As Crypto Prices Seesaw, Every New Investor Should Ask These 5 Questions

This story is part of it Power Money MovesCNET’s coverage of smart money decisions for today’s changing world.

The cryptocurrency hit new highs in late 2021, but this year did not have the same luck. Bitcoin it fell below $ 20,000 for the first time since 2020 on Saturday and continued to fall to a low of $ 17,786 on Sunday. Although the popular cryptocurrency has managed to recover since then above $ 20,000it is still far from its November peak of more than $ 67,000. Bitcoin It’s not the only cryptocurrency to have experienced a recent drop, the price of ethereum has torpedoed similarly this month. As such, cryptocurrency investors are navigating a whole new landscape.

What hasn’t changed is that cryptocurrency is still controversial, risky, and highly volatile. This became especially evident in May, when the The crypto market has plummeted for more than $ 200 billion a day, driven by the collapse of the important stablecoin TerraUSD.

The ups and downs are nothing new in the crypto markets, and skeptics have long been characterizing cryptography as an empty bubble destined to burst. Critics called bitcoin, stable currencies e NFTs simply a new digital form of an old scam ready to scam and scam. But investors see the world of digital currencies as a step forward: a kind of “Money 2.0” that will democratize finance and power the metaverse.

In simple terms, cryptocurrency is a digital token, the property of which is registered in a blockchain, a distributed software book that no one controls; in theory, it is designed to make it more secure. Bitcoin and ethereum are the two best-known crypto flavors, but more than 18,000 tokens are traded under different names (dogecoin is a famous example).

Despite the rocking prices and a relative lack of regulation, Cryptocurrency is seen by many as the next financial frontier. Developments such as President Joe Biden ‘s desire to explore US digital dollar a billionaire Super Bowl ads underline the growing desire of powerful government and corporate institutions to quickly legitimize cryptography in the same way as stocks and bonds.

But it is worth considering whether cryptocurrency is a smart investment for you, especially in light of the current recession and the ever-present potential for a major accident (in crypto and the American economyusually).

“Cryptocurrencies are one of those investment categories that don’t have those traditional protections for investors,” said Gerri Walsh, senior vice president of investor education at the Financial Industry Regulatory Authority. “They are outside the realm of securities trading. It is an area that is constantly changing, in terms of regulations.”

Professionals warn that investors should not put more than they can afford to lose in crypto, which offers few guarantees, many traps e an irregular history. If you’re thinking about adding cryptography to your portfolio, here are five key considerations before you get started.

What are the risks of investing in crypto?

Before investing in crypto, you should know that there is almost no protection for crypto investors. And since this virtual currency is extremely volatile and hype-driven, that’s a problem. It’s easy to get caught up in the tweets, TikToks, and YouTube videos promoting the latest currency, but the adrenaline rush of a rising market can be easily removed with a dramatic crash.

You should pay attention to cryptography scams. One commonly used scheme is a pump and pour, in which scammers encourage people to buy a certain token, which increases its value. When you do, scammers sneak in, often lowering the price for everyone else. These scams are prominent and have led to more than $ 2.8 billion in cryptocurrencies in 2021.

From the current political perspective of the U.S. government, you are alone. At the moment, the government does not offer protection against crypto deposits as it does for bank accounts. That may change after Biden’s March executive order, which was directed at government agencies to investigate the potential risks and benefits of digital assets.

As far as we can tell, it only offers one company cryptographic insurance: Violation insurance, with a Crypto Shield offer that promises to cover your accounts against hacking. Other companies, such as Coincover, offer theft protection, which alerts you to suspicious activity on your account. Coincover maintains a guarantee backed by insurance that, if your technology fails, will pay you up to the amount you are entitled to, which depends on the level of protection offered by the wallet you use. (Neither Coincover nor Breach Insurance will cover you against scams).

Despite all the hype, scams, recurring accidents – and persistent risks – in this market, Cesare Fracassi, who runs the Blockchain Initiative at the University of Texas at Austin, still thinks that cryptography has a viable future.

“I think cryptography has a possible solution to some of the problems in the traditional financial sector,” Fracassi said. “The traditional and current financial system is not inclusive, it’s slow and expensive and the holders, including the big banks and financial institutions, basically have a lot of control. I think the crypto is a place through which you can really break the system.”

How do I start investing in cryptocurrency?

If you are thinking of buying crypto now that prices have dropped, it is worth noting that there is no guarantee that the market will recover. But the easiest way to get your feet wet with cryptocurrency investments is to use US dollars to buy a cryptocurrency through a popular exchange like Coinbase. Binance or FTX. A handful of well-known paid applications, including Venmo, PayPal and Cash application – will allow you to buy and sell cryptocurrencies, although they generally have limited functionality and higher rates.

If you are using Coinbase, Binance, Venmo, or PayPal, you will need to provide sensitive personal and financial information, including an official form of identification. (So ​​much for bitcoin’s reputation for anonymous transactions.)

Once you’ve set up your account, it’s easy to transfer money from your bank. And the entry barrier is pretty low: the minimum trade amount is $ 2 on Coinbase and $ 15 on Binance.

Read more: Best Bitcoin and Crypto portfolios for 2022

What percentage of my portfolio should be in crypto?

Cryptography is so new that there is still not enough data to decide how much of your portfolio “should” be in cryptocurrency, according to Fracassi.

“We need decades of return to understand if a specific asset is good in a portfolio,” Fracassi said. “We know that, on average, stocks return 6% more than bonds. This is because we were 60 to 100 years old to see the average returns on stocks and bonds.”

As with all investment decisions, the amount you spend on cryptography will depend on your risk tolerance. But investment professionals suggest that investors keep their exposure low, even for those who are fully integrated into the technology. Anjali Jariwala, a certified financial planner and founder of Fit Advisors, recommends that clients not spend more than 3% of their portfolio on cryptography.

If I make money from cryptographic transactions, do I have to pay taxes?

Yes. If you are buying, selling, or exchanging crypto, the IRS wants to know about it. Yours fiscal responsibility it depends on your particular situation, but cryptocurrency investments are generally treated like other investments, including stocks and bonds.

You do not need to report encryption on your tax return if you have not sold or exchanged it for another type of encryption. It is also not necessary to report the purchase and operation. However, if you have sold or exchanged cryptocurrencies, you will be required to report any gains or losses made, as you would for stocks and bonds.

Adding cryptographic exchanges will not facilitate your tax return. But popular tax software how TurboTax, CoinTracker and Koinly now connect to wallets and exchanges to automatically track their possessions, sales, and cryptocurrency transfers.

Is there any way to learn about crypto without investing in the currencies themselves?

Buying tokens is the easiest approach to experimenting with cryptocurrencies. But there are other opportunities to explore the world of cryptography while protecting your money from fluctuations.

Here are a handful of alternatives:

Buy shares of cryptographic companies. Many cryptocurrency companies are listed on the stock exchange. Buy Coinbase Global shares or PayPal Holdings instead of the currency itself, it allows you to benefit from the commercial revenues of these companies, which are partly generated by crypto. You can also buy shares of companies that manufacture cryptocurrency-related hardware, such as Nvidia and AMD.

Invest in crypto ETFs or derivatives. Specialized exchange traded funds, or ETFs, are available for crypto. ETFs are baskets of securities, such as stocks, commodities and bonds, that follow an index or sector, in this case, crypto. Futures and options for some cryptocurrencies are also available, although these advanced types of investment vehicles come with their own risks.

Get a job in crypto. LinkedIn, Indeed and Monster list thousands of crypto jobs. Whether you have a traditional financial background or a software engineer, there is a boom in the blockchain job market. There is also Cryptocurrency Jobs, a job market dedicated to blockchain careers.

Ultimately, it depends on whether you are immersed in cryptographic waters, but keep in mind that this is not the only place to start your investment journey. And beyond cryptography, there are other digital assets to consider as well NFTs. But if you take the plunge, be sure to invest in one good portfolio to keep your digital currency safe.

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