Cryptocurrency Investment: Am I A Buyer?

Investing in cryptocurrency has become an increasingly popular option for many people. However, it is important to understand the risks involved before deciding whether to invest. Cryptocurrencies are digital assets that are secured by cryptography, and they are often decentralised, meaning they are not issued or controlled by a central authority like a government or bank. This makes them attractive to those seeking an alternative to traditional financial systems, but it also means they are highly volatile and susceptible to scams, hacks, and theft.

Cryptocurrency is a risky investment due to its extreme volatility, and it is not suitable for those looking to grow their retirement portfolio or save for the future. However, it can be a good option for those who enjoy speculation and are financially prepared to lose their investment. Before investing, it is crucial to do thorough research, understand the technology behind it, and carefully consider your personal risk appetite and investment goals.

Cryptocurrency as a long-term investment

Investing in cryptocurrency is risky, but it can be a good long-term investment if you do it properly and as part of a diversified portfolio.

Cryptocurrency is a good long-term investment if you want to gain direct exposure to the demand for digital currency. A safer but potentially less lucrative alternative is buying the stocks of companies with exposure to cryptocurrency.

Bitcoin, as the most widely known cryptocurrency, benefits from the network effect: more people want to own Bitcoin because Bitcoin is owned by the most people. Bitcoin is currently viewed by many investors as "digital gold", but it could also be used as a digital form of cash. Its decentralised nature, the significant attention it has garnered over the years, and its limited supply are some of the reasons why Bitcoin is often regarded as a good long-term investment.

Ethereum is another cryptocurrency that has emerged as a pivotal player in the crypto space. Its decentralised framework facilitates a broad spectrum of applications, notably in decentralised finance (DeFi), enabling users to undertake lending, trading, and other financial operations without traditional intermediaries. Ethereum's strategic importance extends to supporting Web3 technologies, advocating for a more decentralised internet.

Other cryptocurrencies that have been mentioned as good long-term investment options include Solana, Avalanche, Aave, Toncoin, Shiba Inu, Uniswap, Binance Coin, Dogecoin, Ripple, and Polkadot.

However, it's important to keep in mind that investing in cryptocurrency is risky due to its volatile nature. There are also other risks associated with investing in cryptocurrency, such as exchange vulnerability, wallet security issues, regulatory crackdowns, market manipulation, and technological risks. Therefore, it's crucial to conduct thorough research and have a robust risk tolerance before investing in cryptocurrency.

The risks of investing in cryptocurrency

Investing in cryptocurrency is risky, and it is important to understand the risks before you start trading. Here are some of the key risks associated with investing in cryptocurrency:

Volatility and Manipulation

Cryptocurrency prices are extremely volatile and subject to wild swings, booms, and busts. This volatility is driven by sentiment, speculation, and market manipulation by crypto exchanges, media owners, and influential investors. The unregulated and anonymous nature of digital asset markets makes them susceptible to price manipulation.

Regulatory and Tax Uncertainty

Cryptocurrencies are currently unregulated by governments and central banks, creating uncertainty for investors. The lack of regulatory frameworks also means there is a high degree of uncertainty regarding tax obligations and record-keeping requirements.

Security and Custody Risks

Storing cryptocurrencies is risky due to the constant threat of hacking. Investors cannot recover assets that are lost or stolen, and mistaken transactions cannot be reversed. Cryptocurrencies also lack official safeguards or insurance, and rebates on lost investments are dependent on the organization's discretion.

Loss of Private Key

Bitcoins and other cryptocurrencies are stored in digital wallets controlled by both a public key and a private key. If the private key is lost, destroyed, or compromised, investors may be unable to access their digital assets, resulting in a total loss.

Cyber-Security Risks and Malicious Activity

Trading platforms and third-party service providers are vulnerable to hacking and other malicious activities, including phishing attacks. There is also a risk of Blockchain alteration if malicious actors gain control of sufficient consensus nodes on the network.

Peer-to-Peer Transaction Risks

Digital currencies can be traded on online platforms and through third-party service providers, but many marketplaces provide no clearing or intermediary services and are unregulated. In such cases, all risks, such as double-selling, remain between the transacting parties.

Loss of Confidence in Digital Currencies

Most cryptocurrencies are not backed by central banks, national or international organizations, or assets, and their value is solely determined by market participants. A loss of confidence in these digital assets may lead to a collapse of trading activities and an abrupt drop in value.

Regulatory Restrictions

Certain countries may restrict the right to acquire, own, hold, sell, or use digital currencies in the future. Regulators are concerned about the use of cryptocurrencies by criminals and terrorist organizations.

Currency-Conversion Risks

Policies or interruptions in the deposit or withdrawal of fiat currency into or out of trading platforms may impact investors' ability to convert their digital assets.

Taxation Uncertainty

There is substantial uncertainty regarding the tax treatment of investments in digital currencies. Bitcoins and other cryptocurrencies may be considered assets or currency, depending on the jurisdiction, leading to potential sales or value-added taxes on purchases and sales.

Slow-Down of Network

A high volume of transactions on the blockchain can lead to a slowdown, impacting the ability to validate blocks and verify transactions.

Forks in the Blockchain

Dissent among users regarding protocols can result in a "fork," creating two separate networks and two versions of the digital currency, which can trade very differently.

Dilution Due to Competition

Cryptocurrencies are based on peer-to-peer interaction protocols, and competition from other cryptocurrencies can lead to dilution.

Lack of Understanding

Cryptocurrencies are complex and based on emerging technologies such as blockchain, which most people do not fully understand. This lack of understanding can make investors vulnerable to making uninformed investment decisions.

Cryptocurrency and taxes

There are other situations in which you may owe taxes on cryptocurrency. If you use cryptocurrency to buy goods or services, you owe taxes on the increased value between the price you paid for the crypto and its value at the time you spent it, plus any other taxes you might trigger. If you accept cryptocurrency as payment for goods or services, you must report it as business income. If you are a cryptocurrency miner, the value of your crypto at the time it was mined counts as income. If you own cryptocurrency that belongs to a blockchain that uses staking, you'll be required to pay income tax on any rewards you receive. If you exchange one cryptocurrency for another, you'll need to report any gains or losses.

It's important to note that simply buying and holding cryptocurrency is not a taxable event in and of itself. Taxes are typically incurred when you sell, exchange, or use the crypto to make a purchase. Additionally, donating crypto to a qualified tax-exempt charity or non-profit is not a taxable event, and you may be able to claim a charitable deduction.

The future of cryptocurrency

Firstly, cryptocurrency is becoming more mainstream. It is no longer a niche interest of anti-establishment investors but is attracting everyday consumers who see it as a way to pad their portfolios with potentially rewarding, albeit risky, assets. This is reflected in the fact that analysts estimate the global cryptocurrency market will more than triple by 2030, reaching a valuation of nearly $5 billion.

Secondly, the institutional money that has been pouring into cryptocurrency in recent years has changed the power structure of the market. Crypto enthusiasts aren't the ones mining bitcoin anymore, and the mining network has been ring-fenced by a few companies that can provide the huge amounts of computing power and electricity required to mine at scale. This has made it very difficult for independent users to get involved.

Thirdly, cryptocurrency is facing increasing regulation. While some countries, like El Salvador and the Central African Republic, have embraced Bitcoin as an official currency, others like China have banned it outright. In the U.S., the Biden administration has put together a highly qualified team to steer the cryptocurrency regulation process, and the Securities and Exchange Commission (SEC) approved the first set of exchange-traded funds (ETFs) that include Bitcoin in January 2024. However, there are still ambiguities in how to regulate cryptocurrencies, and it is unlikely that there will be global unity on the issue anytime soon.

Finally, cryptocurrency continues to face challenges related to criminal activity, environmental harms, and consumer protection. Cybercriminals have increasingly used ransomware attacks to demand payment in cryptocurrency, and drug cartels and money launderers are also incorporating virtual currency into their activities. The energy-intensive process of Bitcoin mining has sparked fears about its contribution to climate change. And the rapid rise of cryptocurrencies and decentralized finance (DeFi) enterprises means that billions of dollars in transactions are taking place in a relatively unregulated sector, raising concerns about fraud, tax evasion, and financial stability.

In conclusion, the future of cryptocurrency is difficult to predict. It is likely that it will become even more mainstream and that regulation will increase, but it faces challenges related to criminal activity, environmental harms, and consumer protection that could slow down its progress.

How to buy cryptocurrency

If you are interested in buying cryptocurrency, there are a few different ways to do so. Here is a step-by-step guide on how to buy cryptocurrency:

Choose a Brokerage or Crypto Exchange:

You can buy cryptocurrency through a brokerage or a crypto exchange. Both options allow you to buy crypto, but there are some key differences. Cryptocurrency exchanges, such as Coinbase, Netcoins, Newton, Coinberry, and Kraken, tend to have lower fees but more complex interfaces that may be intimidating for beginners. Brokerages, on the other hand, offer user-friendly interfaces but may charge higher fees. It is important to note that some exchanges only allow the purchase of crypto using another crypto, so make sure your chosen platform accepts fiat currency transfers and purchases in Canadian dollars.

Create and Verify Your Account:

After selecting a brokerage or exchange, you will need to sign up and create an account. As part of this process, you may be required to verify your identity by submitting a copy of your driver's license or passport. This step is essential to prevent fraud and meet regulatory requirements.

Deposit Funds:

To buy crypto, you will need to deposit funds into your account. You can do this by linking your bank account, authorizing a wire transfer, or using a debit or credit card. However, it is important to note that credit card purchases of cryptocurrency are considered cash advances and are subject to higher interest rates and additional fees.

Place Your Cryptocurrency Order:

With funds in your account, you can place your first cryptocurrency order. There are hundreds of options to choose from, including well-known names like Bitcoin and Ethereum, as well as lesser-known cryptos. You can enter the ticker symbol of the cryptocurrency you want to purchase and specify the amount you wish to buy. Many exchanges and brokerages allow you to purchase fractional shares of cryptocurrency.

Select a Storage Method:

Cryptocurrency storage is an important consideration due to the risk of theft or hacking. You have several options for storing your crypto:

• Leaving it on the exchange in a crypto wallet
• Using a hot wallet, which is connected to the internet and offers convenience but has a higher risk of theft
• Opting for a cold wallet, which is not connected to the internet and provides greater security, but if you lose the keycode or the device fails, accessing your crypto may be challenging

Remember that investing in cryptocurrency is risky and volatile, so be sure to do your research and only invest what you can afford to lose.

Frequently asked questions