most investors who invest their money in a digital currency, invest in Bitcoin. This is the first cryptocurrency created, it is still the largest digital currency with the highest circulating supply. As cryptocurrency it is accepted most widely by large companies such as Microsoft and Paypal. And more importantly, you often need bitcoins to invest in other cryptocoins. And if you want to convert your cryptocurrency back to euros, you usually need to transfer them into bitcoins first.
Therefore it can be useful to have at least some bitcoin in your crypto portfolio. Bitcoin is also an important indicator for the overall crypto market, because other coins are affected by its market rate. In this way, the currency can almost function as a stock trading tracker or ETF.
Bitcoin can almost function as a stock trading tracker.
Bitcoin’s popularity also has its downsides, however. Because it is the most widely adapted cryptocoin, there is already a scarcity: Bitcoin has a maximum capped supply of 21 million, and around 18 to 19 million of that is already in circulation. Therefore its growth potential is limited. You can also question if the coin can keep up its market rate moving forward.
Investing in altcoins: small versus established
Alternative coins or altcoins are cryptocoins that were created after the first one, Bitcoin. Among these other cryptocurrencies are the more established coins like Ethereum, but also a growing amount of smaller coins that still have to prove their place in the market.
Newer, smaller altcoins are considered the most risky. Their market rates are the most volatile. Investing in Initial Coin Offerings (ICOs) is also considered very high risk. An ICO is the launch of tokens of a brand new cryptocurrency, sometimes offered in the form of shares, obligations or even an alternative to Initial Public Offering (IPO) on the stock market. You can compare this to investing in a very risky startup. If investing in cryptocurrencies is already a betting game, tokens of new altcoins are the biggest gamble.
New altcoins are the biggest gamble.
For crypto investing in the long-term, it is therefore more fruitful to buy some in established altcoins such as Ethereum, Litecoin and Cardano. Although a market is still moving, developments will more often happen over weeks and months than in a matter of hours. You can consider investing the majority of your funds spread across a few established altcoins. Small altcoins, on the other hand, are for those who enjoy the high risk and check the market semi-daily.
How to invest: exchange, funds and indices
Crypto investing is possible through multiple online platforms. Most investors use a crypto exchange where they can buy, sell, store and trade cryptocurrency with other users, such as eToro, Coinbase and Binance. One thing to look out for is whether an exchange also has a crypto wallet to store your cryptocoins. This makes the investing process much easier, but more on storing your cryptocurrencies later.
Aside from exchanges where you buy your own coins, you can invest in crypto index funds that do this for you. Bitpanda, for example, offers trading but also has its own index funds that invest in the top 5, 10 or 25 cryptocurrencies. An important upside of a fund is that your investment is automatically spread across different coins already, making it less of a risk. Additionally, you will not have to keep track of the market yourself. However, some funds may have a high investing threshold of, for example, 100 thousand euros.
Investing in blockchain
Crypto is based on blockchain technology: a virtual ledger that anyone can access and is constantly checked and verified by algorithms (nodes). This makes for easy, controllable and error-free transactions. By investing, you are also indirectly investing in blockchain. But there are other ways to piggyback on this emerging technology. Blockchain can be more widely adapted than just crypto. For example, because of its advanced verification methods, a growing number of companies and governments use blockchain-technology for security transfers. And some of the biggest tech companies in the world like IBM, Google and Samsung are developing their own blockchain applications.
There are several ways to invest in blockchain.
Investing in blockchain means you can potentially share in the profits if it becomes a success. You can compare blockchain to the emergence of the internet: it can take years before it is applied on a large scale, if at all, or one company develops the right application for it and it suddenly becomes a global phenomenon. It is hard to say, since the technology was only first developed in 2008.
There are several ways to invest in blockchain. The first, of course, is by investing in cryptocurrencies. With crypto indices, you can invest in a handful of companies that use blockchain in different ways. There are also index funds that invest in publicly listed companies that are active in blockchain. Lastly, you can buy shares in companies that use this technology. This is similar to startup investing: it is very high risk, because blockchain still has to prove its place.
Another way to invest in cryptocurrencies in a relatively safe way is by crypto staking. Staking is a form of passive crypto investment with less risk than buying coins or investing in blockchain startups, for example. The returns are still sizable, ranging from 1 to 10 percent per year.
Crypto staking means you purchase coins and hold them for a certain period of time for profits, like interest on a savings account. By holding them in your wallet or on your exchange platform, you can help verify transactions on the blockchain network. The cryptocoins you keep simultaneously act as collateral. In exchange you get a reward, which is usually paid out in crypto.
Staking is a passive crypto investment with less risks.
Staking is seen as a more sustainable alternative for mining, which takes a lot of computational power to approve transactions. For this reason, several cryptocoins have implemented crypto staking instead. Ethereum is one of the biggest coins that offers staking, as well as Cordano, Tezos, Cosmos and Polkadot. Popular crypto brokers that offer staking are Bitstamp, Binance and Coinbase. You can also stake cryptocoins via your own wallet with services like Exodus.
Storing crypto investments in a wallet
When you start to invest in cryptocurrencies, you need to safely store your digital coins. You can store, transfer and sometimes even sell and buy cryptocurrency with a virtual wallet. This is like a bank account for your crypto. It is by far the easiest to use a digital wallet that is provided by a trading platform. Keep in mind, though, that you are dependent on that platform. Some investors choose to spread their coins across different platforms for this reason. If an exchange is hacked or goes bankrupt, not all your assets will be lost.
There are also wallets for desktop or mobile that are not part of an online crypto investing platform. This means your cryptocurrencies are stored on your computer or phone instead of an online platform. It can be safer, if your device is kept free of viruses or malware. Additionally, it is smart to back up the data file that comes with it. If your computer crashes, it will not be a disaster.
Keeping a hardware wallet is the safest type of wallet, but more expensive.
Lastly, you can choose to have a hardware wallet. This is a sort of external hard drive, so your cryptocurrency is not stored on your computer but a seperate device. As it is not connected to the internet or dependent on your computer or phone, this is one of the safest types of wallets. It is a lot more expensive though.
Crypto regulations in Europe
Cryptocurrency and crypto assets are legal across the European Union, with regulations differing per country. For example, crypto exchanges may have to register with local financial regulators. Many member states also issue capital gains tax on cryptocurrency profits at rates between 0 and 50 percent. However, exchanging traditional currency for cryptocurrencies is exempt from Value Added Tax (VAT).
As of January 2020, all cryptocurrency exchanges have to perform Customer Due Diligence and fulfil standard reporting requirements. Because the crypto market is dynamic, further regulations are constantly in development. Like, for example, possible Europe-wide licensing for crypto-asset issuers. The European Central Bank is even considering its own digital euro. Perhaps this means crypto is here to stay.