Investing In Crypto: When To Take The Plunge?

Cryptocurrency is a digital currency that can be used to buy goods and services or traded for a profit. Bitcoin is the most widely used cryptocurrency. It is also likely the best-known virtual money, but there are thousands of cryptocurrencies in existence. Cryptocurrency is supported by blockchain technology, which maintains a tamper-resistant record of transactions and keeps track of who owns what.

If you're thinking about investing in cryptocurrency, it's important to do your research. Here are some key things to consider:

- Understand the crypto landscape, including the underlying technology powering different crypto assets.

- Assess your risk tolerance and whether you're comfortable with the volatility of the crypto market.

- Only invest what you can afford to lose, as cryptocurrency is a highly speculative and volatile asset class.

- Be aware of the security considerations and choose an appropriate storage method for your crypto, such as a hot or cold wallet.

- Understand the tax implications of buying, selling, and using cryptocurrency.

- Consider the different types of cryptocurrency investments, such as buying crypto directly, investing in crypto companies or funds, or becoming a crypto miner or validator.

- Evaluate the specific cryptocurrency you want to invest in by researching its white paper, team, competitors, and real-world adoption potential.

Understand the technology

Before investing in any cryptocurrency, it is crucial to understand the underlying technology. Cryptocurrencies are digital currencies that use cryptography to secure and verify transactions and control the creation of new units. This technology is often based on blockchain, a distributed ledger technology that allows for secure, transparent, and tamper-proof recording of transactions. Blockchain technology enables peer-to-peer transactions without the need for intermediaries like banks.

It is important to familiarize yourself with the different blockchain platforms and their unique features. For example, Bitcoin is a well-known cryptocurrency built on a decentralized blockchain, meaning it is not controlled by any central authority. Ethereum, on the other hand, is a decentralized platform that enables the development of decentralized applications (DApps) and smart contracts. Understanding the specific blockchain technology a cryptocurrency is built on will help you grasp the unique features, advantages, and potential use cases of that particular currency.

Additionally, it is worth noting that the blockchain technology underlying cryptocurrencies is still evolving. There are ongoing innovations in the field, such as the development of smart contracts, which are self-executing contracts with predefined rules. Smart contracts have the potential to revolutionize various industries, including finance, supply chain management, and digital identity verification. Staying informed about these advancements can help you make more informed investment decisions.

When considering investing in a particular cryptocurrency, it is essential to research its technical specifications, such as its consensus mechanism, transaction speed, and level of decentralization. These factors can impact the currency's security, scalability, and overall performance. For example, some cryptocurrencies use a proof-of-work consensus mechanism, which requires solving complex mathematical puzzles to validate transactions, while others use a proof-of-stake mechanism, where transaction validation is based on the number of coins held by a user. Understanding these technical details will help you evaluate the potential strengths and weaknesses of a cryptocurrency and its ability to meet your investment goals.

Furthermore, it is crucial to keep yourself updated with the latest developments and innovations in the cryptocurrency space. This includes staying informed about new blockchain platforms, advancements in smart contract technology, and the emergence of regulatory frameworks. Following crypto news sources, joining crypto communities, and participating in crypto forums can help you stay abreast of the latest technological advancements and their potential impact on the market.

Research the fundamentals

Researching the fundamentals is a crucial step in deciding when to invest in crypto. Here are some key considerations:

Understanding the Fundamentals of Crypto

• Currency Fundamentals: Cryptocurrencies are typically designed to function as units of measurement, stores of value, and mediums of exchange. However, investors should consider the extent to which these characteristics are intentionally coded into the asset by its creators.
• Tokenomics: Understand the distribution, circulation, and total supply of a cryptocurrency. This includes circulating supply (tokens currently in the market), total supply (total amount issued, including burned tokens), and maximum supply (the maximum number of tokens that will ever be issued). These factors influence the price of a cryptocurrency over time.
• Blockchain Technology: Gain a basic understanding of blockchain technology and how it works. Learn about different consensus protocols, such as proof-of-work and proof-of-stake mechanisms, and their implications for the cryptocurrency's security, scalability, and energy consumption.
• White Papers: Read the white papers provided by crypto projects. These documents should outline the objectives, technical details, time frame, and specific plans for the project. Well-written white papers should clearly define the problem being solved and how the blockchain and cryptocurrency will address it.
• Team and Leadership: Research the professional experience and qualifications of the project team, including the founders and developers. Look for teams with relevant expertise, successful track records, and transparent leadership. Anonymous or inexperienced teams may be a red flag.
• Community: Cryptocurrencies are often community-driven projects. Engage with the crypto community through social media channels like Discord or Telegram to gauge the level of support, organisation, and meaningful discussions within the community. A strong and active community can indicate the potential for the project's growth.
• Technology and Vision: Understand the technology underpinning the cryptocurrency and how it solves specific problems. Assess the project's vision and roadmap to determine if they provide clear and achievable goals, with a realistic timeline.
• Use Cases and Adoption: Evaluate the real-world use cases and adoption potential of the cryptocurrency. Consider whether it addresses a genuine need and has the potential for mainstream adoption.
• Competitors and Comparative Advantages: Evaluate the competition within the crypto space and identify the unique selling points of the project you're considering. Understand what sets it apart from other cryptocurrencies and whether it offers something truly distinctive and valuable.
• Regulatory and Legal Compliance: Stay informed about relevant legal cases, regulatory developments, and legislative proposals related to crypto, both domestically and internationally. Changes in regulations and governance can significantly impact crypto prices and adoption.

Applying Fundamental Analysis to Crypto Investing

Fundamental analysis is a valuable tool for identifying undervalued assets and making informed investment decisions. Here's how it applies to crypto:

• Identifying Undervalued Crypto Assets: Fundamental analysis can help investors find crypto projects that are undervalued or have strong growth potential. This involves assessing various data points, such as the development team, technology, utility, tokenomics, partnerships, and regulatory compliance.
• Qualitative and Quantitative Analysis: Fundamental analysis incorporates both qualitative and quantitative information. While technical analysis focuses solely on historical price data to predict future price movements, fundamental analysis considers a broader range of factors to assess a crypto project's intrinsic value.
• Due Diligence and Risk Assessment: By researching the fundamentals, investors can perform due diligence and make more informed decisions. This helps identify worthwhile investments and reduce the risk of investing in over-hyped or speculative projects.
• Long-Term Potential: Fundamental analysis encourages investors to look beyond short-term price trends and focus on the long-term potential of a crypto asset. This approach aligns with the buy-and-hold strategy, where investors seek to identify undervalued assets and hold them for the long term to realise gains.
• Tools and Indicators: Utilise fundamental analysis tools and indicators specifically designed for the crypto market, such as the Network Value to Transactions Ratio (NVT) and the Market Value to Realised Value Ratio (MVRV). These tools provide insights into the valuation and health of a crypto asset's network, helping investors make more informed decisions.

Know the risks

Cryptocurrency is a risky and speculative investment. The market is volatile, and the crypto space is prone to high unpredictability. The prices of cryptocurrencies, even the most established ones, are much more volatile than the prices of other assets like stocks.

One of the biggest challenges for investors is not getting caught up in the hype. Analysts caution investors about the volatile nature and unpredictability of cryptocurrencies. The crypto market is relatively new, and regulatory frameworks are uncertain. The result is a market that experiences substantial volatility, triggered by various factors, including crypto exchange bankruptcies and high-profile hacks.

Cryptocurrencies are not insured by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC). They are also not considered legal tender in most places, and there is a possibility that they could become illegal and, therefore, worthless in the future.

The environmental impact of some cryptocurrencies, such as Bitcoin, is also significant due to the energy-intensive process of mining. Regulatory changes and crackdowns by governments can also affect the market in unpredictable ways.

Additionally, there is a risk of losing access to your crypto investments if you lose your private keys or if your accounts are hacked or phished.

Given these risks, it is crucial to do your research before investing in cryptocurrencies and to never invest more money than you can afford to lose. It is also important to understand the tax implications of crypto investments, as the rules can change rapidly, and there may be unexpected liabilities.

Finally, the unpredictable nature of the crypto market means that there is a higher chance of losing your investment compared to other assets. Therefore, it is recommended to limit your allocation to an amount you can afford to lose and to diversify your portfolio with more stable asset classes.

Store your crypto safely

Storing your cryptocurrency safely is essential. If you don't know how to store your crypto safely, it might go missing or be stolen. In 2021, an estimated $14 billion worth of crypto was stolen, and that doesn't include crypto lost due to user error or exchange failures.

Understand the Different Types of Wallets

Firstly, it's important to understand the different types of crypto wallets available. The main categories are hot wallets and cold wallets. Hot wallets are connected to the internet and are convenient for frequent trading and spending of cryptocurrency. Examples of hot wallets include online exchanges, mobile wallets, and software wallets. Cold wallets, on the other hand, are not connected to the internet and offer a higher level of security. Examples of cold wallets include hardware wallets and paper wallets.

Choose the Right Wallet for Your Needs

When choosing a crypto wallet, consider your needs and preferences. If you plan to actively trade or spend your cryptocurrency, a hot wallet might be more suitable due to its convenience and ease of use. On the other hand, if you want to store a large amount of crypto or don't need frequent access, a cold wallet would be a better option as it provides enhanced security. Many investors use a combination of both types of wallets, depending on their specific needs.

Select a Reputable Wallet Provider

It's crucial to choose a reputable and secure wallet provider to minimize the risk of hacking or theft. Look for providers that offer additional security features such as two-factor authentication and encryption. Well-known options for hot wallets include Coinbase, Binance, and Kraken. For cold wallets, Trezor and Ledger are popular choices.

Follow Security Best Practices

Regardless of the type of wallet you choose, it's essential to follow security best practices to protect your crypto assets. Use strong and unique passwords, and never share your private keys or recovery phrases with anyone. Consider using a virtual private network (VPN) for added security when accessing your wallet online. Regularly update your device's operating system and security software to patch any potential vulnerabilities.

Back Up Your Wallet

Backing up your crypto wallet is crucial to prevent loss of access. Create secure backups of your wallet data and store them in multiple locations, such as an external hard drive and a cloud storage service. Additionally, write down your recovery phrase or seed phrase and keep it in a safe place, such as a locked safe or bank vault. Do not electronically store your recovery phrase unless absolutely necessary, and if you do, encrypt it or password-protect it.

Stay Vigilant and Informed

Stay up to date with the latest security developments and best practices in the crypto space. Follow reputable sources and industry experts to keep yourself informed about new threats and vulnerabilities. Regularly review and update your security measures to ensure your crypto remains safe and secure.

Understand the tax implications

Before investing in cryptocurrency, it's important to understand the tax implications. In the US, the Internal Revenue Service (IRS) treats cryptocurrencies as property for tax purposes. This means that any profits or income from your cryptocurrency is taxable. If you hold a cryptocurrency, sell it, and profit, you owe capital gains tax on that profit, just as you would on a share of stock. The tax rate depends on your income and how long you held the asset before selling it. For the 2024 tax year, the short-term capital gains tax rate is between 0% and 37%, while the long-term capital gains tax rate is 0%, 15%, or 20%.

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 applicable taxes. For example, if you buy a candy bar with crypto, you'll pay sales tax and create a taxable capital gain or loss event. You'll need to report both the sales tax and the capital gain or loss on your tax return.

If you accept cryptocurrency as payment for goods or services, you must report it as business income. The same is true if you are a cryptocurrency miner; the value of the crypto at the time it was mined counts as income. If you successfully mine a cryptocurrency or are awarded it for work done on a blockchain, it is taxed as ordinary income.

Exchanging one cryptocurrency for another also has tax implications. For tax purposes, you are essentially converting one crypto to fiat currency and then purchasing another. You'll need to report any gains or losses on the crypto you converted.

It's important to keep detailed records of all your crypto transactions, including the amount you spent and the market value at the time of the transaction. This information will be needed when you report your taxes. Additionally, if your gross income, including cryptocurrency, exceeds the minimum filing requirements for your tax status, you are required to report the crypto and any capital gains and losses.

While the tax implications of investing in cryptocurrency can be complex, consulting an accountant familiar with cryptocurrency and current practices can help ensure you're reporting your taxes correctly.

Frequently asked questions