Blog

[Prefer to listen? You can find a podcast version of this article here: E279: 3 Ways to Invest in Crypto (and My Preferred Method)]

Cryptocurrency has moved from the fringes of finance to a mainstream investment option. If you're considering adding crypto to your portfolio, you have several ways to gain exposure.

Each method comes with its own set of trade-offs. Understanding these differences will help you choose the approach that aligns with your investment goals and comfort level.

Two Types of Crypto Investors

Before we dive into the methods, it's worth noting that crypto investors generally fall into two camps.

The first type is interested primarily in price exposure. They want to capture returns from crypto's performance in the market as a way to grow wealth. They view it as another asset class with growth potential.

The second type sees crypto as a hedge against financial system collapse or major disruption. They're concerned about government control over traditional currencies and view crypto as a safeguard in a doomsday scenario. These investors often prioritize control and independence over convenience.

I fall squarely into the first camp. My interest in crypto is driven by its potential for returns and portfolio diversification. I simply want price exposure without the complexity of managing private keys or worrying about exchange security.

Your investment philosophy will naturally guide which method works best for you.

Method 1: ETFs and Mutual Funds

How It Works

Cryptocurrency ETFs and mutual funds allow you to invest in crypto through traditional brokerage accounts. These funds hold actual cryptocurrency or crypto-related assets, and you buy shares just like you would with any other fund.

You'll find options ranging from single-currency funds focused on Bitcoin or Ethereum to diversified crypto funds that hold multiple digital assets. Some funds hold the actual cryptocurrencies while others use futures contracts or other derivatives.

Pros

The biggest advantage of ETFs and funds is convenience. You can buy them through your existing brokerage account alongside your stocks, bonds, and other investments. There's no need to set up new accounts on unfamiliar platforms or learn new technology.

Tax reporting is straightforward. Your brokerage sends you a standard 1099 form at tax time, just like with your other investments. You don't need to track individual crypto transactions or calculate gains across multiple exchanges.

Integration with your overall portfolio is seamless. You or your financial advisor can easily include crypto exposure in your asset allocation strategy. Rebalancing is as simple as selling shares of the fund.

Security concerns are minimal. You're not responsible for safeguarding digital assets or private keys. The fund handles custody through institutional-grade security measures.

Retirement account eligibility is another benefit. You can hold crypto ETFs in IRAs, 401(k)s, and other tax-advantaged accounts. This opens up opportunities for tax-deferred or tax-free growth that aren't available with direct crypto ownership.

Cons

The main drawback is cost. ETFs and funds charge management fees that typically range from 0.2% to 2.5% annually. These expenses eat into your returns over time.

You're also limited to the cryptocurrencies the fund holds. If you want exposure to a specific altcoin, you may not find a fund that offers it.

Some crypto purists argue that you don't actually own the cryptocurrency when you invest through a fund. You own shares in a fund that owns crypto. For investors focused solely on price exposure, this distinction doesn't matter much.

Tracking error can occur with funds that use futures contracts rather than holding actual crypto. The fund's performance may not perfectly match the underlying cryptocurrency's price movements.

Method 2: Direct Investment Through Exchanges

How It Works

Cryptocurrency exchanges allow you to buy, sell, and hold digital currencies directly. You create an account, link a bank account or debit card, and purchase crypto that gets stored in your exchange wallet.

This method gives you actual ownership of cryptocurrency. You can transfer it, spend it, or move it to other wallets as you see fit.

Pros

Direct ownership means you control your assets. You're not dependent on a fund manager's decisions about which cryptocurrencies to hold or when to rebalance.

Access to a wide variety of cryptocurrencies is a major advantage. While Bitcoin and Ethereum dominate the market, exchanges offer hundreds or even thousands of other digital assets. If you want exposure to smaller altcoins, direct investment is your only practical option.

Lower fees compared to funds can save you money, especially if you buy and hold. Most exchanges charge a small percentage on each transaction rather than ongoing management fees.

The ability to transfer crypto to other wallets or use it for transactions provides flexibility. You can send crypto to friends, make purchases with merchants who accept it, or move it to different platforms for specific purposes like staking or lending.

Some exchanges offer additional features like staking rewards, where you can earn yield on certain cryptocurrencies you hold. These opportunities aren't available through ETFs or funds.

Cons

Security responsibility falls entirely on you. Exchanges can be hacked, and if your account is compromised, you may lose your assets. While reputable exchanges have insurance and security measures, they're still targets for cybercriminals.

The learning curve is steeper than with funds. You need to understand how exchanges work, how to secure your account with two-factor authentication, and how to navigate the platform.

Tax reporting becomes more complex. You'll need to track the cost basis of each crypto purchase and calculate gains or losses on every transaction. Many investors find this burdensome, especially if they make frequent trades.

Emotional decision-making is easier when you have direct control. The ability to trade 24/7 can lead to impulsive buying and selling based on short-term price movements.

Exchange risk is real. While major exchanges are generally reliable, some have failed or frozen withdrawals during times of stress. Your crypto is only as secure as the exchange holding it.

Method 3: Hardware Wallets (Cold Storage)

How It Works

Hardware wallets are physical devices that store your cryptocurrency private keys offline. You buy crypto on an exchange and then transfer it to your hardware wallet for secure storage.

This method offers the highest level of security because your private keys never touch the internet. Even if your computer is compromised, your crypto remains safe on the hardware device.

Pros

Maximum security is the primary benefit. Hardware wallets protect against online hacks, exchange failures, and most forms of theft. Your private keys are stored on a device that never connects to the internet.

True ownership and control mean no third party can freeze, seize, or restrict access to your assets. This appeals to investors concerned about financial system stability or government overreach.

Protection from exchange failures becomes important if you hold significant amounts of crypto. When an exchange collapses or suspends withdrawals, hardware wallet users are unaffected because their assets were never stored on the exchange.

The ability to hold assets across multiple blockchains with a single device provides flexibility. One hardware wallet can secure Bitcoin, Ethereum, and dozens of other cryptocurrencies.

Cons

The complexity level is high. You need to understand how to set up the device, transfer crypto to it, and safely store your recovery phrase. Mistakes can result in permanent loss of your assets.

Physical security becomes your responsibility. If you lose the device and your recovery phrase, your crypto is gone forever. If someone finds your recovery phrase, they can steal everything.

Transaction friction increases because you need to connect the hardware wallet whenever you want to buy, sell, or transfer crypto. This makes frequent trading impractical.

Upfront cost for the hardware device ranges from $50 to $200 or more. While this is minor compared to the value of crypto you might store, it's an additional expense.

The inheritance and estate planning challenges are significant. If you pass away unexpectedly, your heirs need to know where your hardware wallet is, how to access it, and have your recovery phrase. Many people fail to properly document this information.

Technical problems can occur. Hardware wallets can malfunction, though you can recover your assets with your recovery phrase. Still, dealing with these issues requires technical knowledge.

My Preferred Method: ETFs and Funds

I prefer investing in crypto through ETFs and funds.

This choice aligns with my investment philosophy. I'm interested in crypto for portfolio diversification and potential returns, not as a hedge against financial collapse. I don't need to actually hold the cryptocurrency itself to achieve my goals.

The convenience factor matters to me. I want crypto exposure to fit seamlessly into my overall investment strategy without creating additional complexity. Using ETFs means I can manage everything through one platform, get consolidated tax reporting, and easily adjust my allocation as needed.

The time saved on security and technical management is valuable. I'd rather spend my time on comprehensive financial planning than worrying about exchange security, hardware wallet backups, or managing private keys.

For investors in the first camp who simply want price exposure, ETFs eliminate unnecessary complexity while still capturing the potential upside of crypto assets.

Choosing the Right Method for You

Your best option depends on your investment goals and personal preferences.

Choose ETFs or funds if you want simplicity, easy integration with your existing portfolio, and minimal technical hassle. This works well if you're primarily interested in price exposure and don't need to own the actual cryptocurrency.

Go with direct exchange investment if you want broader access to different cryptocurrencies, lower fees, or the ability to use your crypto for transactions or staking. This requires more involvement but gives you more options.

Consider hardware wallets if security is your top priority, you hold significant amounts of crypto, or you view cryptocurrency as a hedge against financial system problems. Be prepared for a steep learning curve and ongoing responsibility for security.

Many investors use a combination approach. They might hold core Bitcoin and Ethereum exposure through ETFs while using an exchange for smaller positions in specific altcoins. Others keep most crypto in ETFs but maintain a small amount on an exchange for occasional transactions.

The most important decision is to actually take action based on your research and risk tolerance. The perfect method is the one you'll actually use consistently within your overall financial plan.

Getting Started

If you decide to move forward with crypto investment, start small. Allocate only a portion of your portfolio that you're comfortable with given crypto's volatility.

For ETF investors, talk to your financial advisor or brokerage about available crypto fund options. Look at the expense ratios, holdings, and whether the fund holds actual cryptocurrency or futures contracts.

For exchange investors, research reputable platforms and start with major cryptocurrencies before exploring smaller altcoins. Enable all security features your exchange offers.

For hardware wallet users, buy directly from the manufacturer to avoid tampered devices. Take time to properly set up your device and securely store your recovery phrase.

Whatever method you choose, make sure it fits within your overall financial strategy. Crypto should be one component of a diversified portfolio, not your entire investment approach.

The cryptocurrency landscape continues to evolve. New investment vehicles and methods will emerge over time. Stay informed, but don't let analysis paralysis prevent you from taking action if crypto exposure makes sense for your situation.

Your investment method should support your goals, not complicate them. Choose the approach that helps you capture the potential of crypto while maintaining your peace of mind.