Everything You Need to Know Before Investing in Cryptocurrency
Like many of my peers, my first introduction to cryptocurrency came when I read a buzzy article about how a teenager became an overnight millionaire by investing in Bitcoin. Soon, that one astonishing account rippled into thousands of success stories, and it wasn’t long until the internet was practically overrun with news of Bitcoin and the blockchain. But even despite a significant dip in the price of Bitcoin over the last month, cryptocurrencies are moving past its five-minutes of internet fame and are actually gaining legitimate merit in the business and finance world. Prestigious colleges are now offering classes on cryptocurrency, governments are talking about drafting more rigorous cryptocurrency regulations, and even we here at Brit + Co held a cryptocurrency summit last month as a primer for women to discuss how to invest in digital currencies.
But while the internet is running amuck with data-heavy crypto reports, not too many folks are decoding this trendy but complicated new currency for beginners. The sad truth is that only five percent of cryptocurrency investors are women — a fact that we believe is partially due to the lack of adequate digestible information. So for all you ladies who want to start understanding the basics of crypto, here are 13 basic things you need to know before investing.
1. Understand the history of Bitcoin. Created in 2009 by a mysterious figure known only by the alias Satoshi Nakamoto, Bitcoin is the first and most popular cryptocurrency to hit the market. Bitcoin was originally created as a decentralized way to make digital payments using technology. But it isn’t tangible like gold or paper money — instead, Bitcoin is generated or mined through a complex series of mathematical formulas. To purchase it, you must first create a digital wallet. Then, when someone uses a Bitcoin to purchase goods or services or decides to trade it with someone, that transaction is validated by thousands of computers in a vast network and recorded on a public ledger.
2. Don’t use Bitcoin to buy your morning coffee. Bitcoin originated as a way to simplify the process of making digital payments. So does that mean you should be using Bitcoin to buy your everyday micro-payments like your morning Starbucks? Well, the short answer is no. While there are certainly some companies that accept cryptocurrencies like Bitcoin in exchange for goods and services (Overstock and Expedia are two good examples), Bitcoin is currently being used as an investment tool. “As [Bitcoin] becomes more expensive and as the difficulty in transactions continues to rise, some are starting to see it as a store of value,” notes financial expert and Senior Writer at Student Loan Hero Miranda Marquit. “There are a few who still use it as a medium of exchange, but more and more — especially with all the recent hoopla — people are thinking of it as an asset.”
3. Set up a cryptocurrency wallet. So you want to start investing in cryptocurrency — what’s the first step? After doing your research and finding a cryptocurrency that you want to commit to, the first step is to create a digital wallet. According to BlockGeeks, “A cryptocurrency wallet is a software program that stores private and public keys and interacts with various blockchains to enable users to send and receive digital currency and monitor their balance.”
There are many different ways to create a digital wallet, but by far the most popular and secure way to do so is through Coinbase. Coinbase is a digital currency wallet where merchants and consumers can transact with a ton of new digital currencies like Bitcoin, Ethereum, and Litecoin. To create an account, you need to enter your contact information, confirm your identity with your passport or photo ID, and link your credit card and bank information. If you don’t want to use an online wallet, you can also use specialized software, a mobile app, a physical wallet, or a printed paper wallet. For more information about types of wallets, check out this handy article from Coindesk. Just keep in mind that if a wallet service doesn’t ask for confirmation details like your passport or ID, you should probably be wary of using it.
4. You don’t have to drop a lot of money to do it. The price of Bitcoin and other cryptocurrencies like Ethereum have surged and fallen dramatically over the past few months. Today, a single Bitcoin is worth upwards of $11,000. But don’t worry if you don’t have the funds to drop a five-figure investment on it. Bitcoins are divisible to eight decimal places, so the minimum investment you need to get started is 0.00000001 BTC.
5. Be aware of fees involved in buying and selling cryptocurrency. When the time comes to exchange your Bitcoin or other cryptocurrency for more traditional currencies (think USD), there will most likely be fees involved. “The fees are often calculated as a percentage, although for smaller transactions there might be a flat fee,” says Marquit. “For example, if you have 0.01 Bitcoin on Coinbase and you want it converted to USD, it will be based on its dollar value on the GDAX exchange. As of this writing, Bitcoin (BTC) is worth about $8,700. So that amounts to $87. If Coinbase charges 1.49 percent as a fee, that’s about $1.30 in fees.” Marquit also notes that the fee algorithm is quite complex and the fee percentage differs depending on a myriad of factors, including which currency you’re converting, whether you use a digital wallet with the platform, and whether you get the money transferred to a bank account or receive it through another method like PayPal. “Carefully read the fine print on all platforms to make sure you understand the conversion fees,” she warns, as some investors have been caught paying outrageous fees for micro-transfers.
6. Converting your cryptocurrency takes time. Despite being a completely electronic way to make payments and invest in currency, converting your crypto to fiat (AKA traditional currencies like the US dollar) can be more of an involved process that you may think. “If you use the Instant Exchange with Coinbase and you have a wallet, the conversion, even with multiple steps, can go fairly quickly — only a few minutes.” That being said, completing the conversion process from start to finish can still take a while. “Realize, though, that once you go to withdraw from your wallet to a bank account, it can take several business days to get your money. Also, realize that sending some cryptocurrencies, especially Bitcoin, can take more than an hour for a transaction to complete if you are sending it directly to another person.”
7. Understand that cryptocurrency is a volatile market. If you’ve made it this far into the article, we probably don’t have to tell you that cryptocurrency has seen its fair share of surges and dips. In fact, the price of a single Bitcoin has dropped from $17,500 to $7,000 in just a few months. While cryptocurrencies are a hot topic right now and the technology is unquestionably exciting, it’s important to be mindful of how volatile the market is. Investing in cryptocurrency is not guaranteed to make you a millionaire, and you may even end up losing your entire investment. Use conventional wisdom and only invest in as much as you can afford to lose.
8. Buying and selling cryptocurrencies must be reported on your taxes. “It’s important to remember that if you do buy and sell individual cryptocurrencies, you are expected to report the gains or losses on your taxes,” note Marquit. The IRS views cryptocurrencies as property. So, if you bought BTC at $1,200 and sold a Bitcoin back when it was doing really well, at about $19,500, you see a gain of $18,300. You will be taxed at the short-term gains rate, since you held the Bitcoin for less than a year. If you hold a cryptocurrency for a year and a day, you can count the gains as long-term gains, and see a more favorable rate — but you’ll still be taxed.” Furthermore, if you’re spending your cryptocurrency on products or services, you still need to be wary of taxation. “Say you bought LTC (Litecoin) for about $70. You decided to buy something for $250, and the seller accepts LTC. You pay with a single Litecoin, which has gone up in value. Your gain is $180 because you’re getting that extra value for a single Litecoin. You are expected to report that $180 gain as part of your income and pay taxes accordingly.”
9. Bitcoin isn’t the only cryptocurrency on the market. Ethereum, Ripple, Litecoin, and Dash are all cryptocurrencies that can be bought and sold on popular cryptocurrency hubs, and there are many more being created every day. While Bitcoin is by far the trendiest cryptocurrency to date, it’s probably a wise idea to spend a little time researching the pros and cons of investing in other digital coins before choosing if and where to invest your money.
10. Know what an Initial Coin Offerings (ICO) is and how to use it. While buying cryptocurrencies at a low price and waiting to flip them for profit is one strategy for investing in crypto, more adventurous investors can also opt to participate in an Initial Coin Offering or an ICO. Initial Coin Offerings are an unregulated way for a new cryptocurrency venture to gain funding. Instead of going through the tedious task of raising capital, companies can start an ICO campaign instead. “In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin,” according to Investopedia. Many experts note that investing in an ICO is similar to investing in a crowdfunding venture. “Early investors in the operation are usually motivated to buy the cryptocoins in the hope that the plan becomes successful after it launches, which could translate to a higher cryptocoin value than what they purchased it for before the project was initiated.” If you’re interested in perusing the current list of companies with ICOs, check out ICO Alert for more details.
11. The regulations surrounding ICOs are murky at best. Because cryptocurrency is just starting to gain widespread attention, governments have been slow to create binding regulations regarding ICOs. Technically speaking, the SEC considers all digital tokens or coins as “securities” (that is, they view it as a stock), and all ICOs are supposed to be properly registered. “The reality is that no ICOs or ETFs have registered with the SEC, and there are some suits underway against companies that offer these,” says Marquit. “Investing could be problematic, and you could lose your investment if the SEC comes down on a cryptocurrency company offering one of these products.”
12. Be wary of potential ICO scams. Unfortunately, cryptocurrencies are not immune to scammers. For instance, a cryptocurrency startup called Prodeum originally told the public that they planned to build a database of fruits and veggies on the Ethereum blockchain, but after only five days, the site completely disappeared and everyone’s investment was lost. While this scheme didn’t harm too many investors, there are a few instances such as OneCoin, Confido, and BitConnect where crooks were able to scam a lot of people out of their hard-earned money before their ICO was finally shut down.
13. Take advice from the experts. Now that you know the basics of investing in cryptocurrency, here’s a tidbit of advice: “First of all, only use money you can afford to lose, and don’t put in money that you need,” notes Marquit. “Also, make it a point to take profits when you have them. Sure, there was a big runup toward $20,000 with BTC. Then we hit a correction and now it’s down to less than $9,000. Because cryptocurrencies are so new and trendy, they don’t have any sort of long-term history, and you don’t know what’s next. Things could completely change in the coming months and cryptocurrencies might not even look like they do now. If you’re going to do this, be clear about why you’re doing it, use profit-taking strategies, limit your losses, and only risk money you can afford to lose.”
Are you looking to start investing in cryptocurrency? Tweet us by mentioning @BritandCo.
(Photos via Getty)
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