If you’ve contemplated becoming a cryptocurrency investor, you probably came across a plethora of information and disinformation regarding digital currencies. But what are cryptocurrencies, and how can you work them in your favor as an investor?
Like conventional or fiat currency, digital currencies are used to buy and sell goods and services. Not all vendors embrace Bitcoin and the like, but many online sellers and brick-and-mortar stores give their customers this option. However, cryptocurrencies are not centrally regulated and therefore don’t qualify as legal tender.
As a cryptocurrency holder, you would have a virtual wallet in which you store your virtual coins. Whenever you make a purchase, the transaction is updated on a public ledger known as a blockchain. There are many cryptocurrencies currently in existence, but most are based on blockchain technology.
1. Stay Informed
In addition to the basic info you have, keeping abreast with any events that affect your chosen cryptocurrency value is crucial. It is just as important to keep tabs on any changes in legislation regarding crypto regulation and taxation. In 2014, for instance, the Internal Revenue Service issued a notice of how they would treat cryptocurrency transactions for purposes of taxation.
The document comprehensively answered many questions crypto users and other interested parties sought clarification about. For purposes of federal tax, virtual currencies are treated in the same way as property. If you were paid in crypto in exchange for a product or service, you are expected to declare this income in its equivalent dollar amount for income tax computation.
2. Know the Industry is Volatile
The value of a Bitcoin unit in March 2021 was over $50,000, up from $46,000 the previous month. Bitcoin started 2021 at around $34,000 but, as of September 2020, was hovering around the $10,000 mark. Looking at these numbers from a bird’s eye view, you may get the impression that the virtual currency is on a steady rise, but that is not the case. At the beginning of March 2021, Bitcoin’s value dipped by more than $1,500 compared to the close of February the same year.
All cryptocurrencies, not just Bitcoin, are highly volatile. Experts, however, say that this volatility will begin to stabilize sometime in the future as cryptos gain broader acceptance and its derivatives market takes shape.
3. Hire a CPA
As you venture into the crypto market, it’s a good idea to bring on a financial accounting professional. For one, he or she will be able to advise you on which crypto to buy into and when to buy, based on their knowledge of crypto price trends. Bitcoin’s recent price surge was due to a massive investment by Tesla. The right accountant will be aware of such events as they break and advise you on how to capitalize on them.
Your CPA will also be able to help you stay on the right side of the IRS when it comes to filing and paying your cryptocurrency tax. Learn more about how to get help with crypto tax accounting here.
4. Diversity
Seeing how wildly the value of cryptocurrencies fluctuates, it’s wise to have as diverse an investment portfolio as your resources allow. This way, if one asset dips, you are covered by another one that’s performing better. You can invest in Bitcoin but also spread your investment among other altcoins.
Cryptocurrency speculation should not be your only investment avenue. Think about getting into the stock market or real estate to balance out your portfolio.
5. Understand Hot and Cold Wallets
Cryptocurrency coins are stored in virtual wallets which exist on computer hard disks. These wallets can either be hot or cold. A hot wallet is online or connected to the internet. When you’re just starting in cryptocurrencies, you will find hot wallets much easier to operate. However, their connectivity to the web means they’re susceptible to hackers and other cybersecurity threats.
Cold wallets are not online and are better from a security standpoint. But they do have several disadvantages. Cold storage devices are not free, and you cannot use them with as many types of cryptocurrencies as hot wallets.
6. Compare Fees
If you’re going to do any buying or selling of cryptocurrency, you will likely do so through a cryptocurrency exchange. Coinbase and eToro are two of the more popular crypto brokers in the market.
Before settling on any particular one, you should consider factors like their fees and commission rates, the level of security they offer, and whether they allow you to monitor your account via mobile apps.
7. Have a Strategy
Your chances of success at anything in life are better when you approach it with a plan; cryptocurrency investment is no different. Your plan will lead you to the right cryptocurrencies, the right brokers, etc. It will also help you spread your risk wisely.
Involving a CPA from your planning formative stages will give you an expert ear to ask for advice. He or she will let you know what works and what doesn’t and how to stay compliant with your tax obligations.
Knowledge is Power
The investors who tend to do well are not the quickest to act or those with the most to invest, but those who jump in with their eyes wide open. Increase your chances of reaping good rewards from your crypto investment by doing as much research as you can about the various available options. Understand the various currencies and the market itself so that they work to your advantage.