Crypto: The Best Investment Option?

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, with other popular cryptocurrencies including Ethereum, Binance Coin, and Dogecoin. Crypto is having a moment in 2024, with some top buys being Bitcoin, Ethereum, and Solana. However, cryptocurrencies are incredibly volatile and not for all investors. Before investing in crypto, it is important to understand the risks and potential rewards.

Crypto's extreme volatility

Cryptos Extreme Volatility

Cryptocurrencies are incredibly volatile and not for all investors. Crypto is having a moment in 2024, but investors should decide if it fits their risk tolerance before diving in.

At its peak in November 2021, the crypto market was worth upwards of $2.9 trillion. By mid-2022, hit by rising inflation and an aggressive rate-hiking cycle, the entire market was worth less than $900 billion. Fast forward to June 2024, and cryptocurrencies collectively were worth more than $2.5 trillion. That's quite a rollercoaster.

Bitcoin, the first cryptocurrency and the largest by market capitalization, is no exception. After languishing below $17,000 at the beginning of 2023, less than two years later, it now trades for upwards of $69,000.

Ethereum, the second-largest cryptocurrency by market cap, has also experienced tremendous growth. From April 2016 to the end of September 2024, its price went from about $11 to around $2,343, increasing by 21,196%.

The extreme volatility of cryptocurrencies is due in part to their status as nascent asset classes. For example, Bitcoin only dates back to 2009. As a result, investors looking to protect themselves from the potential total collapse of their holdings tend to go with more established names like Bitcoin and Ethereum.

Additionally, the extreme volatility of cryptocurrencies can be attributed to their speculative nature. For instance, the price of Bitcoin is influenced by factors such as the approval of spot Bitcoin ETFs, the Bitcoin halving event, and rising interest rates.

Furthermore, the inherent characteristics of cryptocurrencies, such as their decentralised nature and lack of central authority, contribute to their extreme volatility. This makes them more susceptible to market forces and speculative investing, leading to wild swings in their value.

Lastly, the extreme volatility of cryptocurrencies can also be attributed to their complex and evolving technology. The use of blockchain technology, mining processes, and proof-of-work or proof-of-stake consensus mechanisms can impact the supply and demand of cryptocurrencies, leading to price fluctuations.

The pros and cons of investing in crypto

Pros

• Cryptocurrencies are supported by secure, decentralised blockchain technology, independent of traditional banking systems.
• The chance of greater returns due to market volatility.
• The blockchain technology underlying cryptocurrency is inherently secure.
• Bye bye traditional banks—hello to a fairer, more transparent financial system.
• Crypto trades around the clock.
• Cryptocurrencies could help investors beat inflation.
• Accessibility and financial inclusion: cryptocurrencies have the potential to provide financial services to the unbanked and underbanked populations around the world.

Cons

• Extreme price fluctuations.
• Steep learning curve.
• It can be tough to scale widely.
• It is still uncertain whether cryptocurrencies will stay viable in the long term.
• Security vulnerabilities may pose significant risks, especially to new investors.
• Cryptocurrencies haven't proven themselves as a long-term investment yet.
• Crypto has serious scalability issues.
• Crypto newbies are vulnerable to security risks.
• The rules and regulations aren't set in stone.

How to buy crypto

Crypto is having a moment in 2024, but it's not an investment for the faint of heart. Cryptocurrencies are incredibly volatile, and investors need to decide if they fit their risk tolerance before diving in.

If you're considering buying crypto, here's a step-by-step guide to help you get started:

Step 1: Do Your Research

Before investing in any cryptocurrency, it's crucial to understand the risks and potential rewards. Crypto is highly volatile, and its value can fluctuate significantly in a short period. Make sure you're comfortable with the level of risk involved and have a clear investment strategy in mind.

Step 2: Choose a Platform

There are several platforms through which you can buy cryptocurrencies, including traditional investment platforms, crypto exchanges, mobile payment services, and alternative platforms. Each option has its own set of fees and security considerations, so it's important to compare them before deciding.

Step 3: Create an Account

Once you've selected a platform, you'll need to create an account. This typically involves providing some form of ID verification and linking a payment method, such as a bank account or credit/debit card. Some platforms may also require you to complete a know-your-customer (KYC) process, which helps ensure secure and legitimate transactions.

Step 4: Place Your Order

After setting up your account, you can start buying cryptocurrencies. Decide on the type of cryptocurrency you want to purchase and the amount you wish to invest. Review the purchase details carefully before confirming your order.

Step 5: Store Your Crypto Securely

Once you've purchased your crypto, you'll need to store it securely. You can use a crypto wallet, such as a hot wallet or cold wallet, to keep your digital assets safe. It's essential to choose a secure and reliable wallet provider and follow best practices to protect your investment.

Step 6: Monitor Your Investment

Cryptocurrency values can fluctuate, so it's important to monitor your investment regularly. Keep yourself updated with market trends and news that could impact the value of your crypto holdings. Remember that crypto is a highly speculative investment, and its value can change rapidly.

Additional Considerations:

• Diversification: Consider diversifying your crypto investments across multiple cryptocurrencies to spread the risk.
• Regulatory Environment: The regulatory environment for crypto is currently uncertain, and it's important to stay informed about any changes that may impact your investments.
• Tax Implications: Buying and selling crypto may have tax implications, so ensure you understand the applicable rules and regulations in your jurisdiction.
• Risk Management: Crypto investments are risky, so only invest what you can afford to lose. Don't put all your eggs in one basket, and consider setting stop-loss orders to limit potential losses.

Remember, this is not financial advice, and you should always consult a financial professional before making any investment decisions.

How to store crypto

Crypto wallets are used to store cryptocurrencies. These wallets can be programs or devices that keep your crypto assets, private keys, and wallet addresses (public keys) in the same place. There are several types of wallets, each with its own pros and cons, and it's common for crypto owners to use a combination of wallets to balance security and accessibility.

Hot Wallets

Hot wallets are online, software-based crypto wallets. They can be custodial, where a third party manages the private keys, or non-custodial, where users control their private keys. Hot wallets are convenient and easy to use, but they are susceptible to hacks and scams. Examples of hot wallets include accounts on crypto exchange platforms and mobile wallets.

Cold Wallets

Cold wallets, on the other hand, are offline wallets that are not connected to the internet. They are considered safer than hot wallets as they are not vulnerable to online hacks. However, cold wallets can be lost, stolen, or damaged, resulting in the permanent loss of crypto assets. Common types of cold wallets include hardware wallets and paper wallets.

Exchange Wallets

Exchange wallets are provided by crypto exchanges and are often the default option for new investors. They are convenient, support a wide range of cryptos, and usually don't require additional setup. However, they lack total control over private keys and are vulnerable to hacks and theft.

Hardware Wallets

Hardware wallets are physical devices that allow users to hold their private keys offline. They provide a high degree of security but may be confusing for less technical users and typically cost around $100. Examples of hardware wallets include Trezor and Ledger.

Paper Wallets

Paper wallets were one of the earliest forms of cold storage, where private and public keys are printed on paper. They are affordable and relatively safe, but there is a high risk of user error, damage, or theft.

Multi-Signature Wallets

A multi-signature wallet requires multiple keys to sign a transaction, adding an extra layer of security. For example, a 2-out-of-3 multi-signature wallet would require signatures from 2 keys before a transaction can be sent.

Factors to Consider

When choosing a crypto wallet, it's important to consider security, fees, the number and quality of supported cryptocurrencies, storage and custody, and customer service. Additionally, individuals should assess their investment amount, desired transaction frequency, and level of technical expertise to determine the most suitable combination of wallets for their needs.

Crypto's legal and tax issues

The legal and tax status of cryptocurrencies varies by country. In some countries, such as Spain, Mexico, and the United States, cryptocurrency transactions are not expressly prohibited. In Canada and Colombia, commercial transactions are allowed as long as banks are not involved. Meanwhile, paying with cryptocurrencies is forbidden in regions like Saudi Arabia and Vietnam, and they are illegal in China and Morocco.

The taxation of cryptocurrencies is also evolving. In Spain, for example, it became mandatory to declare investments in cryptocurrencies in the Income Tax Return in 2021. In the European framework, Portugal, Germany, and Switzerland are considered the most attractive countries for cryptocurrency investors in terms of taxation, as they do not require profits to be declared. On the other hand, Bermuda's "Digital Assets Business Act" of 2018 excludes cryptocurrencies from taxation.

The classification of cryptocurrencies for tax purposes is a key issue. When crypto is sold for profit, capital gains should be taxed as they would be on other assets. Similarly, purchases made with cryptocurrencies should be subject to the same sales or value-added taxes (VAT) applied to cash transactions. However, the evolving nature of crypto asset transactions makes it challenging to establish clear tax guidelines.

The pseudonymous nature of cryptocurrency transactions also poses challenges for tax authorities, as it can make tax evasion easier. While reporting obligations can help address this issue, they may also drive people to use decentralized exchanges or peer-to-peer trades, which are more difficult for tax administrators to penetrate.

Frequently asked questions