Riding on the blockchain revolution, Bitcoin and other encrypted cryptocurrencies, residing in a vast digital network of blockchain distributed ledgers, became very popular with investors. The majority of investors looking out for speculative gain in a booming crypto market were ill-prepared to tackle the extreme volatility of these digital currencies. Profits zoomed, and so did the losses.
The wise investor must gain a proper understanding of the cryptocurrency market to balance the risks and benefits of crypto investments. We consulted leading experts on crypto and accounting to get to know the ins and outs of investing in cryptocurrencies. In the following guide, we share these insights that will strengthen your crypto investment strategy:
The Major Risks of Investing in Cryptocurrencies
Before we examine the advantages of cryptocurrencies, let’s take a close look at the negatives. We’ll be sharing tips as we move along.
The Cryptocurrency Market Witnesses Extreme Volatility
Extreme price fluctuations are the norm in the crypto market. Starting the year at $18,000 USD, Bitcoin, the most popular crypto in the market, slipped to $7,000 USD. Ethereum, another crypto, slipped from $1600 USD to $400 USD. The trading term HODL (Holding on for dear life) was the favored option for investors conserving cryptocurrency in the hope that prices would bounce back.
What you can do: Invest a reasonable portion, not the whole bank balance, in cryptos. Avoid purely speculative trading. Hold back; think of long-term gain, and wait because your patience will be rewarded.
Cryptocurrency Is a Grey Market Which Is Largely Unregulated
Cryptocurrencies are not legal tender in many nations. The blockchain technology is a highly decentralized digital system which operates within networked protocols far removed from government control or regulatory laws. So, if you lose money in Bitcoin trading, it’s difficult to pin liability, legally pursue default, and recover losses.
With large inflows of fiat currencies (like the dollar), cryptos have grown exponentially. A lot of public money is invested in cryptos, making it difficult to ignore. The US, China, and South Korea are just a few nations that are framing aggressive regulations to govern blockchain and control cryptos. With regulations in place, pricing and token value may stabilize, and we may no longer witness booms.
What you can do: If you are intent on investing in an unregulated market, be prepared to take losses with a smile.
Cryptocurrencies Are Coming Under the Tax Scanner
In the US, it is now mandatory for taxpayers to report cryptocurrency transactions when they file their personal income tax returns. You can move fiat currency to crypto, or do transactions between different cryptos, and exchange your crypto funds back to fiat currency. All capital gains from these dealings will be taxable.
What you can do: Keep a meticulous record, from day one, of all your crypto transactions. If the IRS comes calling, you’ll be prepared.
Nations Are Clamping Down on Cryptocurrency Transactions and Exchanges
Some nations are deeming cryptocurrency trading as unlawful and potentially dangerous to the public interest. China has already banned all forms of cryptocurrency trading. This is forcing operators to scamper offshore.
What you can do: Restrict investments to crypto exchanges that are regulated and answerable to the law of the land. Resist the temptation to invest outside the country’s jurisdiction as you won’t get legal protection.
Not All Cryptocurrencies Are Genuine: Scams Abound
There are more than 1500 cryptocurrency models in circulation in a market that is riding piggyback on the stupendous success of Bitcoin. But many are fly by night scam operators out to dupe unsuspecting investors blinded by quick profits. Scam coins keep valuations very low to attract incremental investors willing to invest cheaply and wait for long-term for killing profits that never come.
If scam coins weren’t bad enough, we have scam exchanges too. These are cryptocurrency exchanges that set up shop, collect a sizable investor following, then clean out wallets before disappearing without a trace. With tightening exchange regulation, there are fewer chances of exchange scams being repeated, but the risks persist.
What you can do: Invest only in the top cryptocurrencies that are favorably reviewed on reputed tech sites. Avoid unknown coins like the plague.
User Accounts May Become Vulnerable to Hacking
Contrary to claims that blockchain follows an unbreakable cryptographic coding protocol, instances of hacking have occurred. Hackers usually exploit weaknesses in coding or feed off the negligence of users that leave wallet key codes exposed.
What you can do: Deploy strong alphanumeric passwords, and two-factor authentication (2FA) on exchange platforms, and safeguard coded private keys.
Cryptocurrency Transactions Are Traceable and Actionable
There is a widespread notion that crypto transactions remain anonymous and safe from prying eyes. This is partially true. Your identity is protected. The system conducts transactions between coded addresses of the sender and receiver. Although the amount transacted will be visible in a publicly distributed ledger, nobody will know who you are, to whom you sent money, and for what purpose.
But your anonymous status is about to change. In the US, the Internal Revenue Service (IRS) won a lawsuit against Coinbase, a major crypto exchange. The exchange was compelled to share information about individuals transacting upward of $20,000 in cryptos. Coming on the heels of this development, it is now a prosecutable offense to withhold cryptocurrency information when you file your personal income tax returns in the US.
What you can do: Since anonymity has taken a toss, keep your crypto dealings strictly above board, and ensure you are not violating local laws, especially laws punishing drug dealing and money laundering.
The Major Benefits of Investing in Cryptocurrencies
Looking at the amazing growth curve of cryptocurrency and its foundational technology the blockchain, you get the feeling that you are revisiting the excitement that greeted the birth of the internet. Blockchain and cryptocurrency will continue to add value to our lives. If you successfully navigate the disadvantages of cryptocurrency (that’s doable), you’ll be cheered by its positives:
Cryptocurrency Has an Enviably Strong Track Record for Endurance
Cryptocurrencies have survived all kinds of booms and busts and doomsday prophecies, and are still going strong. This trend is likely to continue because of the strong backbone provided by blockchain technology. Bitcoin, the most active crypto, strides the arena with a market capitalization of $108 billion, which is strengthening. Bitcoin is now trading above $6000 USD. Admittedly, that’s way below the heady days of $18000 USD, but what’s remarkable is the currency’s ability to bounce back every time.
Cryptocurrency Offers a Hedge and Acts Like a Diversification Tool
If you are concerned about growing government debt and collapsing financial systems, you have a great solution in the making. Cryptocurrency is a valuable hedge against financial chaos and is a way of spreading financial portfolio risk, provided you limit your exposure to reasonable levels.
Even when you face an economic downturn, crypto has value. The fact that Bitcoin enjoys thrice the value of gold should clinch the argument. With Bitcoin futures going online, investors have a safer alternative to investing directly in the digital currency.
Cryptocurrency Is Widely Accepted as a Payments Route for Accessing Goods and Services
More and more e-commerce players are accepting cryptos as payment for delivering goods and services. Moreover, you can make payments and transfer funds in a faster mode and cheaper way using cryptos. The average consumer is no longer at the mercy of intermediaries like banks and other financial institutions that levy hefty fees for basic financial services.
Cryptocurrencies Solve the Problems That Fiat Currencies Create
When an inflationary economy reduces the purchasing power of the dollar or any other fiat currency, cryptos store value that can be used and reused many times. Moving fiat currency between borders becomes problematic because of government restrictions. Cryptos come to the rescue, making global payments easier. Governments and banks may seize and dispose of your physical assets and freeze your bank balance, but cryptos are safe from outside interference.
Cryptocurrencies Display Greater Momentum Compared to Stock Market Shares
If you analyze the price movement of popular cryptocurrency pairings like BTC/USD (Bitcoin), LTC/USD (Litecoin), and ETH/USD (Ethereum), you can’t fail to notice the enhanced momentum they enjoy compared to regular trading in stocks and commodities.
Playing your cryptocurrency card can be your best bet to safeguard against financial turmoil in the coming future, provided you follow three fundamentally sound practices.
Ensure that you deal only with trusted exchanges and reputed brokers that are flexible and offer better leverage for your investment. Focus only on the top performing cryptos and analyze the technical and trading charts closely. Protect your privacy and safeguard your transactions using advanced passwords and safety protocols.
Last but not the least, keep a meticulous record of transactions and consult professionals who will deal with taxation while you delight in the profits.