Cryptocurrency recently reached a $3 trillion market capitalization – a figure larger than Apple’s market capitalization. And although crypto is a high-risk investment, 16 percent of Americans say that they’ve invested in it. Before pouring money into digital coins, you must do your research and understand cryptocurrency basics. Our platform helps you gauge whether or not investing in crypto is a smart move. For example, you can see your largest income source and types of income streams[ew1] . If your income barely covers your expenses, you may want to hold off investing in crypto.
Do you feel you’re in an excellent financial position to start investing in crypto? Here’s what you should know before you start:
You Need a Wallet
You need a wallet before you can start investing in cryptocurrency. A Crypto wallet is a medium that securely stores your cryptocurrency while allowing you to buy and trade. Each wallet has a string with 26 – 35 characters that serve as the wallet address. The wallet address enables other individuals to send you cryptocurrency. Many digital wallet platforms also act as exchange platforms, allowing you to buy, sell, and store cryptocurrencies all in one place.
Some of the most popular cryptocurrency wallets include:
There Are More Than 9,000 Cryptocurrencies
Recent data shows that there are more than 9,000 cryptocurrencies – a nearly 15,000 percent increase from 2013! However, many digital currencies are hard to acquire or have small market caps. Since there are so many coins to choose from, it’s essential to do your research before investing. Currently, the top five cryptocurrencies include:
- Bitcoin (BTC)
- Ethereum (ETH)
- BNB (BNB)
- Tether (USDT)
- Cardano (ADA)
Source: CoinMarketCap
Cryptocurrency Can Be Extremely Volatile
Like stocks, cryptocurrencies can be highly volatile, resulting in significant gains or devastating losses. Let’s take Ethereum as an example. In May 2020, the cost of one coin was $243.63. A year later, in May 2021, the coin price jumped to $2,407.61 – an 888 percent increase. Another example is Uniswap (UNI) – a coin that hit $42.33 on May 3rd, 2020. A few weeks later, on May 23rd, the coin fell $16.74, losing more than 50 percent of its value since May 3rd.
You Must Pay Taxes on Your Gains
The IRS considers cryptocurrency property and requires you to pay short or long-term capital gain taxes. You’ll have to pay short-term capital gains if you hold the cryptocurrency for less than one year and long-term capital gains if you hold for more than one year. Short-term capital gain taxes are higher, but sometimes it doesn’t make sense to hold a particular coin for more than a year (especially if you’re a day trader). You should report cryptocurrency gains on Schedule D of Form 1040. Note: you only have to report realized gains.
Fortunately, the IRS allows you to net up to $3,000 of cryptocurrency losses against gains. If you don’t have any gains, you can deduct $3,000 from your ordinary income.
Cryptocurrency Is Not a Security
The Security and Exchange Commission has stated that “cryptocurrencies are not securities and that the offer and sale of cryptocurrencies are beyond the SEC’s jurisdiction.” Thus, investors don’t enjoy the same protection as those who trade stocks, ETFs, or bonds. For example, publicly-traded companies must file annual reports with the SEC. These reports allow investors to see the company’s performance and overall financial standing. However, cryptocurrency investors don’t have the same visibility level into digital currencies. Therefore, it’s essential to do your research before investing a sizeable amount of money into any cryptocurrency.
You Should Diversify Your Portfolio
As they say with stocks, “don’t put all your eggs in one basket.” The same rule-of-thumb applies to crypto – you shouldn’t invest all your money in a single coin. For instance, many investors place more weight on stable cryptocurrencies that they believe have long-term potential. Their portfolio may contain 70 percent Ethereum and Bitcoin. The other 30 percent could consist of small, up-and-coming coins – Stellar, Cardano, and Polkadot. Regardless of your portfolio’s diversification, you’ll have to keep a close eye on your crypto’s performance to mitigate losses.
Cryptocurrency Is Not a Passive Investment
Because cryptocurrencies are highly volatile, you shouldn’t just park your funds in a coin and check the balance once a month. Many investors check their wallet balance around one to five times daily. Not only that, but you should always stay in the know by reading cryptocurrency news on websites like CoinDesk and Yahoo! Finance. And remember, the cryptocurrency market is open 24/7/365. Therefore, you should remember to view your investments on the weekends and during the weeknights. Checking your wallet frequently enables you to time a profitable sale or offload a coin before you run into a significant loss.
Don’t Invest More than You Can Afford to Lose
When it comes to cryptocurrency, you should never invest more than you can afford to lose. Many financial experts recommend investing no more than five percent of your portfolio in crypto. If you invest more than five percent, you increase your exposure to risk and the significant losses that could follow. And before even thinking about crypto, ensure that you have adequate emergency savings and a realistic budget.
Understand Each Coin
You wouldn’t invest in a company’s stock without knowing anything about the company – the same applies to cryptocurrency. Many coins utilize unique technologies and aim to achieve long-term goals. For example, Cardano (ADA) is an open-source and decentralized blockchain platform founded with peer-reviewed research. Many investors see Cardano as an innovative and practical cryptocurrency, making it an attractive investment.
Investing in Cryptocurrency: A Final Glance
As they say, “slow and steady wins the race.” If you’re new to crypto, start investing a small percentage of your portfolio in a single coin. Make sure you do your research beforehand and understand the coin’s mechanics. Over time, you can steadily increase your cryptocurrency investments, ensuring that you diversify your portfolio.
Sign up for Chunk today to use our resourceful collection of tools, such as a budget tracker [ew2] and debt simulator[ew3] . You’ll want to make sure your finances are in good order before dabbling in cryptocurrency.
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