Investing in cryptocurrencies is a popular topic in today’s investment world. Whether you’ve already invested or are thinking about taking a chance on one of the many available cryptocurrencies, chances are you’ve heard your share of vehement proponents and detractors.
Your experience with investing in cryptocurrencies will largely be determined by your propensity for risk-taking in your investments, as well as your knowledge of the cryptocurrency industry as a whole.
Understand the Industry
The cryptocurrency industry has become well-known for its volatility, especially in recent years. The mining tactics that made investors and miners millions in the beginning are now obsolete. Staying up-to-date on the latest industry developments and trends will be crucial when developing your own investment strategy.
Part of understanding any industry is having a grasp on the basic inner-workings of how business owners profit from their activities. In the world of cryptocurrency, this means having a conversational understanding of things like blockchain, mining techniques, wallets, exchanges, private keys, and common risks like equipment and electricity requirements.
Don’t plan on investing in cryptocurrency if you can’t read an industry report without opening your browser to look up the definitions of key terms.
Know the Major Companies
While Bitcoin is by far the most well-known cryptocurrency on the market, other cryptocurrencies like Ethereum, Ripple, and Stellar are also worth researching. These cryptocurrencies are referred to as “blue chip” cryptocurrencies, meaning that they have a total market capitalization of over $2 billion.
When investing in any industry, it’s customary to familiarize yourself with the major competitors, and the differences between them, to make informed investment decisions. Reading news stories about blue chip cryptocurrencies is a great place to begin researching the industry.
Of course, there are other investment options out there other than the blue chip cryptocurrencies, but they’re seen as more risky and might require a longer wait on your part before you see rewards.
Decide How You’ll Invest
There are two major ways to invest in cryptocurrencies. Depending on the investments you choose, you’ll either buy in cash with a traditional stockbroker or buy cryptocurrencies first and trade them on crypto exchanges like Coinbase. This is the part that usually trips up investors and causes hesitation.
When you buy cryptocurrencies on an exchange, you can either keep the purchased coins in the exchange itself or transfer them to your own digital wallet that you download from the cryptocurrency company. The wallets will require you to create a private key and set up basic security parameters to protect your digital investments.
Once you’ve chosen how to invest, you can more or less follow common investment strategies that you would use for any type of trading on traditional markets. Activities like buying low and selling high, holding on to investments through downturns, and sticking to your original investment strategy all apply here.
Understand Your Tax Implications
The tax implications of investing in cryptocurrencies are finally becoming more clear as the cryptocurrency industry takes shape over time. The IRS has begun establishing more clearly stated tax regulations for reporting income from cryptocurrencies. With defined regulations, adhering to tax laws and planning for the tax implications of your investments will be less of a burden going forward.
Understanding the taxable events associated with buying and selling cryptocurrencies will prevent you from making mistakes that could cost you more money in the long run. For example, each time you buy or sell a cryptocurrency, the IRS sees that as a taxable event. That means that day trading and making multiple transactions in a short period of time might require some additional legwork on your part to ensure that you’re complying with tax regulations.
As always, before you invest, do your research. While we neither endorse nor oppose investments in cryptocurrencies (or any specific investments, for that matter), we see where the asset class might be an appealing one for investors of all kinds. Additionally, discuss further consequences (tax, financial planning, etc.) with your financial planner and your tax professional to ensure that you’re covering all bases.