Cryptocurrency Investment Fund: A Beginner's Guide To Crypto Investing

Cryptocurrency investment funds are a new type of investment vehicle that parallels traditional portfolio investments, like hedge funds, but are composed entirely of digital assets. Cryptocurrency funds are managed portfolios that pool investor money to invest in various crypto assets. These funds offer convenience and potential tax advantages for retirement accounts. The main types of cryptocurrency funds are venture capital funds and hedge funds. Venture capital funds involve pooling investor money to buy into smaller businesses with high growth potential, such as new projects and altcoins. Hedge funds, on the other hand, are actively managed portfolios that work to minimize risk in the market. These funds can be made up of any assets and typically use long and short strategies to diversify the portfolio and make it resistant to high volatility. Cryptocurrency funds have seen significant growth in recent years, with the overall value of assets under management doubling from $1 billion in 2018 to $2 billion in 2019.

Cryptocurrency investment funds vs. traditional investment funds

Cryptocurrency investment funds and traditional investment funds differ in several ways, each with its own advantages and drawbacks. Here is a detailed comparison:

Nature of Investments

Cryptocurrency funds are a new type of investment vehicle that is similar to traditional portfolio investments like hedge funds but composed entirely of digital assets. These funds are typically managed by individuals or small teams and are often available to high-end investors. In contrast, traditional investment funds are established financial assets that have been used for decades to build wealth, including stocks, bonds, and real estate.

Volatility and Risk

Cryptocurrency markets are known for their high volatility, with prices fluctuating significantly over short periods. This volatility can lead to substantial gains but also carries a higher risk of losses. Traditional investments, on the other hand, tend to exhibit lower volatility and are generally less risky. Stocks and bonds generally offer more predictable returns, and real estate investments provide stability through rental income or property value appreciation.

Liquidity

Cryptocurrencies can be bought and sold 24/7 on various exchanges, providing high liquidity and flexibility. However, some cryptocurrencies may have lower trading volumes, impacting their liquidity. Traditional investments, such as stocks and bonds, can only be traded during market hours, while real estate transactions can take much longer to complete.

Returns

Cryptocurrencies offer the potential for high returns due to rapid price appreciation. Early investors in successful cryptocurrencies have reaped significant profits. However, these high returns come with increased risk. Traditional investments, like stocks and real estate, have historically provided steadier, long-term returns. Bonds offer lower returns but with reduced risk.

Regulation and Security

The regulatory environment for cryptocurrencies is still evolving, and the lack of comprehensive regulations exposes investors to fraud and market manipulation. Traditional investments, on the other hand, are regulated by government agencies and financial institutions, providing an added layer of security and established rules for investors.

Accessibility

Cryptocurrencies offer increased accessibility compared to traditional investments. Anyone with an internet connection can easily buy and sell cryptocurrencies through online exchanges. Traditional investments often have higher barriers to entry, requiring substantial capital or intermediaries like brokers.

Diversification

Investing solely in cryptocurrencies may lead to a lack of diversification, as the market is still relatively new and focused primarily on digital assets. Traditional investment portfolios can be diversified across various asset classes, sectors, and geographic regions, helping to spread risk and enhance returns.

The choice between cryptocurrency and traditional investment funds depends on an individual's financial goals, risk tolerance, and investment strategy. Cryptocurrencies offer high returns, accessibility, and transparency through blockchain technology. However, they come with higher volatility, regulatory uncertainties, and security risks. Traditional investment funds provide stability, regulatory oversight, and well-established markets but may offer lower potential returns and have higher barriers to entry. Diversification, combining both types of investments, can be a prudent strategy to balance risk and maximize returns.

Cryptocurrency investment funds: pros and cons

Cryptocurrency investment funds can be an attractive prospect for investors looking to diversify their portfolios and access the potential for high returns. However, as with any investment, there are pros and cons to consider before diving into the world of cryptocurrency.

Pros:

• Accessibility and Liquidity: Cryptocurrencies are accessible and versatile, allowing users to purchase goods and services from a growing list of places that accept them. They can also make it easier to spend money in other countries without incurring foreign transaction fees.
• Independence from Central Authority: Cryptocurrencies like Bitcoin are decentralized, meaning they are not regulated by a single government or central bank. This gives them immunity from government interventions and control.
• Inflation Protection: Cryptocurrencies like Bitcoin have a limited supply, which can protect against inflation. As the growth of the money supply outpaces the supply of Bitcoin, its price is expected to increase.
• Cost-Effective Transactions: Cryptocurrency transactions can be faster and cheaper than traditional exchanges, as they eliminate the need for third-party intermediaries like VISA.
• 24/7 Trading: Cryptocurrency markets are always open, allowing investors to buy, sell, or trade at any time, providing opportunities for investors to generate returns outside of normal working hours.
• Potential for High Returns: The cryptocurrency market is driven by supply and demand dynamics, which can result in hefty returns for investors who get in at the right time.
• Secure and Transparent Infrastructure: Cryptocurrencies are supported by secure, decentralized blockchain technology, which makes transactions secure and transparent. Once a transaction is recorded on the blockchain, it cannot be erased or tampered with.

Cons:

• Extreme Price Volatility: Cryptocurrency prices can fluctuate drastically due to various factors, including supply and demand, future value uncertainty, and security breaches. This volatility can make it challenging to predict the value of investments and may increase the overall risk of investing.
• Lack of Regulatory Oversight: The lack of clear regulations and standardized policies in the cryptocurrency space can leave investors vulnerable to fraud and scams. The ambiguity surrounding cryptocurrency laws and taxes, which vary by country, further complicates the investment landscape.
• Complex and Technical: Understanding the intricacies of cryptocurrency and blockchain technology can be challenging, especially for those who are not digital natives. This steep learning curve may deter potential investors or lead to uninformed investment decisions.
• Scalability Issues: While cryptocurrency transactions are generally fast, they can run into major issues at scale, slowing down the processing of transactions and causing potential financial losses.
• Security Risks: Cryptocurrency investors face security risks, such as losing their private keys or falling victim to hacking and phishing attempts. These risks can result in the loss of investments, and newer investors may be more vulnerable to such threats.
• Uncertain Long-Term Viability: Cryptocurrencies have only been around for just over a decade, and their long-term viability is still uncertain. The lack of a proven track record, compared to traditional investments like stocks and gold, makes investing in cryptocurrencies a risky proposition.

How to buy cryptocurrency

There are several ways to buy cryptocurrency, each with its own pros and cons. Here is a step-by-step guide on how to buy cryptocurrency:

Choose a Broker or Crypto Exchange

Firstly, you need to pick a broker or a crypto exchange. Both allow you to buy crypto, but there are some differences. A cryptocurrency exchange is a platform where buyers and sellers meet to trade cryptocurrencies. Exchanges often have low fees but can be intimidating for new crypto investors due to their complex interfaces. Some popular cryptocurrency exchanges include Coinbase, Gemini, and Binance. On the other hand, cryptocurrency brokers offer user-friendly interfaces that interact with exchanges for you, making the process simpler. Examples of crypto brokers include Robinhood and SoFi. It is important to note that brokers may have restrictions on transferring your cryptocurrency holdings off the platform.

Create and Verify Your Account

Once you have chosen a cryptocurrency broker or exchange, you can sign up and create an account. Depending on the platform and the amount you plan to buy, you may need to verify your identity to prevent fraud and meet regulatory requirements. This usually involves submitting a copy of your driver's license or passport, and sometimes a selfie, to confirm your appearance matches the documents.

Deposit Funds

To buy crypto, you will need to deposit money into your account. You can typically 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 using a credit card can be risky and expensive due to higher interest rates and additional cash advance fees.

Place Your Cryptocurrency Order

Once you have funds in your account, you can place your first cryptocurrency order. There are hundreds of cryptocurrencies to choose from, including well-known ones like Bitcoin and Ethereum, as well as lesser-known options. You can enter the ticker symbol of the cryptocurrency you want to purchase, such as BTC for Bitcoin, and specify the amount you wish to buy. With most exchanges and brokers, you can purchase fractional shares of cryptocurrency, allowing you to invest in high-priced tokens without needing to buy a whole coin.

Select a Storage Method

Cryptocurrency exchanges do not have the same protections as traditional financial institutions, so it is crucial to choose a secure storage method for your cryptocurrencies. You can leave your crypto on the exchange in a "hot wallet," which is convenient but has a higher risk of theft since it is connected to the internet. Alternatively, you can transfer your crypto to a separate hot wallet or a "cold wallet," which is not connected to the internet and offers more security. Cold wallets can take the form of external devices like a USB drive or hard drive but come with the risk of losing access to your crypto if the device fails or the keycode is lost.

How to pull your money out of crypto

There are several ways to withdraw your money from crypto, each with its own pros and cons. Here is a step-by-step guide on how to pull your money out of crypto, along with some important considerations.

Using a Crypto Exchange

One of the most popular ways to cash out your crypto is by using a centralized crypto exchange platform such as Coinbase, Binance, or Kraken. These platforms offer a wide range of cryptocurrencies, multiple fiat currencies, and generally reliable withdrawal processes. Here's how you can withdraw your money using an exchange:

• Login and Select Crypto: Sign in to your crypto exchange account and select the cryptocurrency you want to withdraw.
• Choose Withdrawal Method: Decide whether you want to withdraw to an external wallet address or to a connected app/bank account.
• Add Withdrawal Address (for external transfers only): If you're withdrawing to an external address, you'll need to add and verify the withdrawal address.
• Review and Confirm Withdrawal: Check the amount you want to withdraw, including any applicable withdrawal fees. Then, confirm the withdrawal.
• Complete Verification: Depending on the platform and your security settings, you may need to complete two-factor authentication (2FA) or provide an SMS one-time password (OTP) to finalize the withdrawal.
• Wait for Processing: Withdrawals from crypto exchanges usually take up to 2 hours but can sometimes take longer. You will typically receive a notification once the withdrawal is processed.

Using a Broker

If you purchased crypto through an online broker like Robinhood or Webull, selling it through the same platform is usually the most straightforward option. Here's an overview of the process:

• Login and Select Crypto: Access your broker's platform and select the crypto you want to sell.
• Sell Crypto: Execute a sell trade on the platform. You may be able to set a specific amount you want to sell, or you can sell your entire balance.
• Funds Available: After completing the trade, the cash will be available in your broker account, ready for further trading or withdrawal to your bank account.

Peer-to-Peer Trade

Another option for withdrawing your money from crypto is through a peer-to-peer (P2P) trade. This method involves selling your crypto directly to another person, often facilitated by an exchange like Binance P2P or Paxful. Here's how it works:

• Find a Buyer: Use a P2P platform or another means to find a buyer for your crypto.
• Agree on Terms: Negotiate and agree on the terms of the trade, including the amount of crypto and the payment method.
• Escrow and Verification: Depending on the platform, your crypto may be held in escrow by the exchange until the buyer verifies that they have received the funds.
• Release and Payment: Once the buyer confirms receipt of the crypto, the platform will release the payment to you, either directly or through the chosen payment method.

Bitcoin ATM

For those seeking immediate access to cash, a Bitcoin ATM can be a convenient option. These ATMs allow you to sell your Bitcoin for cash, but they are typically associated with high fees. Here's the general process:

• Choose Sell Option: At the ATM, select the option to sell Bitcoin or another supported crypto.
• Provide Verification: You may be required to provide identity verification, such as a driver's license, to complete the transaction.
• Open Digital Wallet: Access your digital wallet containing the Bitcoin you wish to sell.
• Scan ATM QR Code: Send your Bitcoin to the ATM's QR code to initiate the transfer.
• Receive Cash: Once the transaction is confirmed, the ATM will dispense the agreed-upon amount in cash.

Important Considerations:

When withdrawing money from crypto, there are several important considerations to keep in mind:

• Tax Implications: In many countries, including the US, cryptocurrency is taxed like property. Selling crypto at a profit may result in capital gains tax, so be sure to understand the tax implications before cashing out.
• Fees: Withdrawing money from crypto often incurs fees, which vary depending on the platform and method used. Crypto exchanges, brokers, and ATMs may charge different fees, so be sure to check beforehand.
• Security: Always prioritize the security of your funds. Use secure platforms, enable two-factor authentication, and be cautious when providing personal or wallet information.
• Processing Times: Withdrawals can take varying amounts of time, from near-instant to several business days. Be mindful of the processing times, especially if you need immediate access to funds.
• Minimum and Maximum Withdrawal Limits: Some platforms have minimum and maximum withdrawal limits, so ensure that your desired withdrawal amount falls within these limits.

Cryptocurrency investment funds: legal and tax issues

Cryptocurrency investment funds are a relatively new area, and the regulatory and legal environment is still evolving. This is a complex area, and the following is a general overview of some of the legal and tax issues surrounding cryptocurrency investment funds.

Taxation

Cryptocurrencies are generally regarded as property or capital assets and not currencies by tax authorities. This means that profits from cryptocurrency trading are subject to capital gains tax laws. In the US, for example, the IRS has defined cryptocurrencies as property, and any profits made are subject to capital gains tax laws. This is the case even when cryptocurrencies are used as a form of currency in a transaction. The onus is on the individual to report these transactions and pay the relevant taxes.

Determining the value of a cryptocurrency for tax purposes can be challenging, as the value can fluctuate wildly, and there is no central authority that sets the price. The fair market value of the cryptocurrency at the time of the transaction is generally used as the basis for taxation. This value needs to be converted into a traditional currency to calculate any taxes owed.

The treatment of cryptocurrency transactions for tax purposes can vary depending on the nature of the transaction and the jurisdiction. For example, in Canada, using cryptocurrency to pay for goods or services is considered a barter transaction for income tax purposes. This means that the individual disposing of the cryptocurrency is considered to have business income or a capital gain, while the vendor must include the value of the goods or services, or the value of the cryptocurrency accepted as payment (whichever is higher), in their income.

Regulatory and Legal Issues

The decentralised nature of cryptocurrencies and the lack of a central authority can pose legal and financial risks to investors. For example, in the case of a dispute or theft, there is often no standard practice or intermediary to resolve the issue. The anonymous nature of blockchain transactions can also make it difficult for law enforcement to track and prevent financial crimes such as fraud and money laundering.

The regulatory environment for cryptocurrencies is still developing, and the lack of clear guidance from regulatory agencies can create uncertainty for investors. The legal status of cryptocurrencies can vary across jurisdictions, and what may be allowed in one country may not be permitted in another.

Smart Contracts

The use of smart contracts in blockchain technology introduces further complexity. Smart contracts are self-executing contracts that automatically pay the other party when they fulfil their contractual duties. The legal validity of smart contracts is not always clear, and they may not fit neatly into traditional contract law frameworks. This could lead to lengthy litigation processes if disputes arise.

Data Theft and Privacy

The promise of anonymity in blockchain transactions can be appealing to users, but it also raises concerns about data theft and privacy. As blockchain analytic tools improve, the anonymity provided by cryptocurrencies may be compromised, and personal information could be at risk. The lack of comprehensive data protection frameworks specifically addressing blockchain technology further exacerbates these concerns.

The legal and tax landscape surrounding cryptocurrency investment funds is complex and evolving. Investors need to stay informed about the latest regulatory developments and guidance from tax authorities to ensure compliance and avoid legal risks. The decentralised nature of cryptocurrencies and the lack of a central authority mean that investors may have limited legal recourse in the event of disputes or financial losses.

Frequently asked questions