Investing in cryptocurrency is a popular topic right now. The market is full of excitement and extremely volatile. It’s hard to not want to get in on the action. However, while many people have made significant profits from investing in cryptocurrency, others have lost everything they put into it. If you’re considering investing in cryptocurrency but don’t know where to begin, this article will give you some guidelines for what to expect and the risks involved.1
What is a Cryptocurrency?
A cryptocurrency is a digital or virtual currency that uses cryptography for security. A key feature of cryptocurrencies is that they are not regulated by any central authority, making them theoretically immune to government interference or manipulation.
The biggest differentiator for cryptocurrencies from fiat currencies (US dollars, Euros, etc.) is the fact that they are decentralized, meaning they are not subject to government or financial institution control. The most popular cryptocurrency is Bitcoin, which was created in 2009. Cryptocurrencies are often traded on decentralized exchanges and can also be used to purchase goods and services, sometimes by directly trading them (just like dollars) and other times by using an intermediary.2
What Is Blockchain Technology?
Blockchain technology is the foundation of cryptocurrency. It is a public ledger that records all the transactions, or digital events, in chronological order. Blockchain technology can be used in cryptocurrencies to provide a secure and decentralized ledger for transactions. Cryptocurrencies such as Bitcoin and Ethereum use blockchain technology to record transactions on a public ledger, ensuring that all parties involved in the transaction have a record of it. This transparency and security is one of the main advantages of blockchain technology, and is why it is so important for cryptocurrencies.2
How to Invest in Cryptocurrencies
Investing in cryptocurrencies is a speculative endeavor that comes with a high degree of risk. Prices can fluctuate wildly, and investors may lose all of their invested capital. Before investing in cryptocurrencies, it’s important to understand how they work and the risks involved. Once you’ve done immense research and fully understand what you’re getting into, you can move forward with investing in cryptocurrency by using an exchange. Just like you go to a stock exchange to exchange dollars for stocks, you can go to a crypto exchange to exchange fiat currency (USD, Euros, etc.) for crypto and vica versa.3
Tips for Investing Safely in Cryptocurrency
If you’re new to the world of cryptocurrency, you may be wondering how to buy and sell cryptocurrency without losing your shirt. Here are a few tips to help you get started:
1. Do your research. Cryptocurrency is a volatile market, so it’s important to do your homework before investing any money. Read up on different currencies, their pros and cons, and what experts are saying about them before making any decisions.1
2. Start small. Once you’ve done your research and decided which currency you’d like to invest in, start with a small amount of money. You can always add more later if you’re happy with the results. It’s important to make sure you don’t invest more than you can afford to lose in extremely speculative assets such as cryptocurrencies.1
3. Use a reputable exchange. When it comes time to buy or sell your currency, make sure you’re using a reputable exchange. There are many scams out there, so it’s important to be careful when choosing an exchange. Once you’ve made your trades, we recommend moving your cryptocurrency to a wallet that you actually own as opposed to storing it on an exchange. By storing it on an exchange, you open yourself up to risks such as those experienced by FTX users.1
4. Don’t forget taxes. Cryptocurrency gains are subject to capital gains tax, so be sure to factor that into your calculations when deciding how much money to invest. In addition to making sure you don’t forget to pay your taxes on them, make sure you consider the unique planning opportunities available to cryptocurrency investors such as, on the basic level, holding cryptocurrency in an IRA and taking advantage of the fact that the wash sale rule does not apply to them.4, 5
5. Have realistic expectations. Cryptocurrency can be a great investment, but it’s important to have realistic expectations about its potential returns. Don’t expect to make millions overnight and recognize that your investment could go to 0. Cryptocurrency investing takes time and patience and, even if you do everything right, you could still lose everything on such a speculative asset.6
Conclusion
With the right approach, investing in cryptocurrency can be a great way to expose your portfolio to the blockchain revolution without putting your financial future at risk. By following the tips outlined in this article, you can learn how to invest in cryptocurrency without losing your shirt. So what are you waiting for? If it’s right for your situation, get started today and see how far you can go!
If you’re not sure if it’s right for your situation, we recommend chatting with the appropriate tax, financial, & legal counsel. Our advisors are ready to have a conversation with you and would love to help you make excellent financial decisions. Click the link above to schedule a call!
Sources
1: https://www.investopedia.com/investing-in-cryptocurrency-5215269
2: https://www.investopedia.com/terms/b/blockchain.asp
4: https://www.investopedia.com/best-bitcoin-ira-companies-5115296
5: https://anderscpa.com/wash-sale-rules-cryptocurrency-tax-planning-for-2022/
6: https://fortune.com/recommends/article/how-safely-buy-and-sell-cryptocurrency/
When Daniel is not giving financial advice or managing investments, he enjoys renovating properties, real estate investing, drinking coffee, hanging out with friends, spending weekend trips in his camper van, and exploring the outdoors on a hiking or biking trail in his hometown of Roanoke, VA and beyond.