Crypto Investment: A Beginner's Guide To Getting Started

Investing in crypto can be a daunting task, especially for beginners. There are thousands of cryptocurrencies to choose from, and the market is extremely volatile. However, with the right research and caution, investing in crypto can be a rewarding experience. Here are some essential things to know before investing in crypto:

- Understanding the Basics: Cryptocurrencies are digital assets that are usually created using blockchain technology, a decentralised ledger system. They are not backed by real assets or governments, and their value is highly speculative.

- Choosing a Cryptocurrency: The most well-known and dominant cryptocurrency is Bitcoin, which was created in 2009. Other popular options include Ethereum, Binance Coin, and Dogecoin. Each cryptocurrency has unique features, use cases, and risks, so it's important to research before investing.

- Using Crypto Exchanges: Crypto exchanges like Coinbase, Binance, and Kraken allow users to buy and sell cryptocurrencies. These platforms offer a variety of coins, fees, and security measures, so it's essential to compare them before choosing.

- Storing Crypto: Once you purchase crypto, you'll need a digital wallet to store it. Wallets can be hot (online) or cold (offline), with hot wallets being faster but more vulnerable to security breaches.

- Investing Strategies: Crypto investors can choose to buy and hold, day trade, or invest in crypto funds, companies, or mining operations. It's important to understand your risk tolerance and investment goals before deciding on a strategy.

- Risks and Regulations: Cryptocurrency investing is risky due to its volatility and potential regulatory changes. It's crucial to only invest what you can afford to lose and stay informed about new developments in the crypto space.

- Tax Implications: Investing in crypto can create complex tax situations. Gains from crypto investments may be subject to capital gains taxes, and it's important to carefully track your transactions and understand the tax laws in your country.

How to buy crypto

There are several ways to buy crypto, each with its own advantages and drawbacks. Here is a step-by-step guide on how to buy crypto:

• Cryptocurrency exchanges: You can purchase crypto, including Bitcoin, from cryptocurrency exchanges such as Gemini, Kraken, Coinbase, and Crypto.com. These exchanges offer a variety of cryptocurrencies and carry different fees and consumer protections, so it is important to research them before choosing one.
• Traditional stockbrokers: A few traditional investment brokers, like Robinhood (available in most U.S. states), Webull, TradeStation, and Fidelity, offer their customers the ability to buy and sell Bitcoin. Some of these brokers, like Robinhood, do not charge any fees for Bitcoin trades.
• Mobile payment services: Some mobile payment apps that users may already have on their smartphones allow the purchase of crypto. These apps usually have a "Crypto" tab on their dashboards. However, some of these apps do not allow users to withdraw crypto to a private or cold wallet, which may be a drawback for experienced investors. Additionally, payment apps often charge a base fee and a spread on purchases, making them more expensive than other options.
• Alternative platforms: Crypto can also be purchased through alternative online platforms using a credit or debit card. These platforms can be convenient, but they typically charge high fees, with some services charging as much as 4.5% for card transactions. Another option is Bitcoin ATMs, which are physical kiosks that allow crypto purchases with a credit or debit card. However, these ATMs also come with high transaction fees, averaging 11%.
• Peer-to-peer money transfer apps: Cash transfer services like PayPal, Venmo, or Cash App allow users to buy, store, send, and sell Bitcoin directly through their apps. Some crypto apps, such as games or crypto wallets, also enable users to buy and sell digital assets within their apps. These options may be convenient for those already familiar with the interfaces.

When buying crypto, it is important to remember that it is a highly volatile and unregulated asset. The future regulatory environment for crypto is uncertain, and it is not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation. Therefore, it is crucial to only invest an amount you are willing to lose. Additionally, always ensure you are using a secure, private internet connection when making crypto purchases.

Crypto wallets

On the other hand, cold wallets are not connected to the internet. They are usually in the form of a USB drive or paper, where your keys may be accessible via print-out QR codes, written on a piece of paper, or engraved on some other material. Cold wallets are harder for malicious users to access but are limited in function and risk being lost or destroyed. Examples of cold wallets include hardware wallets and paper wallets. Ledger, Ellipal Titan, and SafePal are some of the best cold wallets available.

When choosing a crypto wallet, it is important to consider factors such as security, functionality, cost, supported currencies, and ease of use. Additionally, it is recommended to enable all available security features, stay vigilant against suspicious activity, and consider storing larger amounts of cryptocurrency in offline hardware wallets to mitigate the risks associated with online wallets.

Crypto exchanges

Coinbase

Coinbase is one of the most popular and user-friendly cryptocurrency exchanges. It allows you to invest directly with USD and offers a wide range of cryptocurrencies, including Bitcoin, Ethereum, and Litecoin. Coinbase also provides the opportunity to earn interest on your USDT and token rewards through various activities. However, it is important to note that Coinbase charges high fees unless you use Coinbase Pro. Additionally, users do not control the private keys in their wallets, and Coinbase has been slow to adopt popular new cryptocurrencies.

Kraken

Kraken is one of the original crypto trading platforms and offers a good selection of coins and tokens. It also allows margin trading, making it a popular choice for more experienced traders. However, Kraken is a real exchange and may not be as intuitive for beginners as some other platforms. It is important to note that Kraken offers a limited selection of coins and tokens to US customers compared to international customers.

Gemini

Gemini is one of the largest and most popular crypto exchanges, supporting most major cryptocurrencies. It offers competitive interest rates on assets and has a user-friendly app-based interface. Gemini also has a referral program where both the referrer and the new user can earn $15 in BTC or another crypto of their choice when the new user trades $100 within 30 days of signing up.

Bitstamp

Bitstamp is one of the oldest and most well-established cryptocurrency exchanges, founded in 2011. It offers over 70 tokens and a volume-based fee structure. Bitstamp allows users to buy crypto instantly with a credit or debit card and has a solid mobile app. However, staking features are not available to all users, and there are limited assets on which users can earn staking rewards.

EToro

EToro is a platform that has been popular in the UK and Europe and is now available to traders in the United States. It offers a wide range of digital assets and provides a practice trading account for beginners. eToro also has a $10 bonus offer for US users who deposit and trade $100 in crypto-assets. However, it is important to note that eToro has limited options in the United States and is only available in 41 states.

Crypto.com

Crypto.com is one of the largest and fastest-growing crypto exchanges, based in Hong Kong. It offers access to over 90 tokens and coins worldwide, with 50 options for US customers. Crypto.com provides solid rates on crypto savings accounts and allows users to get a debit card linked to their account. However, the platform has a complicated fee structure and is only available through a mobile app, with no desktop support. Additionally, it has limited customer support.

Binance

Binance is a well-known crypto exchange that offers a robust trading platform and a decent mobile app. It supports a huge number of cryptocurrencies, including some of the more risky tokens. However, Binance.us, the US version of the platform, has limited coins and tokens compared to the international version. Binance has been associated with poor customer service, and it is not available in all 50 states.

Uphold

Uphold is a crypto exchange that allows users to trade multiple assets within a single account. It offers a simple and transparent pricing structure and supports a wide range of crypto tokens, including popular ones like XRP. Uphold also provides both desktop and mobile apps for convenience. However, some users have reported that Uphold is not as easy to use as other platforms, and there have been reports of poor customer service.

When choosing a crypto exchange, it is important to consider factors such as the number of supported tokens and coins, fees, ease of use, security, customer service, and additional features like crypto savings accounts. It is also essential to keep in mind that investing in cryptocurrency carries risks, and you should carefully research any digital coin or token before investing.

Crypto and taxes

In the US, crypto is considered a digital asset and is taxed like stocks, bonds, and other capital assets. The money you gain from crypto is taxed at different rates, either as capital gains or as income, depending on how you got your crypto and how long you held onto it.

Taxable Events

Transactions that result in a tax are called taxable events. Here are some common taxable events for crypto:

• Selling crypto for cash: If you sell your crypto for a profit, you will owe taxes on the capital gains.
• Converting one crypto to another: When you convert one cryptocurrency to another, it is considered a sale and is taxable.
• Spending crypto on goods and services: Spending crypto is similar to selling it, and you will likely owe taxes on the transaction.
• Getting paid in crypto: If you receive crypto as payment from an employer, it will be taxed as compensation according to your income tax bracket.
• Mining crypto: Crypto mined is usually taxed as self-employment income, based on the fair market value of the coins at the time they were received.
• Staking rewards: Staking rewards are taxed similarly to mining proceeds.
• Earning other income: Some cryptocurrencies may provide rewards for holding them, and this income is considered taxable.

Non-Taxable Events

Not all transactions involving crypto are taxable. Here are some common non-taxable events:

• Buying crypto with cash and holding it: Simply purchasing and owning crypto is not taxable. Taxes are usually incurred when you sell or dispose of the crypto.
• Receiving a gift: If you receive crypto as a gift, you generally will not incur a tax until you sell or participate in another taxable activity.
• Giving a gift: You can gift up to $17,000 per recipient per year without paying taxes on the amount (and higher amounts to spouses).
• Transferring crypto to yourself: Transferring crypto between your own wallets or accounts is not a taxable event.

Calculating Crypto Taxes

To calculate your crypto taxes, you need to determine your capital gains or losses. Here are the steps to calculate your crypto taxes:

• Identify your cost basis: Your cost basis is generally the amount you paid for the crypto, the fair market value when you received it, or the basis of the person who transferred it to you, depending on the type of transaction.
• Determine the sale price: This is the amount you received when you sold or exchanged the crypto.
• Calculate the capital gain or loss: Subtract your cost basis from the sale price to determine whether you have a capital gain or loss.
• Apply tax rates: Capital gains taxes can be short-term or long-term, with different tax rates. If you held the crypto for one year or less before selling, it is usually taxed at your ordinary income tax rate. If you held it for more than a year, it is typically taxed at a reduced capital gains rate.

Reporting Crypto on Tax Returns

When filing your tax returns, you must report all income related to your crypto transactions. Here are some key points to remember:

• Answer the digital asset question: On your tax return, you will be asked whether you received or disposed of any digital assets during the tax year. Answer this question accurately, even if you did not have any taxable transactions.
• Use the correct forms: Different forms are used for reporting crypto transactions, such as Form 8949 for sales or exchanges of capital assets and Form 1040 for additional income related to forks, staking, or mining.
• Keep detailed records: Maintain records of your crypto transactions, including the type of digital asset, the date and time of the transaction, the fair market value, and your cost basis.

Crypto investment strategies

Direct Investment

The most common way to invest in crypto is to buy and hold one or more coins. You can purchase established cryptocurrencies like Bitcoin and Ethereum, or newer coins. Crypto exchanges, such as Coinbase, Binance, and Gemini, allow you to buy, sell, and store cryptocurrencies. These exchanges may charge various fees, so it's important to review them before choosing one. You can also buy crypto through apps like Cash App or broker-dealers.

Indirect Investment

If you want exposure to crypto but don't want to directly purchase coins, you can invest in crypto-focused companies or funds.

• Companies: You can invest in companies with partial or total focus on crypto, such as crypto mining companies, hardware makers, or companies that support crypto (e.g., Robinhood, PayPal). You can also invest in companies that hold large amounts of crypto on their balance sheets, like MicroStrategy.
• Funds: You can choose to invest in crypto-focused funds, including exchange-traded funds (ETFs), index funds, futures funds, and cryptocurrency investment trusts. The first Bitcoin Spot ETFs were approved in January 2024, allowing investors to buy shares based on Bitcoin spot prices.

Crypto Mining or Validation

Another way to invest in crypto is to become a crypto miner or validator. Miners and validators earn rewards in crypto, which they can hold as investments or exchange for other currencies.

Crypto Savings Accounts

Some platforms, like Crypto.com, offer crypto savings accounts that pay interest on your crypto holdings.

Crypto Wallets

You can store your crypto in a digital wallet, either hosted by an exchange or an independent provider. Hot wallets are always connected to your computer and the crypto network, making them more vulnerable to security breaches. Cold wallets, on the other hand, are offline devices that are considered more secure but take longer for transactions.

Frequently asked questions