The Future Of Money: Bitcoin And Crypto Investment

Bitcoin and other cryptocurrencies have been growing in popularity for years, but why should you invest in them? Well, cryptocurrencies are digital currencies that are not backed by real assets or tangible securities. They are traded between consenting parties with no broker and tracked on digital ledgers. One of the main reasons people invest in cryptocurrencies is that they hope their value will rise, netting them a profit. Cryptocurrencies are also described as a transformative technology that could revolutionize a number of industries, from shipping and supply chains to banking and healthcare. They may also provide a safe store of value as they cannot be printed or seized. However, it's important to note that cryptocurrencies are highly speculative and remain unregulated, so there is a high level of risk involved in investing in them.

Transformational technology

Cryptocurrency is a digital currency that can be used to buy goods and services or traded for profit. Bitcoin, the most widely used cryptocurrency, is decentralised and secure digital money based on blockchain technology. This technology has been hailed as a potential game-changer for a large number of industries, from shipping and supply chains to banking and healthcare.

Removing Intermediaries

By removing intermediaries and trusted actors from computer networks, distributed ledgers can facilitate new types of economic activity that were not possible before. For example, blockchain technology can enable entire financial ecosystems to operate without a central authority, such as insurance without the insurance company or real estate titling without the title company.

Stable Store of Value

Because they cannot be printed or seized, cryptocurrencies may also provide a safe store of value. Unlike fiat money, most cryptocurrencies have a limited supply, capped by mathematical algorithms, making it impossible for any political body or government agency to dilute their value through inflation.

High Risk, High Reward

While the potential makes for an attractive investment, cryptocurrencies remain highly speculative, and there is no guarantee that they will ever achieve mainstream usage. As a new technology, some speculative behaviour is to be expected, but new investors should be wary of falling into psychological traps.

Security

There are several complex security protocols that should be followed carefully before buying cryptocurrency. Theft remains one of the most common threats to cryptocurrency users, and hackers have stolen tokens worth billions of dollars. In addition, there are also a number of scams and schemes to trick users into giving up their tokens, such as doubling scams, social engineering, and market manipulation.

The Future of Money?

Cryptocurrency is a relatively risky investment, and generally should be considered only if you have a high-risk tolerance and can afford to lose some or all of your investment. For those who do choose to invest, it is important to maintain a diversified portfolio that includes several different types of investments to reduce overall risk exposure.

Safe store of value

Bitcoin and other cryptocurrencies are often described as a safe store of value. This is because they cannot be printed or seized, and their supply is finite.

Scarcity

The scarcity of Bitcoin is one of its most important features as a store of value. There will only ever be 21 million Bitcoin in existence, and after 2140, no more will be created. This fixed supply means that any increase in demand will lead to an increase in the value of Bitcoin over time, helping it to retain its value.

Predictable supply schedule

Bitcoin's supply schedule is also predetermined and disinflationary. This means that the amount of Bitcoin that gets mined roughly every four years decreases by half. This is known as "The Halving", and it ensures that Bitcoin becomes scarcer over time, regardless of demand or price increases.

Durability

Bitcoin is also a durable store of value. It doesn't erode, wear down, or break apart over time or with use.

Fungibility

Bitcoin is also fungible, meaning that one Bitcoin is always identical to another Bitcoin. This makes it easy to exchange and increases confidence in the holder that they will be able to receive value in the future.

Verifiability

Bitcoin is simple to verify and has never been counterfeited. The Bitcoin blockchain is constantly validating and verifying each block of transactions, ensuring that everything in that block is fully valid. The ledger is also transparent and immutable, so anyone can verify the validity of any coin or transaction at any time.

Portability

Bitcoin is highly portable, as it can be stored on a thumb drive or accessed anywhere in the world with an internet connection. This makes it much easier to transport than gold, which is heavy and inconvenient to carry.

Divisibility

Bitcoin is essentially infinitely divisible. Even as its value increases, it is still possible to transact in Bitcoin due to its infinite divisibility.

Widespread adoption

Widespread adoption is crucial for a store of value, and Bitcoin has garnered an impressive level of global adoption over the last decade. While it may not yet have the long history of gold, it is gaining ground quickly.

Transparency

Every Bitcoin in existence and every transaction is immutably recorded on the blockchain. This means that we can measure with 100% accuracy and certainty the total supply, the circulating supply, transaction volume, and velocity of Bitcoin. This level of transparency creates greater trust in Bitcoin as a store of value.

Non-sovereign and seizure-resistant

Bitcoin is not controlled by governments and is resistant to forceful seizure. This feature is becoming increasingly important in our modern, digital lives, where governments and corporations can more easily invade our privacy.

Criticisms

Despite these inherent properties, there are a few concerns that people tend to raise about Bitcoin as a store of value.

Volatility

One common argument against Bitcoin as a store of value is that it is too volatile. However, this critique is somewhat superficial, as Bitcoin is much younger and has a much smaller market cap compared to gold. As Bitcoin's market cap grows, its volatility has been steadily decreasing and will likely continue to do so.

Not "backed" by anything

Another criticism of Bitcoin is that it is not "backed" by anything. Gold, for example, is used in jewelry and electronic components and has intrinsic value beyond its investment value. Bitcoin, on the other hand, is digital and does not have any intrinsic value beyond its use as a store of value and a payment system.

Not widely accepted

A final critique of Bitcoin is that it is not accepted by most merchants. However, this argument confuses store of value with a medium of exchange. While it may not be the best candidate for smaller transactions, it is excellent for transferring large amounts of value efficiently and securely.

High risk, high reward

Cryptocurrency is a high-risk, high-reward investment. It is a volatile asset class with a high level of uncertainty, but it has also delivered tremendous profits for some investors.

The Risks

Cryptocurrency is a risky investment due to its extreme volatility. The price of Bitcoin, for example, can fluctuate drastically, and investors need to be prepared for significant downturns. There is also the possibility that a cryptocurrency could go to zero, for instance, if several crypto platforms fail and there is a massive sell-off.

Other risks include the lack of regulatory oversight, making it difficult to know the legal and financial risks. The industry is prone to fraud and hacks, with billions of dollars of cryptocurrency stolen in 2021. Additionally, there is the risk of losing access to one's investment through lost or forgotten wallet credentials.

The Rewards

The potential reward of investing in cryptocurrency is high. It has delivered eye-popping returns for some investors, and the potential for significant profits remains.

Cryptocurrency is also a transformative technology that could revolutionise a number of industries, from shipping and supply chains to banking and healthcare. By removing intermediaries, blockchain technology can facilitate new types of economic activity.

For those who believe in the future of digital currencies, investing in cryptocurrency is a way to earn high returns while supporting innovative technology.

Managing Risk

While cryptocurrency is a risky investment, there are ways to manage this risk. It is generally recommended that high-risk investments make up a small part of a diversified portfolio – typically no more than 10%.

It is important to do your research and understand the specific risks and investment thesis of each cryptocurrency. It may be helpful to examine how widely a cryptocurrency is being used and whether its use is growing.

Additionally, diversifying one's crypto investments across several different products can help insulate against losses in any one holding.

Crypto security

• Wallets: Crypto wallets are crucial for digital currency security. They can be software- or hardware-based, with hardware-based wallets generally considered more secure. Keeping wallet private keys safe is of utmost importance, and multi-signature wallets provide added security.
• Secure Internet Connection: Always use a secure internet connection when dealing with cryptocurrencies. Avoid public Wi-Fi networks as they can be targeted by cybercriminals.
• Exchanges: Not all cryptocurrency exchanges are equally secure. Research an exchange's security measures before committing, looking for features like two-factor authentication (2FA), cold storage, and withdrawal whitelists.
• Education: Understanding the technology behind cryptocurrencies and the various threats is vital. Stay updated with the latest security trends and threats in the crypto space.
• Phishing Attacks: These occur when an attacker poses as a trustworthy entity to trick victims into revealing sensitive information.
• Exchange Hacks: Cryptocurrency exchanges are lucrative targets for hackers despite improved security measures.
• Email Attacks: Adversaries launch large-scale phishing campaigns to infiltrate organizations, using emails with malicious files or links to harmful websites.
• Wallet Hacks: Crypto wallets, especially those connected to the internet ("hot wallets"), are vulnerable to attacks.
• Ponzi and Pyramid Schemes: These fraud schemes promise high returns but rely on new participants' funds to pay earlier investors.

To protect your cryptocurrencies, consider the following:

• Secure Wallets: Choose wallets known for strong security features. Hardware wallets that store private keys offline offer higher security than online wallets.
• Two-Factor Authentication (2FA): 2FA adds an extra layer of security, requiring a secondary code sent to a trusted device in addition to a password.
• Avoid Storing Coins on Exchanges: The principle of "not your keys, not your coins" emphasizes the importance of self-custody and the risks of leaving cryptocurrencies on centralized exchanges.
• Keep Software Up-to-date: Updates often include security enhancements that protect against newly discovered threats.
• Use Secure Networks: Avoid conducting crypto transactions over public Wi-Fi, as these networks can be insecure.
• Be Vigilant Against Phishing Attempts: Always double-check emails and messages, especially those requesting sensitive information.

Crypto taxes

In the United States, cryptocurrency is considered a digital asset by the IRS, and it is taxed similarly to 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 obtained your crypto and how long you held it.

Transactions that result in a tax are called taxable events, while those that don't are called non-taxable events. Here are some examples of each:

Taxable Events

• Selling crypto for cash: You'll owe taxes if you sell your crypto for more than you paid for it.
• Converting one crypto to another: The IRS considers this a sale, and therefore a taxable event.
• Spending crypto on goods and services: The IRS treats this similarly to selling crypto.
• Getting paid in crypto: Crypto received as payment from an employer is taxed as compensation according to your income tax bracket.
• Mining crypto: Taxes on mined crypto are based on the fair market value of the coins when received. Crypto mined as a business is taxed as self-employment income.
• Earning staking rewards: Staking rewards are taxed similarly to mining proceeds.

Non-Taxable Events

• Buying crypto with cash and holding it: Buying and owning crypto is not taxable on its own. Taxes are incurred later when you sell and "realize" the gains.
• Donating crypto to a qualified tax-exempt charity or non-profit: You may be able to claim a charitable deduction.
• Receiving a gift: You won't 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 for 2023, and $18,000 for 2024.
• Transferring crypto to yourself: Transferring crypto between wallets or accounts you own is not taxable.

The amount of tax you owe depends on your income tax bracket and the holding period of your crypto assets. If you earned crypto or disposed of it within 12 months of holding, you'll typically pay tax between 10-37%. If you dispose of your crypto after 12 months of holding, the tax rate is between 0-20%.

It's important to note that crypto losses can also lead to tax savings. Capital losses from crypto can be used to offset an unlimited amount of capital gains and up to $3,000 of income for the year. Any additional losses can be carried forward into future tax years.

To accurately report your crypto taxes, it's crucial to maintain records of all your crypto transactions for the year. Major exchanges like Coinbase send 1099 forms to the IRS, which include your information and records of your crypto income. The IRS can use this information to track 'anonymous' wallets and identify individuals.

Failing to report your crypto taxes can result in penalties, including criminal prosecution, prison time, and fines.

Frequently asked questions