Crypto Investing: An Early Beginner's Guide To Success

Investing in crypto is not for the faint of heart. Cryptocurrencies are incredibly volatile and not for all investors. Before diving in, it's important to decide if they fit your risk tolerance. Crypto is also a relatively new asset class, with origins only dating back to 2009.

Bitcoin, the first cryptocurrency, remains the most popular and valuable crypto. In March 2024, it reached a new all-time high of over $70,000. Other popular cryptocurrencies include Ethereum, Binance Coin, Solana, and Dogecoin.

When investing in crypto, it's important to do your research and understand the risks involved. Crypto exchanges, apps, and platforms can facilitate crypto investments. Additionally, conventional online brokers like Interactive Brokers also offer some cryptocurrency access. It is recommended to either focus on Bitcoin or invest in a diversified cryptocurrency ETF to minimise risk.

Understand the risks of crypto's extreme volatility

Volatility is a natural part of any market activity, and it refers to changes in the price of an asset. Extreme volatility occurs when an asset's price changes rapidly within a short time. Crypto volatility is considered to be in a league of its own compared to traditional financial markets.

The price of Bitcoin, for example, rose by 125% in 2016 and then by more than 2000% in 2017. This was followed by a receding period before Bitcoin again set new all-time highs in 2021, more than tripling the peak price achieved during the 2017 bull run.

The reasons for such volatility in the crypto market are multi-fold:

• News developments and speculation fuel price swings, and their effect is exaggerated in crypto markets due to less liquidity. Crypto markets lack a robust ecosystem of institutional investors and large trading firms.
• Heightened volatility combined with a lack of liquidity can be a dangerous combination as they feed off each other.
• Most cryptocurrencies, except for Bitcoin, lack established and widely adopted derivatives markets.
• The value of crypto is based on speculation, which is essentially educated guesswork, making the price of crypto incredibly sensitive to even slight changes in investors' expectations or perceptions.
• The influence of a single person, for example, Elon Musk, can heavily impact the value of crypto, as seen with his tweets affecting Bitcoin's value.

However, there are signs that crypto volatility is improving as institutional investors and trading firms are entering the market, and a derivatives market is also taking shape. As the crypto market continues to mature, it is likely that volatility will eventually mimic the patterns present in mainstream assets.

In conclusion, crypto volatility presents significant risks that potential investors should be aware of. The extreme volatility of the crypto market can lead to substantial gains or losses within short periods.

Research the best cryptocurrencies to buy now

There are thousands of cryptocurrencies to choose from, and investing in this volatile market is not for the faint of heart. Before investing in crypto, it is important to understand your risk tolerance and do thorough research on the different coins and their underlying technology.

Bitcoin and Ethereum are the two best cryptocurrencies to buy and are in a league of their own. Other cryptos that are worth considering include:

• Solana (SOL): Solana is a blockchain that facilitates the easy creation of decentralized applications. It is faster, has lower fees, and is more easily scalable than its competitors. SOL, the native token of the Solana blockchain, has had a meteoric rise since its launch in 2020, increasing its market share by almost 300-fold.
• Avalanche (AVAX): The Avalanche blockchain has ambitious goals, including allowing users to deploy their own mini-blockchains. Its AVAX token has surged in value over the past year, nearly tripling in price.
• Polygon (MATIC): Polygon is a scaling platform that aims to increase the capabilities of the Ethereum blockchain, allowing it to run a potentially limitless number of decentralized applications. MATIC is one of the riskier tokens on this list, but it could be a good long-term investment.
• Cardano (ADA): Cardano is a proof-of-stake blockchain that aims to compete with Ethereum in the smart contract market. It is more scalable and easier to use for developers, and it has a hard cap on the number of coins that can exist. Cardano has low transaction fees and is highly secure, making it attractive to online merchants as a potential payment option in the future.

Other cryptocurrencies that have been mentioned as top contenders by various sources include Binance Coin (BNB), Tether (USDT), XRP, Dogecoin (DOGE), Toncoin, TRON, Shiba Inu, Polkadot, and IOTA.

Know how to buy and sell cryptocurrency

Before you buy cryptocurrency, you'll need to choose a broker or a crypto exchange. While both options allow you to buy crypto, there are some key differences to keep in mind. A cryptocurrency exchange is a platform where buyers and sellers meet to trade cryptocurrencies. Exchanges often have relatively low fees, but they tend to have more complex interfaces with multiple trade types and advanced performance charts, which can be intimidating for new crypto investors. Some of the most well-known cryptocurrency exchanges are Coinbase, Gemini, Binance, Kraken, and Robinhood. Cryptocurrency brokers, on the other hand, take the complexity out of purchasing crypto, offering easy-to-use interfaces that interact with exchanges for you. However, brokers may restrict the movement of your cryptocurrency holdings off their platform, and they often charge higher fees than exchanges.

Once you've decided on a broker or exchange, you can create and verify your account. Depending on the platform and the amount you plan to buy, you may need to provide a copy of your driver's license or passport, and in some cases, a selfie to prove your identity. After verifying your account, you'll need to deposit cash to fund your crypto purchases. You can typically do this by linking your bank account, authorizing a wire transfer, or using a debit or credit card. It's important to note that using a credit card to fund your crypto purchases can be risky and expensive due to high interest rates and cash advance fees.

With your account set up and funded, you're ready to place your first cryptocurrency order. There are hundreds of cryptocurrencies to choose from, including well-known options like Bitcoin and Ethereum, as well as more obscure cryptos like Theta Fuel or Holo. When deciding which cryptocurrency to purchase, consider your investment goals and conduct thorough research to understand the risks involved. Remember that cryptocurrency is a highly volatile and speculative investment, so it's crucial to only invest what you can afford to lose.

Finally, you'll need to select a storage method for your cryptocurrency. Leaving your crypto on the exchange or platform where you purchased it is one option, but this comes with security risks if the provider is hacked or your individual credentials are compromised. An alternative is to use a non-custodial wallet, which gives you more control over your crypto holdings. Non-custodial wallets can be hot wallets or cold wallets. Hot wallets are connected to the internet, making them more convenient but potentially more vulnerable to security threats. Cold wallets are offline storage devices like USB drives or hard drives, which offer greater security but require more effort to use.

Learn about the fees and costs of buying and holding crypto

When investing in cryptocurrency, it is important to consider the fees and costs associated with buying and holding crypto assets. These fees can vary widely depending on the exchange, the type of transaction, and the volume of your trades. Here are some key things to keep in mind:

Types of Crypto Fees

There are generally two types of crypto fees: exchange fees and network fees. Exchange fees are charged by the platform or broker you use to buy, sell, or trade cryptocurrencies. These fees can include trading fees, deposit or withdrawal fees, and account fees. Network fees, on the other hand, are built into the basic operating structure of a cryptocurrency. For example, Bitcoin refers to network fees as a "network fee," while Ethereum transactions result in "gas fees." These fees support the blockchain network and are automatically included in the transaction price.

Factors Affecting Exchange Fees

Exchange fees can vary depending on several factors. One common factor is the trading volume and frequency. Many exchanges use a tiered fee structure, where fees decrease as your 30-day trading volume increases. Additionally, some exchanges differentiate between "makers" and "takers." Makers are those who place limit orders that add liquidity to the exchange, while takers place market orders that take liquidity away. Makers typically pay lower fees than takers.

Comparing Exchange Fees

When comparing exchange fees, it's important to consider the specific cryptocurrencies you want to trade, as not all exchanges offer access to all coins. Additionally, the location of the exchange can impact the fees, as regulations vary by region. For example, Binance, one of the largest cryptocurrency exchanges, offers over 400 cryptocurrencies, but users in the U.S. are restricted to trading only about 150 coins due to regulations. Another popular exchange, Coinbase, charges maker and taker fees that vary based on trading volume. Advanced trading options and account features may also incur additional fees.

Minimizing Crypto Fees

To minimize crypto fees, consider using an exchange that offers commission-free trading, such as Robinhood or eToro. Alternatively, buying cryptocurrency with coins instead of fiat currency may help reduce fees. Additionally, watch the amounts and types of transactions you make, as some exchanges charge a percentage of the trade value, and others may charge for converting between cryptocurrencies and fiat currency. Finally, take advantage of promotions and sign-up offers to offset some of the fees.

Consider the tax implications of crypto trading

When investing in crypto, it's important to be aware of the tax implications and ensure you're complying with the relevant regulations. In the United States, cryptocurrency transactions are subject to income and capital gains tax. The IRS classifies digital assets as property, and any transactions involving them are taxable by law. This means that when you sell, trade, or dispose of cryptocurrency and make a profit, you are required to report and pay taxes on that profit. Even trading one cryptocurrency for another can be considered a taxable event. It's important to keep accurate records of your crypto transactions to properly report gains and losses when filing your taxes.

The tax rate you pay on cryptocurrency gains depends on your taxable income, tax filing status, and how long you held the crypto before selling it. If you owned the crypto for 365 days or less, you will pay short-term capital gains taxes, which are typically higher than long-term capital gains taxes. However, if you owned the crypto for longer than 365 days, you will pay long-term capital gains taxes, which are generally lower.

It's also important to note that mining cryptocurrency or earning rewards through staking can be considered taxable income. The fair market value of the cryptocurrency at the time of receipt is what determines your tax liability. Additionally, if you receive cryptocurrency as compensation for services, it may be subject to employment or self-employment taxes.

To accurately report your cryptocurrency taxes, it's crucial to maintain records of all your transactions. While crypto exchanges may provide tax forms, such as Form 1099-MISC or Form 1099-K, they might not always be accurate due to the unique characteristics of cryptocurrencies. Therefore, it's your responsibility to calculate and report your crypto gains and losses correctly to avoid penalties for tax fraud.

To lower your crypto tax liability, you can consider the following strategies:

• Hold your cryptocurrency for the long term: When you sell crypto that you've held for more than a year, you may qualify for a lower tax rate on your capital gains.
• Tax-loss harvesting: You can use capital losses from crypto to offset capital gains and even a portion of your income.
• Hold cryptocurrency in a self-directed IRA: This allows you to hold cryptocurrencies and defer taxes until you withdraw funds near retirement age.
• Donate cryptocurrency: Donating crypto is generally not subject to capital gains tax, and you can claim a tax deduction based on the value of your donation.

Frequently asked questions