Here's what retail investors need to know to find 'success' with cryptocurrency, according to experts

"Your success is going to be directly correlated to your understanding of the market."


When it comes to investing in traditional assets such as stocks and bonds, financial advisors' advice is pretty uniform: Keep your costs low, and build a broadly diversified portfolio. The growing popularity of index funds and exchange-traded funds has made this easier than ever. For a fee of just 0.03% of assets (and in some cases, even less), investors can buy exposure to thousands of stocks trading on U.S. markets as easily as a single share of stock.

But in the burgeoning world of cryptocurrency investing, no easy shortcuts exist for retail investors. "Indexes exist for accredited investors," who usually have a net worth over $1 million, says Brady Dale, a senior reporter at cryptocurrency site Coindesk. "But there's not an index out there for regular people to invest in."

Since there's no easy, broad approach to the crypto market, it's essential that you understand it before buying in, says Kiana Danial, author of "Cryptocurrency Investing for Dummies."

"Rule number one is that you shouldn't get into crypto just because you saw Elon Musk mention it on Twitter," she says. "Your success is going to be directly correlated to your understanding of the market," whether from hitting the books or doing some in-depth studying online. Before you take a deep dive, here's a quick primer to get you started.

'Don't invest more than you can afford to lose'

Before you think about putting a cent into a crypto investment, you need to understand the risks, Dale says. Unlike stocks and bonds, crypto investments don't have underlying earnings or cashflow streams dictating prices, which are instead controlled by investor speculation. Given that potential for volatility, Dale's advice is simple: "Don't invest more than you can afford to lose."

6 lessons new retail investors say they learned the hard way

Video by Helen Zhao

"All of these tokens are pretty correlated, and we're in a bull run now. But people need to steel themselves," he says. "If everything works out, this market will get much, much bigger, but before then it will probably take another giant nosedive."

'A bet on bitcoin and ethereum is a bet on the space'

With those caveats out of the way, the safest bets in the Wild West of digital currencies are bitcoin and ethereum, Dale says. "They have a much more fundamental case than other tokens. They both have real things going on with them."

Investors like bitcoin, the original cryptocurrency, for its potential as a store of value. "Bitcoin is in its own category, like gold or other precious metals," says Danial. "People are the ones who decide the trajectory of bitcoin, and that's the beauty of it. It represents liberty from governments, because no government can access it. You have it in your wallet. You're in control of it."

Like gold, bitcoin has an important quality: scarcity. Only a certain number of bitcoins will ever exist. That's one of the reasons it's touted by financial advisors (including author and podcast host Suze Orman) as a portfolio diversifier — an asset that will move differently than other investments in your portfolio, thereby smoothing out your returns over time.

Rule number one is that you shouldn't get into crypto just because you saw Elon Musk mention it on Twitter.
Kiana Danial
author, 'Cryptocurrency Investing for Dummies'

Ethereum, meanwhile, is known for its blockchain technology — a decentralized digital ledger that acts as a platform for all sorts of other things in cryptoworld, from nonfungible tokens to decentralized finance applications to other digital currencies. "Ethereum basically invented a new type of computing — that's really powerful," Dale says. "A lot of tokens you see among the top 100 are part of the Ethereum ecosystem."

For that reason, buying ether — Ethereum's cryptocurrency — could be a way to get exposure to a few corners of the crypto market. "Ethereum is kind of like an index for everything that's running on it," Dale says. "A bet on bitcoin and ethereum is a bet on the space."

How to invest in altcoins

Digital tokens other than bitcoin are referred to as "altcoins," and come with a wide variety of values and uses. "Just like with stocks, these come in all different categories," says Danial. "There are projects in tech, electric vehicles, health care, and finance, to name a few."

Because these coins are often smaller — some valued at tiny fractions of a cent — there is more potential for huge runups in the coins' prices. "Every bull run, people call it altcoin season," says Dale. "Altcoins move faster than the big coins. People want to get those big moves, but there are always questions as to whether they have long-term value."

Of late, the poster child for altcoins has been dogecoin — a coin started as a joke based on a shiba inu meme, which has spiked in value by almost 9,000% this year. But altcoins go far beyond the realm of jokes, with many of them geared toward solving real-world problems, such as easing digital payments or making businesses more efficient.

Experts: Retail investors are taking on too much risk. Do this instead

Video by Helen Zhao

Because the market for these coins is so new, it remains unclear which coins will prove to be the "winners" in their given space, says Danial. Her portfolio consists of what she sees as the most promising coins in several categories. "Some are optimized for ease of payment. Some are optimized as a crypto platform. Some are optimized for creating ease of supply-chain tracking. Some are optimized for privacy," she says. "There are so many more up-and-coming categories. You can basically apply blockchain technology to any industry."

However, unless you consider yourself an expert in these category-specific crypto markets, altcoins can be extremely risky. There's little stopping scammers from charging you for worthless coins, and there's not much you can do if you get duped. "There aren't really any government protections in this world," Dale says. "There's no FDIC to come in and make you whole."

But if you understand the risks and have done some research, altcoins can present a great opportunity to pump up your portfolio returns, says Shidan Gouran, co-founder of Gulf Pearl, a merchant bank that was an early investor in cryptocurrency.

"For now, these are a replacement for lottery tickets," he says. "After you've done your research, find a really small-cap token that you think has a chance to go up 1,000 times. Spend whatever you'd spend on the lottery — you have better odds of winning. But this isn't somewhere to store your wealth or try to fight inflation."

More from Grow: