You may have just recently started getting into cryptocurrency, or you want to. It’s an exciting space to be investing, and there are opportunities for great returns. But it’s also quite different from other investments in some key ways. That’s why you need to know the basics of cryptocurrency before making a large investment.
Since cryptocurrency is fairly new, there is a lot of confusion surrounding it. This article aims to clarify the basics for you so that you don’t lose your hard-earned money investing in this latest finance trend. Here are some things to consider before you start investing in cryptocurrency.
How Does Crypto Work?
As mentioned before, crypto differs substantially from other assets like stocks or bonds. The main difference is that it has no physical form. This alone brings a lot of complicacy and nuance in cryptocurrency, unlike other financial instruments.
Instead, it’s a cache of digital data stored in your digital wallet. As a result, by nature, cryptocurrency is decentralized, which means no bank or government affects the price or backs up its value. This presents a new and intriguing opportunity for investors, with a greater upside and also a greater downside of losing money.
How the IRS sees crypto
In its early days, cryptocurrency was considered a niche financial instrument that the IRS didn’t bother with. Today, the picture is entirely different, as now the IRS cares about your gains and losses in cryptocurrency investments. With cryptocurrency now competing with international financial instruments like the US dollar, it’s now considered taxable like any other property.
The sale, exchange, and investment in crypto have had tax consequences and liability for a couple of years now. Cryptocurrency taxes are considered your asset in income statements and other financial documentation required for taxes. Not paying your crypto taxes can bring the ire of the IRS on you, so if you’re not sure what you’re doing when it comes to tax time, it’s best to consult an expert.
The 2017 Bull Run isn’t the Norm
The upside to cryptocurrency is that you can deal with it anytime, anywhere, since there is no centralized control over it. The price of traditional financial instruments like gold, oil, real-world money is determined by who is controlling the resource market. In the case of cryptocurrency, its price is influenced by more free-form factors like supply, demand, and competition, making the value fluctuations more random.
In recent years, crypto has seen epic gains, but that doesn’t mean that it is always going to rise. In 2017 cryptocurrency had a bull run, but that isn’t the norm. In fact, many cryptos have seen almost equal falls for all the vast surges in price, so manage your expectations. Many people enter the field of cryptocurrency, hoping to get rich quick but fail miserably due to a lack of knowledge and patience.
Cryptocurrencies Can Fail and Even Vanish
The value fluctuations can rise and fall over almost instantly, and sometimes they just up and vanish. Bitcoin is the most popular cryptocurrency, but it’s not the only one. There are many well-known and established cryptocurrencies like Bitcoin, Ethereum, and Litecoin. But there are also other newer and lesser-known cryptos come out every single day.
So far, there are over a thousand known instances of new cryptocurrencies entering the market and failing. If you, unfortunately, invest in these cryptocurrencies, you’ll only set yourself up for losses.
And that’s the only way you lose cryptocurrency. Cryptocurrency has no physical form and, as such, needs to be stored in a memory drive or digital wallet. If you lose access to either storage, you lose everything you’ve invested in
Crypto is More Volatile than Other Assets
From the discussion so far, you may have already surmised that cryptocurrency is more volatile than other assets. This means it’s much riskier than other investments due to its decentralized nature; there is little to no accountability.
In a way, cryptocurrency investment is more akin to speculation than traditional financing. But on the flip side, the profits made are much higher, and if you stick trading in the established cryptocurrencies, there is a low risk of loss. Even then, the stakes might be too high for your comfort zone, whether you’re a veteran or novice in trading.
While risky, cryptocurrency has already proven itself to be the trend of the future. If you want to ride that wave, you should do it carefully. With proper information and training, you can end up being a winner despite the risks.