How to Start Investing in Cryptocurrency
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- Find out how to start investing in crypto
- Learn about different cryptocurrencies
- Find the right crypto investment for you
There is an awful lot of cryptocurrency out there so if you are thinking of buying into or investing in cryptocurrency, its vital that you do your research first! Make sure you know what you are getting into before picking a cryptocurrency exchange to invest in and making your first crypto purchase.
Trading and buying crypto can be different to buying shares, and you need to be prepared to lose all your investment, so choose carefully.
How to buy crypto in 5 easy steps
- Choose a crypto exchange or broker. If you’re unsure which one to choose, see my list of the best crypto exchanges
- Open an account. You will need your national insurance number, personal ID and bank details.
- Enter payment details. Fund your new account via a debit card or bank transfer.
- Buy your cryptocurrency. Search for the cryptocurrency you want to buy and place your order.
- Choose a storage method. Buying crypto through an exchange rather than a broker gives you the option to leave the crypto on the exchange or store it in a hot or cold wallet. More on this later in this guide.
Is trading cryptocurrency legal?
One of the main concerns that many investors have is whether or not buying and selling cryptocurrency is legal and it is perfectly understandable why.
In recent years, cryptocurrencies have captured the public imagination largely thanks to the success of Bitcoin. As you may remember, it first entered the news in late 2017 when Bitcoin prices reached a peak of nearly $20,000 per coin.
However, there has been a considerable amount of controversy surrounding it, partly due to official concerns that criminals are using cryptocurrency transactions for money laundering purposes. This suspicion has made many people concerned about the legality of crypto exchanges.
Thankfully for tech-minded investors, trading cryptocurrency is absolutely legal in the US and so you don’t need to worry about the 5-O coming round your door! According to figures from a recent study roughly 59.1 million Americans have digital assets in some form, as effectively anyone with a credit or debit card and an internet connection can buy them.
Is it safe to trade cryptocurrencies?
It’s important to note that while it is legal to buy and sell cryptocurrencies, they are not financially regulated products.
This can mean that your money often isn’t as safe with cryptocurrency purchases as it is when you’re trading traditional investments, such as buying stocks and shares.
Although there is speculation that the US government will be pushing through more legislation to help govern cryptocurrency trading in the future, it’s important to note that currently a rough patchwork of federal and state regulation oversees cryptocurrency trading. Sadly legislators are playing catchup with a sector that is quickly changing.
This can mean that trading them exposes you to a significant amount of risk.
Before you invest any money, it’s important to be aware that while there may be large gains to be made, investments into cryptocurrency come with an equally significant amount of risk.
This means that if your trades in the crypto market do not go well, you could stand to lose a large amount of money, so it’s important to think carefully before buying any.
Can I invest in cryptocurrency in the US?
The short answer to this question is, yes. Investing in cryptocurrency is legal in the US.
However, it’s important to remember that, as these assets are not yet regulated, they are something of a legal grey area. Of course, this may change in the near future and the Senate is reviewing a number of proposals designed to help tame the Wild West of crypto.
Cryptocurrency and taxes
If you plan to invest in cryptocurrencies, it’s important to be aware of current tax legislation so that you don’t run into any unexpected issues.
You can check the government website to find out more about when you need to pay tax on your crypto investments.
What really is cryptocurrency?
While you may have heard the word “cryptocurrency” a lot, it may not initially be obvious what it actually is.
To put it simply, cryptocurrencies are digital currencies. Instead of having a physical form, like with traditional fiat currency, units of these currencies are traded over networks that have two main properties:
The first of these is that there is no central control over digital currency like there is with physical money.
The second is that there is no central storage of transactions, such as a database that lists them all.
Instead, cryptocurrencies use “blockchain technology” to build a network of thousands of computers that process and store transactions together.
The sheer number of computers in the system (known as “nodes”) makes it difficult to have a common record of all sales and purchases.
This decentralization is both one of the biggest advantages and disadvantages of cryptocurrency.
How does this decentralization affect me?
On one hand, it means that transactions are very hard to monitor, making them popular with people who are concerned about government surveillance. This is why cryptocurrencies have grown in popularity with ordinary people attracted to the freedom and wealth potential that cryptocurrency offers.
However, the lack of central control can also pose problems if you are the victim of fraud, as you cannot be recompensed.
Without a central authority to monitor transactions, if a hacker or scammer steals any of your cryptocurrency, there is little you can do to get it back.
Why is cryptocurrency controversial?
Despite the popularity of cryptocurrencies among tech enthusiasts and investors, the Securities and Exchange Commission has taken a cautious approach to them.
One of the main reasons for suspicion is that since the transactions are anonymous and there is no central record of them, they are popular with criminal groups for money laundering.
Since the government and financial regulatory authorities obviously want to prevent money laundering, as it often funds organized crime, they tend to take a skeptical approach.
Furthermore, some financial experts consider the risks of cryptocurrency trading to be too high to deem it a valid avenue for investment, although this view obviously depends on your own attitudes and tolerance to risk.
What are the pros and cons of buying cryptocurrency?
While investing in cryptocurrencies can seem like an appealing prospect, it’s important to think carefully about your decision before you act.
There can be a lot of factors to think about and so it’s important that you consider both the pros and cons of the investment before buying or selling.
There can be many good reasons for retail investors to buy cryptocurrencies. Some of the most common reasons are:
- The potential for large capital gains
- One of the most obvious attractions of cryptocurrency is that the price has a tendency to fluctuate significantly.
- While this means that your wealth is at risk if you buy in at a bad time, if you buy it at the right time then you may have the opportunity to increase your investment significantly.
- A useful tool for seeing the history of many different crypto assets is the Coindesk website.
- For example, if you had made the decision to buy Bitcoin in 2014, the year that it was first launched, the price of one coin was about $318.
- As of October 2021, however, the price of a Bitcoin has surged to around $58,000.
- The fluctuations in bitcoin’s price mean that you have the potential to make a considerable amount of money if you time your transactions correctly.
- Another of the main attractions of cryptocurrencies is that all transactions are done anonymously.
- While you presumably have nothing to hide, if you’re concerned about the prospect of government surveillance then cryptocurrencies can be used for online purchases.
- As cryptocurrencies become more mainstream, more and more shops will let you purchase their goods using this form of payment.
- You may remember Elon Musk’s announcement back in March, reported by the BBC, that people could buy Tesla electric cars using your Bitcoin wallet.
- While he later changed his mind, and you can no longer buy them in this way, it goes to show how much more accepted these forms of transactions are becoming.
- If you want to know more about where you can use your cryptocurrency to purchase goods and services, the 99 Bitcoins website has a list of retailers that accept Bitcoin as payment.
As I mentioned earlier, the main disadvantage of cryptocurrencies is that you can stand to make a considerable loss if your investment falls in value.
If things go wrong then you could stand to lose tens of thousands of pounds, if you are unlucky.
There are essentially three main ways that you could lose money when buying cryptocurrencies. These are:
- 1. The value plummeting – Cryptocurrencies are inherently volatile. As they aren’t linked to any physical goods or services, their price is simply determined by market sentiment.If you buy cryptocurrency and its value falls, you may lose money when you come to sell it. This is known as “crystallising” your losses.For example, if you had invested in bitcoin at the start of 2018, and then gone on to sell your assets on 31 December, you would have made a 73% loss.This is a significant fall and goes to show how large your losses can be if you aren’t careful.
- 2. You lose track of it – Another significant risk is simply forgetting that you have it. While it sounds absurd to lose an expensive asset, this is actually more common than you think.According to a report published in the Times, experts estimate that around 20% of all cryptocurrency has either been lost or forgotten about. This accounts for around $140 billion worth of assets.Part of the problem is that since they are stored electronically in a “cryptocurrency wallet”, you may run the obvious risk of simply forgetting the password.
- 3. You lose it to cybercriminals – Another worrying possibility is that you could lose it due to cyber fraud.
As I mentioned earlier, cryptocurrencies are typically decentralized, so there is no central store of transactions.
While this is good if you’re concerned about surveillance, it can pose a serious problem if you’re the victim of cyber fraud.
If you’re the victim of normal fraud, whereby hackers gain access to your bank account, or trick you into making a fraudulent bank transfer, the centralization works to your advantage.
This is because your bank is able to independently edit its database and records to change how much money you have in your account.
If you’re the victim of fraud, the bank can simply change your balance to what it was previously.
With cryptocurrency, since there is not the same central authority to monitor transactions (like with your bank transfers), if a hacker or cybercriminal steals any of your assets, there is very little that you can do to get it back.
What are cryptocurrency exchanges?
They work in a similar way to an online stockbroker, except with digital currencies instead of traditional investments such as shares and bonds.
There are many cryptocurrency exchanges to choose from. However, if you want to maximize your profits, while also staying safe, you should look for a cryptocurrency exchange that offers both low fees and strong security features.
Typically, the best crypto exchanges will offer a variety of useful features like these, so it’s important to choose carefully which one you want to use.
How can I buy and sell cryptocurrency safely?
If you want to trade cryptocurrency in the safest way possible, there are essentially two ways to do so.
The first is to make sure that you trade through a legitimate and reputable exchange, or ideally through a brokerage. This can help to give you invaluable peace of mind that you’re in safe hands.
The second is to make sure your crypto wallet – the online space where your currency is stored – is secure. This can make it much more difficult for hackers to gain access to your account and, by extension, your crypto assets.
You could also consider a “hardware” wallet, which involves moving your wallet onto a physical, external device, such as an external hard drive or a USB stick. This prevents anyone from accessing it without the physical hardware.
Of course, if you lose your hardware wallet, you’ll lose access to your funds. Factor this into your decision.
While you can never fully discount the risk from cybercriminals, taking some preventative measures can go a long way in keeping your assets safe.
Do I have to pay tax when selling cryptocurrency?
As I mentioned earlier, cryptocurrency falls under something of a grey area when it comes to the law, as it isn’t a regulated financial product. However, to answer the question simply, you typically do have to pay tax when disposing of crypto assets.
You may need to pay Capital Gains Tax whenever you:
- Sell your crypto assets
- Exchange your them for another type of crypto-asset
- Use your crypto assets to pay for goods and services
- Give them away to another person (unless they’re your spouse or civil partner)
You may also need to pay tax if you donate any crypto assets to charity.
If you’re unsure of whether or not you need to pay tax on a transaction involving cryptocurrency, you can check the government website to find out more.
Is trading cryptocurrency right for me?
Trading cryptocurrency can be a highly lucrative investment strategy if it’s done right. However, if you are unlucky, you could stand to lose a considerable amount of money.
That’s why it’s important to be sure of your decision before you invest any of your wealth into cryptocurrencies. Investing in this way requires you to have a very high-risk tolerance.
Alternatively, if you’re looking to grow your wealth but aren’t willing to accept such high levels of risk, there are a variety of other investment options you could consider.
For example, you may prefer to invest your money in Index Funds, Mutual Funds, or even Real Estate Investment Trusts.
If you’re unsure which of these might be right for you, you could benefit from seeking professional advice. Working with a financial advisor could help you to assess your risk tolerance and build an investing strategy that reflects that.
Please note: Crypto assets are not regulated financial products so please be aware that trading them carries a considerable amount of risk for your capital. Cryptocurrencies are also not covered by existing consumer protection laws.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
This article is for informational purposes only and does not constitute financial advice. All contents are based on my understanding of the relevant US legislation, which is subject to change.