The Cryptocurrency Investors: Exploring The Diverse Community

Investing in cryptocurrency has become increasingly popular in recent years, with buyers attracted to its innovative nature and potential for high returns. Cryptocurrency is a digital currency that can be used to buy goods and services or traded for a profit. Bitcoin, the most well-known cryptocurrency, allows for direct peer-to-peer exchange on a decentralised payment network. However, it is important to remember that investing in cryptocurrency is risky and highly volatile. The prices of cryptocurrencies, even the most established ones, are much more unpredictable than the prices of other assets like stocks. If you decide to invest, it is important to do your research, be aware of scams, and only invest money you can afford to lose.

Who's buying crypto and why

Cryptocurrency is a digital currency that can be used to buy goods and services or traded for a profit. It is secured by blockchain technology, which makes it nearly impossible to fake or hack. The original intent of cryptocurrency was to allow online payments directly between parties without the need for a central third-party intermediary like a bank.

Anyone can invest in cryptocurrency, and people invest in cryptocurrencies for the same reason they invest in anything else: they hope its value will rise, netting them a profit. The most well-known cryptocurrency, Bitcoin, was initially developed primarily as a form of payment that isn't controlled or distributed by a central bank. Other cryptocurrencies have been developed for various reasons, including smart contracts, non-fungible tokens (NFTs), and stablecoins.

Some people are attracted to the potential upside of investing in crypto. For example, if demand for Bitcoin grows, the interplay of supply and demand could push up its value. If people began using Bitcoin for payments on a huge scale, demand for Bitcoin would go up, and in turn, its price in dollars would increase. So, if you'd purchased Bitcoin before that increase in demand, you could theoretically sell it for more U.S. dollars than you bought it for, making a profit.

Cryptocurrency is also appealing as a form of investment in an innovative digital asset. It offers convenience and accessibility, as it can be sent online to anyone in the world, often with much lower fees than conventional money transfer companies charge. In developing countries that lack conventional banking systems, crypto could be directly available to consumers via their mobile phones, bypassing the need for the usual banking infrastructure.

However, investing in cryptocurrency is risky, and it's important not to invest more money than you can afford to lose. The prices of cryptocurrencies, even the most established ones, are much more volatile than the prices of other assets like stocks. The prices of cryptocurrencies in the future could also be affected by regulatory changes, with the worst-case possibility that cryptocurrency becomes illegal and therefore worthless.

Additionally, most crypto-related activities are not regulated, and there is no regulatory infrastructure in place for cryptocurrencies. That means investors are entirely responsible for the security of any cryptocurrency spot holdings. The SEC has noted that there is "substantially less investor protection" in the crypto market than in traditional securities markets.

Crypto's value and volatility

Cryptos Value and Volatility

Cryptocurrencies are a rapidly growing market. They are digital currencies that are not backed by tangible assets or securities. Bitcoin, for example, is a peer-to-peer cash system that is not backed by a government. Its value is based on speculation and influenced by supply and demand, media hype, investor sentiment, and government regulations.

Volatility

Bitcoin and other cryptocurrencies are highly volatile due to their speculative nature. Their value is based on how much people are willing to trade for them, and this can fluctuate significantly in response to various factors. For example, a single Bitcoin was worth around $59,125 in September 2024, a growth of 11,725% since May 2016.

The volatility of Bitcoin is almost 10 times higher than that of major exchange rates like the US dollar, euro, and yen. This makes it challenging for Bitcoin to function as a medium of exchange, and it has limited use as a risk diversifier in investment portfolios. The high volatility also makes it difficult for Bitcoin to be integrated into the global foreign exchange market.

Store of Value

Despite its short-term volatility, Bitcoin can be considered a store of value over the long term. Its deflationary design, with a fixed supply, means that demand can exceed supply growth, leading to a positive long-term price trend.

Impact of Volatility

The high volatility of cryptocurrencies has several implications. Firstly, it makes them a risky investment, and they should only constitute a small part of an overall investment portfolio. Secondly, the extreme price fluctuations make it challenging to use Bitcoin as a medium of exchange, as the purchasing power can vary significantly within a short period. Lastly, the volatility can impact the potential for Bitcoin to be integrated into the global financial system.

While cryptocurrencies offer a decentralised and unregulated alternative to traditional currencies and investments, their volatility is a significant factor to consider. For investors, this can mean the potential for significant gains or losses. For those looking to use cryptocurrencies as a medium of exchange, the volatility can create uncertainty and additional costs.

Crypto's legality and tax implications

The legality of cryptocurrencies varies by country. In the US, cryptocurrencies are legal, but they are not considered legal tender, and they are taxed as property rather than currency. This means that capital gains taxes apply to profits made from selling cryptocurrencies. US taxpayers are required to report transactions involving cryptocurrencies in US dollars on their annual tax returns, and they must determine the fair market value of the cryptocurrency by converting it into US dollars for each transaction.

In the UK, Japan, and Canada, cryptocurrencies are also legal. However, El Salvador and the Central African Republic have gone a step further and adopted Bitcoin as legal tender.

The anonymous and decentralised nature of cryptocurrencies poses challenges for tax systems, particularly regarding value-added tax (VAT) and sales taxes. Crypto transactions have similarities to cash transactions in that they can be hidden from tax administrations, potentially leading to widespread tax evasion if widely used. To address these challenges, tax authorities may need to implement standard "know your customer" tracking rules and withholding taxes on centralised exchanges.

The lack of centralised regulatory bodies in the cryptocurrency space also raises legal concerns for investors. For example, if a cryptocurrency owner's account credentials are stolen and money is fraudulently transferred, there is no financial institution acting as an intermediary to resolve the matter. As a result, victims of cryptocurrency theft may have no legal avenue to compensate for their losses.

How to buy and sell crypto

There are several ways to trade and invest in cryptocurrencies. Here are the basic steps on how to start trading crypto:

Step 1: Signing up for a crypto exchange account

It is essential to choose a crypto trading platform carefully. The most popular type of trading platform is a cryptocurrency exchange. Traders usually check reputation, compliance, security, features, and listed cryptocurrencies on these exchanges.

Step 2: Adding funds to an account

Funds can usually be added to a crypto exchange account via wire transfer, debit or credit card, or by transferring a cryptocurrency balance from an existing cryptocurrency wallet. Once you have funds, it is as easy as buying certain cryptocurrencies and holding them on the exchange until their price changes enough to sell them — hopefully, for a profit.

Step 3: Selecting a crypto to trade

Many experienced crypto traders carefully choose a cryptocurrency based on technical and fundamental analysis. Think of crypto trading as buying a car. Technical analysis is like checking the car’s speed, engine performance, and mileage to predict how it will run in the future, whereas fundamental analysis is like looking at the car’s brand, reviews, and safety features to determine its overall reliability and value.

Step 4: Making a trade

Making a first trade or purchase involves selecting a trading pair — e.g., USD/BTC — which means you’re trading fiat United States dollars for Bitcoin. Traders must also choose their order type — either a market order or limit order — and the amount before confirming the order.

Step 5: Storing cryptocurrency

Traders keep their cryptocurrency funds intended for immediate trades on the exchange. Crypto balances held for longer are more safely stored in a cryptocurrency wallet, with a hardware device being the safest option.

You can buy cryptocurrencies through crypto exchanges, such as Coinbase, Kraken, or Gemini. In addition, some brokerages, such as WeBull and Robinhood, also allow consumers to buy cryptocurrencies.

When buying cryptocurrency, you will first need to pick a broker or a crypto exchange. While either lets you buy crypto, there are a few key differences between them 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 tend to have more complex interfaces with multiple trade types and advanced performance charts, which can make them intimidating for new crypto investors.

Cryptocurrency brokers take the complexity out of purchasing crypto, offering easy-to-use interfaces that interact with exchanges for you. Some charge higher fees than exchanges.

Who's Investing in Cryptocurrency?

Cryptocurrency is a relatively risky investment, and generally speaking, high-risk investments should make up a small part of your overall portfolio. You may want to look first to shore up your retirement savings, pay off debt, or invest in less volatile funds made up of stocks and bonds.

Cryptocurrencies are generally used to pay for services or as speculative investments. People invest in cryptocurrencies for the same reason anyone invests in anything. They hope its value will rise, netting them a profit.

Bitcoin is still the dominant cryptocurrency, followed by Ethereum.

Crypto wallets and security

Crypto wallets are indispensable tools for managing and utilizing digital assets. They serve as a bridge between decentralized blockchain technology and financial activities. Crypto wallets can be categorized into software wallets and hardware wallets.

Software Wallets

Software wallets are applications that can be installed on computers or mobile devices. They can be further divided into hot wallets and cold wallets.

Hot Wallets

Hot wallets are connected to the internet, making them convenient for frequent transactions. However, they are more susceptible to hacking. Examples include web-based, mobile, and desktop wallets.

Cold Wallets

Cold wallets, on the other hand, are offline wallets that provide enhanced security by keeping private keys secure on devices that are not connected to the internet. They are ideal for long-term storage. Paper wallets are an example of cold wallets, but they require careful handling to prevent loss or damage.

Hardware Wallets

Hardware wallets are physical devices that resemble USB drives. They offer strong security by keeping private keys offline. Users can connect hardware wallets to their computers or mobile devices when necessary.

Security Considerations for Crypto Wallets

The security of crypto wallets is crucial due to the irreversible nature of transactions and the prevalence of cyber threats. Here are some essential security measures to consider:

• Private Key Protection: It is vital to safeguard private keys from unauthorized access. Hardware wallets and cold storage methods provide optimal protection for private keys.
• Two-Factor Authentication (2FA): Enabling 2FA adds an extra layer of security to crypto wallets, making it harder for unauthorized access to occur.
• Regular Updates: Keeping wallet software updated ensures users benefit from the latest security patches and improvements, enhancing overall security.
• Phishing Awareness: Be cautious of phishing attempts aimed at tricking users into revealing private keys or login credentials.
• Backup Wallet Data: Regularly backing up wallet data helps prevent loss in case of device failure or loss, ensuring that access to crypto assets is not lost.
• Use Cold Storage for Savings: Hot wallets are more prone to phishing and other attacks, so it is recommended to use cold storage for savings as it provides absolute control over funds and reduces the risk of online manipulation.
• Use Multisig Wallets for Treasury: Multi-signature wallets require multiple signatures for transactions, making it difficult for hackers to steal funds.
• Use Strong and Unpredictable Passwords: Setting strong and unpredictable passwords for wallets makes it harder for hackers to guess and gain unauthorized access.
• Keep Seed Phrase and Passwords Secure: For non-custodial wallets, it is essential to store the seed phrase securely offline, while for custodial wallets, keeping passwords safe is crucial.

By following these security practices and choosing the right type of wallet for their needs, crypto investors can enhance the security of their digital assets and have a safer crypto journey.

Frequently asked questions