Crypto Investment: Should You Take The Plunge?

Investing in crypto is a hot topic, with many people curious about getting into the game. Cryptocurrency is a virtual currency that acts as a source of purchasing power. It's also an avenue for investment and can be bought with the objective of financial return. However, it's important to note that cryptocurrency is a highly volatile asset class, with large price swings that can be driven by market speculation, regulatory news, technological advancements, and macroeconomic trends.

There are several ways to invest in cryptocurrency. The most common way is to buy cryptocurrency directly through a crypto exchange or broker-dealer. You can also invest in crypto funds, companies with a focus on crypto, or even become a crypto miner or validator. When deciding how much to invest, it's recommended to allocate no more than 1-5% of your net worth to crypto to limit your exposure to risk.

While investing in crypto can be lucrative, it's not without its risks. The market is highly volatile, and it can be difficult to predict when values will rise or fall. Additionally, the lack of government regulation means transactions don't come with legal protection. It's also important to be vigilant about scams and fraud, as anyone can launch a cryptocurrency.

Overall, investing in crypto can be a viable option for those looking to diversify their portfolio and are comfortable with the associated risks.

How to buy cryptocurrency

Investing in cryptocurrency is risky, and the market is extremely volatile. However, if you are looking to buy cryptocurrency, there are several ways to do so.

Choose a Broker or Crypto Exchange

You can buy cryptocurrency through a crypto exchange or a broker. Exchanges tend to have low fees but complex interfaces that can be intimidating for new investors. Some popular exchanges are Coinbase, Gemini, and Binance. Brokers take the complexity out of purchasing crypto but often charge higher fees. Examples include Robinhood and SoFi.

Create and Verify Your Account

Once you have chosen a broker or exchange, you can create an account. You may need to verify your identity by submitting a copy of your driver's license or passport.

Deposit Cash to Invest

To buy crypto, you will need to deposit money into your account. You can do this by linking your bank account, authorizing a wire transfer, or using a debit or credit card. Be aware that credit card companies process cryptocurrency purchases as cash advances, which are subject to higher interest rates.

Place Your Cryptocurrency Order

With funds in your account, you can place your first order. There are hundreds of cryptocurrencies to choose from, including well-known names like Bitcoin and Ethereum, and lesser-known options. You can purchase fractional shares of cryptocurrency, allowing you to buy a sliver of high-priced tokens.

Select a Storage Method

Crypto exchanges are not backed by protections, so it is important to choose a secure storage place for your cryptocurrencies. You can leave your crypto on the exchange in a crypto wallet, or transfer it to a separate hot or cold wallet. Hot wallets are stored online and are convenient but carry a higher risk of theft. Cold wallets are not connected to the internet and are the most secure option.

Other Ways to Buy Cryptocurrency

• Crypto futures: Futures are another way to wager on the price swings in Bitcoin, and they allow the use of leverage to generate large returns (or losses).
• Bitcoin ETFs: Exchange-traded funds that invest directly in Bitcoin are available through most online brokers.
• Crypto exchange or broker stocks: You can buy stock in a company that’s poised to profit from the rise of cryptocurrency, such as an exchange like Coinbase or a broker like Robinhood.
• Blockchain ETFs: These allow you to invest in companies that may profit from the emergence of blockchain technology, but your exposure to cryptocurrency is diluted.

Pros and cons of investing in crypto

Pros:

• Cryptocurrencies are supported by secure, decentralized blockchain technology, independent of traditional banking systems.
• The 24/7 trading offered by crypto provides opportunities for greater returns due to market volatility.
• The blockchain technology underlying cryptocurrency is inherently secure.
• Crypto offers a fairer, more transparent financial system without the need for third-party intermediaries.
• Cryptocurrencies could help investors beat inflation as their price reflects global demand rather than national inflation.
• Accessibility and financial inclusion: cryptocurrencies have the potential to provide financial services to the unbanked and underbanked populations around the world.

Cons:

• Cryptocurrencies often see extreme price fluctuations, and the market is highly volatile.
• There is a steep learning curve, and it can be tough to scale widely.
• It is still uncertain whether cryptocurrencies will remain viable in the long term.
• There are security vulnerabilities that may pose significant risks, especially to new investors.
• The rules and regulations around crypto are constantly evolving, making it challenging for investors and businesses to navigate compliance requirements and potential legal risks.
• The concept of cryptocurrency can be difficult to understand, particularly for those who are not digital natives.

Crypto wallets

There are two main types of crypto wallets: hot wallets and cold wallets. The main difference is that hot wallets are always connected to the internet, while cold wallets are kept offline.

Hot wallets are digital tools that offer convenience and easy access but are vulnerable to cyberattacks. They include online wallets, mobile wallets, and desktop wallets.

Cold wallets, on the other hand, store your digital keys offline, either on a hardware device or a physical medium like paper. They provide stronger security but are harder to access and more limited in function. Examples of cold wallets include hardware wallets and paper wallets.

When choosing a crypto wallet, it's essential to consider factors such as security, supported currencies, accessibility, customer support, and hardware wallet compatibility. Reputable crypto wallet brands include Ledger, MetaMask, Coinbase, and Trust Wallet, each offering unique features and supporting a range of cryptocurrencies.

Crypto as a long-term investment

Investing in cryptocurrencies is a risky business, but it can also be rewarding. Crypto is a volatile asset class, and its decentralised nature means it is not issued, backed, or regulated by a central authority. However, this also means that crypto is not subject to the same supply constraints as fiat currencies, and its value can increase over time.

The Benefits of Long-Term Crypto Investment

Long-term crypto investment means buying and holding crypto for years, if not decades. This strategy may suit investors who believe that their chosen cryptocurrency will attract users and gain utility over time. Here are some of the benefits of long-term crypto investment:

• Building wealth over time: Crypto investments can build wealth, but this may take years, and there are no guarantees of short-term profits.
• Less active management: Long-term investors don't need to keep a constant eye on price fluctuations and can avoid the stress of day-to-day trading.
• High potential rewards: Crypto has the potential for a large return on investment. For example, $1000 of Bitcoin in 2010 would be worth over $200 million today.

Tips for Long-Term Crypto Investment

• Do your research: Understand the technology, the team behind the project, and the white paper.
• Only invest what you can afford to lose: This is a golden rule of investing, and it's especially important in the volatile crypto market.
• Take a long-term perspective: Crypto prices can be volatile, so it's important to take a long-term view and not make emotional decisions.
• Choose established cryptocurrencies: Opt for major cryptocurrencies like Bitcoin and Ethereum, which have stood the test of time and have large market capitalisations.
• Use dollar-cost averaging: This strategy involves making small, regular purchases of crypto, rather than trying to time the market.
• Understand the risks: Crypto is a risky investment, and it's important to be aware of the potential for high losses due to security breaches and scams.
• Diversify your portfolio: Don't put all your eggs in one basket. Invest in a variety of cryptocurrencies and other assets to spread the risk.
• Be patient: The crypto market is still maturing, and it may take time for your investments to pay off.

Crypto tax rules

• Taxation of Crypto Profits: In most countries, crypto profits are subject to taxation, which can fall under capital gains tax, income tax, or wealth tax. It's important to understand the specific tax regulations in your country.
• Capital Gains Tax: When you sell, trade, or spend cryptocurrency, you may realise a capital gain or loss. The tax rate depends on how long you've held the asset and your total income. Short-term capital gains (holding the asset for one year or less) are typically taxed at a higher rate than long-term capital gains.
• Income Tax: Certain crypto transactions are considered income and are subject to income tax. These include getting paid in crypto, mining crypto, receiving an airdrop, or earning interest through lending protocols.
• Tax on Lost or Stolen Crypto: In some countries, like the US, the IRS does not allow crypto investors to claim lost or stolen crypto as a capital loss. However, if you have documentation of the loss, such as a declaration or receipt from the exchange, losses that occurred prior to 2017 may be deductible.
• Crypto Gifts and Donations: In the US, gifting crypto under a certain amount ($17,000 as of 2023) is generally tax-free. Additionally, donating crypto to a registered charitable organisation is usually tax-deductible.
• Tax Reporting and Record-Keeping: It's important to maintain detailed records of your crypto transactions, including dates, fair market values, capital gains or losses, and transaction details. Crypto exchanges are also required to report certain user information to the IRS.
• Tax Strategies: To minimise taxes on crypto gains, consider holding your assets for more than a year to take advantage of lower long-term capital gains tax rates. Additionally, keep track of any losses, as they can be used to offset gains and reduce your overall tax liability.

Frequently asked questions