Crypto 101, Part 2: Investment Instruments

Welcome to Part 2 of our Crypto 101 series. In this installment, we explore the broad spectrum of crypto investment instruments and strategies, building on the foundational concepts introduced in Part 1. Each investment method has its own structure, risks, and opportunities.

The following sections provide an overview of the primary ways to participate in the market: direct spot purchases, trading futures on crypto-native and traditional exchanges, investing through exchange-traded products and managed funds, and yield-generating options such as staking and lending. More advanced and ecosystem-specific approaches, including DeFi participation, venture investing, airdrops, running validators, and mining, are also explored to help you understand how each path works and how it may align with your goals and risk tolerance.

Spot

The spot market is the most straightforward way to invest in crypto. You buy and sell cryptocurrencies at the current market price, and you own the actual asset. These can be stored in your personal wallet or held on an exchange (note that centralized exchanges are custodial entities).

Futures on Crypto Exchanges

Futures are legally binding agreements between two parties: one agrees to buy, and the other agrees to sell a commodity or financial instrument at a fixed price on a specified future date. As a result, futures allow you to speculate on the price of a crypto asset without actually owning it.

At the start of a futures transaction, no money changes hands for the full contract value. Instead, both the buyer and seller are required to post margin—a deposit that serves as collateral and represents only a small portion of the contract’s total value.

While some crypto exchanges offer dated futures contracts (typically quarterly, with a fixed end date), most trading volume occurs in perpetual futures—contracts with no expiration date, also known as perpetual swaps or "perps."

Like traditional futures, when you enter a perpetual contract, you're not buying the asset itself; you're entering into an agreement to exchange the difference in price between your entry and exit.

The key distinction in crypto perpetuals is the lack of expiration, which allows you to hold the contract indefinitely. Unlike traditional markets, you'll pay or receive a funding rate at fixed intervals (often every 8 hours). The funding rate is a unique mechanism in crypto that helps keep perpetual contract prices close to the actual market (spot) price.

Because traders only need to post margin, both dated and perpetual futures are inherently leveraged products (meaning you can control a larger position with less capital). In the case of perps, however, you’ll need to explicitly set the leverage for each asset in your account.

Futures in Traditional Exchanges

Traditional financial exchanges, such as the CME (Chicago Mercantile Exchange) and CBOE (Chicago Board Options Exchange), also offer cryptocurrency futures. These are typically fixed-term contracts, usually with quarterly expiration dates.

Unlike spot trading, these futures are settled in cash. This means that when the contract expires, the buyer does not receive the underlying cryptocurrency . Instead, they receive, or owe, the difference between the settlement price and the price at which they entered the contract.

As with all futures, these contracts are inherently leveraged. Traders do not pay the full notional value of the contract upfront; instead, they post margin, and the leverage comes from the difference between this margin and the full contract size.

A key advantage of traditional exchange-traded crypto futures is that they enable institutional investors, including those restricted from crypto-native platforms, to gain exposure to cryptocurrency price movements in a regulated environment. This is especially important for funds and institutions with strict compliance requirements.

Exchange-Traded Products (ETPs): ETFs and ETNs

Exchange-Traded Products (ETPs) are traditional financial instruments that provide exposure to crypto assets without requiring direct ownership of the underlying coins. They’re traded on stock exchanges, just like shares of companies, making them accessible through a regular brokerage account.

ETFs (Exchange-Traded Funds)

Crypto ETFs aim to track the price of a cryptocurrency (like Bitcoin or Ethereum) or a basket of digital assets. They offer:

• Exposure to crypto without dealing with wallets, private keys, or exchanges;
• High transparency, most ETFs disclose daily what they hold;
• Regulatory oversight and investor protections;
• Fees that may slightly eat into returns;
• These products do not grant direct ownership of crypto assets, so they cannot be used for staking, DeFi, or transfers.

Some notable examples of ETFs are:

• Spot Bitcoin ETFs (e.g., BlackRock’s IBIT, Fidelity’s FBTC)
• Futures-based ETFs (which hold Bitcoin or Ethereum futures instead of spot)

ETNs (Exchange-Traded Notes)

ETNs are similar in goal to give you crypto price exposure, but they’re debt instruments issued by a bank or institution.

ETNs don’t hold the underlying asset; instead, they promise to pay you the return of a reference index (e.g., Bitcoin’s price). As such, they carry credit risk: if the issuer goes bankrupt, your investment may be at risk.

ETNs are more common in Europe than in the U.S. and may be taxed differently depending on your jurisdiction.

Why Investors Use ETPs

Investors use ETPs because they are simple and convenient: you can buy and sell them just like stocks, and they are integrated into your existing brokerage or retirement account.

For some investors, regulatory constraints may make ETPs the only available means of accessing crypto.

On the downside, they are a lot less flexible than holding the actual crypto and provide access to only a few cryptocurrencies .

Crypto funds

Managed investment vehicles that pool investor money to gain exposure to digital assets. These include hedge funds, index funds, and venture-style funds.

Crypto hedge funds actively manage portfolios using various strategies such as long/short, arbitrage, or algorithmic trading.

Index funds typically track a basket of top cryptocurrencies , offering broad market exposure with less volatility.

Venture-style funds invest early in crypto startups or protocols, often before tokens are publicly tradable.

These funds may require accreditation and substantial minimum investments. They are popular with individuals or institutions seeking crypto exposure without direct custody or trading.

Staking and yield products

Some blockchains utilize a proof-of-stake consensus mechanism, which enables users to earn rewards by staking their tokens, thereby locking them up to help validate transactions and secure the network. In return, you receive periodic staking rewards, often paid in the same token.

Additionally, the crypto space offers various yield-generating products, including lending platforms, liquidity pools, and yield farming protocols. These allow you to earn interest or incentives on deposited assets, often by providing liquidity to decentralized finance (DeFi) platforms.

Returns can be attractive but also come with risks, such as token price volatility, protocol failures, or smart contract exploits (errors or attacks in the code governing decentralized platforms).

Other ways of market participation

DeFi & Liquidity Provision

Decentralized Finance (DeFi) refers to a growing ecosystem of financial services built on blockchain platforms, particularly Ethereum. These services, including lending, borrowing, trading, and insurance, operate without traditional intermediaries, instead relying on smart contracts to facilitate transactions.

A key pillar of DeFi is liquidity provision, where users deposit crypto assets into decentralized exchanges (DEXs) or protocols, enabling others to trade or borrow. In return, they receive a share of trading fees or rewards in the form of new tokens.

Another important aspect is liquidity mining, which involves depositing crypto assets into a liquidity pool and earning rewards, typically in two forms: trading fees and incentive tokens.

A typical liquidity mining strategy involves deciding:

• Where to provide liquidity (selecting a pool),
• When to enter and exit (seeking high incentives with manageable volatility),
• How much capital to invest,
• How to diversify across pools, and
• How to minimize losses due to price divergence (called impermanent loss, which happens when the value of provided assets changes compared to just holding them).

For example, a strategy might involve staking USDC and ETH in a Uniswap V3 pool, providing liquidity within a narrow price range, and rebalancing when the price drifts outside that range.

Some centralized exchanges or order book-based DeFi platforms (like dYdX or Hyperliquid) also run liquidity mining programs, rewarding users who:

• Place resting limit orders,
• Maintain tight spreads,
• Contribute to consistent market depth.

This resembles market making, where strategies often include:

• Quoting both bid and ask prices around the mid-price,
• Adjusting quotes based on volatility and inventory,
• Capturing spread in addition to earning incentives.

Liquidity provision and liquidity mining played a crucial role in bootstrapping the DeFi ecosystem. However, they come with risks, including impermanent loss (losses relative to a simple buy-and-hold strategy) and smart contract vulnerabilities. As the space matures, newer models, such as concentrated liquidity (e.g., Uniswap v3) and protocol-owned liquidity, are changing how liquidity is sourced and rewarded.

Venture Investing in Tokens or Startups

Venture investing in crypto mirrors traditional venture capital, but with some unique twists. Instead of investing only in equity, crypto venture investors often back early-stage blockchain startups by purchasing their tokens, sometimes long before those tokens are publicly available.

These investments typically fall into one of two categories:

• Equity investments in companies building blockchaininfrastructure, tools, or applications (e.g., exchanges, wallets, or Layer 1 blockchains).
• Token investments, where investors receive allocation in a new cryptocurrency or governance token that will later trade on public markets.

In many cases, VCs and early backers receive favorable terms, such as discounted prices or token vesting schedules. While the potential upside is significant, these deals are high-risk and illiquid, often with long lock-up periods and uncertain regulatory treatment.

Venture investing plays a critical role in the crypto ecosystem by:

• Funding innovation and experimentation,
• Bootstrapping protocols and networks,
• Bringing experience and capital to early-stage teams.

Access to these deals is typically limited to institutional investors, crypto-native funds, and accredited individuals. However, some retail-accessible platforms, such as CoinList, Republic, or certain DAOs (Decentralized Autonomous Organizations), have begun offering limited exposure to token pre-sales or early-stage crypto projects.

As with traditional venture capital, the vast majority of early-stage projects may fail, but the few that succeed can offer outsized returns.

Airdrops & Ecosystem Participation

If someone told you there's a corner of crypto where free money is real, you'd probably raise an eyebrow and rightly so. However, that’s exactly the premise behind airdrops: free tokens distributed by blockchain projects to users who qualify in some way, often simply by showing up early.

Airdrops are typically used to:

• Decentralize ownership of a new protocol or token,
• Bootstrap a community by attracting users,
• Reward early adopters for testing or supporting the ecosystem.

The criteria for receiving an airdrop vary. Some are retroactive, based on past activity, like holding specific tokens, interacting with certain smart contracts, or using particular apps. Others require active participation, such as completing social media tasks, testing a beta product, or referring new users.

Some of the most well-known airdrops, such as Uniswap’s $UNI, Arbitrum’s $ARB, or dYdX, have awarded thousands of dollars' worth of tokens to ordinary users simply for being early adopters or active participants.

Airdrops aren’t guaranteed, but for those who enjoy exploring new projects and staying ahead of trends, they can be one of the most exciting and rewarding parts of the crypto world.

Running Validators or Nodes

In proof-of-stake (PoS) blockchains, validators are responsible for proposing and confirming new blocks of transactions. Running a validator node typically requires locking up (staking) a minimum number of tokens as collateral. For example, Ethereum requires 32 ETH to become a validator. Validators earn rewards in return for their service, but can also be penalized (slashed) for misbehavior or going offline.

Running a full node, on the other hand, doesn't require staking or earn direct rewards, but it contributes to the decentralization and security of the network by independently verifying all transactions and blocks. Some blockchainsoffer "light nodes," which require less storage and computing power.

While running a validator can be profitable, it requires technical knowledge, 24/7 uptime, and secure infrastructure. For most investors, staking through a provider or pool is an easier way to participate in validation.

Mining

Cryptocurrency mining is the process by which the blockchain network generates new coins and records transactions to the blockchain. Miners compete (the first to succeed gets to add the next block and earn a block reward, plus transaction fees) to solve complex cryptographic puzzles that validate and secure transactions on proof-of-work (PoW) decentralized networks, such as Bitcoin, Ethereum Classic, Litecoin, Dogecoin, or Monero.

This process is crucial for maintaining the integrity and security of the blockchain, as miners compete to solve these problems in exchange for rewards in the form of newly minted cryptocurrency .

In the early days, mining could be done on a regular computer. Today, Bitcoin mining is dominated by specialized hardware (ASICs - Application-Specific Integrated Circuits, which are specialized computer chips designed for a specific task) and large mining farms. However, some PoW coins, like Monero, remain CPU-mineable, making them accessible to home miners.

Mining can be seen both as an investment (with upfront costs for equipment and electricity) and as a way to support network security. The key challenges are hardware costs, electricity prices, heat, and noise, all of which affect profitability.

As we've seen in this overview, the world of crypto investment is diverse and constantly evolving. Whether you're interested in straightforward spot purchases, complex derivatives, or ecosystem participation through staking, DeFi, or mining, understanding each path's unique risks and rewards is crucial. In Part 3 of this Crypto 101 series, we'll focus on how to buy your first crypto safely, covering the practical steps, essential security tips, and best practices to ensure your entry into the crypto market is as secure and confident as possible. By equipping yourself with knowledge, you can make more informed decisions and navigate the dynamic crypto landscape with greater confidence.