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We’ve all heard of Dollars, Pounds, Yen, and Euros, but in 2009 a new currency found itself in the limelight, Bitcoin. Bitcoin is now perhaps the most famous cryptocurrency, but when it was first launched, it was largely dismissed by everyone except futurists who could see its investment potential. Today, there are hundreds of cryptocurrencies, and they are used by many people as an alternative to global currency or as a very lucrative investment opportunity.
In this guide, we’ll explore what cryptocurrency is and how it works for those looking for opportunities for investing in cryptocurrency for the first time. Because Bitcoin was the first to market and is one of the cryptocurrencies most widely used, we’ll use it as our main example, however, there are other cryptocurrencies to choose from.
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What is a cryptocurrency and how do they work?
People have been trading assets such as gold or goods for thousands of years. Today, these assets primarily take the shape of printed bills or metal coins that are controlled by a centralized authority such as the government or a financial institution. When cryptocurrency first emerged in 2009, it turned this concept on its head, creating a currency that was entirely digital and was controlled by mathematics rather than a government or financial authority.
The way that each cryptocurrency works is that it is supported by a decentralized peer-to-peer network known as Blockchain. It is this Blockchain technology that keeps track of each cryptocurrency regardless as to whether it is sitting in someone’s digital wallet or if it is being used to make a trade.
Now you may be wondering how a peer-to-peer decentralized network is capable of keeping a cryptocurrency safe, and the answer lies in the very clever infrastructure behind the cryptocurrency. Bitcoin uses a very simple system in which two people, the sender and the receiver of Bitcoins, use a digital signature to sign off payments. Each person trading with Bitcoin has both a public and private signature which is verified for accuracy.
At the center of this system also lies something known as a Ledger where all Bitcoin transactions are made public which forces all traders to ‘play fairly’. The inner workings of Bitcoin can be a little overwhelming to get your head around at first, but there are some great more in-depth resources online if you are looking to explore it further.
Why are cryptocurrencies becoming so attractive as an investment?
Bitcoin was an extremely profitable experiment for early investors, with those buying Bitcoin back in 2011 being able to buy a Bitcoin (BTC) for around 30 cents. By this math, a small $100 investment in Bitcoin would turn into 333BTC, which, if sold at current market rates, is an investment now worth $2.131 million.
Success stories such as this definitely threw fuel on the flames of Bitcoin’s later popularity, but it’s important to remember that Bitcoin, and most other cryptocurrencies, are a very volatile market, and with prices now having risen significantly, the opportunities are a little less attractive. That being said, Bitcoin remains a very popular investment cryptocurrency for two main reasons:
- It is anonymous – you can own and use Bitcoin entirely anonymously, and,
- The price could explode again turning even a small Bitcoin investment into a winning ticket if timed correctly.
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How to get into cryptocurrency as an investment
So you’ve decided that cryptocurrency makes sense as an investment for you, what do you do next? Firstly, you need to remember that a cryptocurrency such as Bitcoin, isn’t really technically an investment at all, after all, there’s no interest and no dividends and so any return on your investment is solely based on the price of the currency increasing over time. With this in mind, most people choose to only invest a small proportion of their portfolio into cryptocurrencies.
5% to 10% is a good ballpark figure, though a lot of people choose a percentage even lower than that to begin with, keeping the majority of their portfolio filled with traditional investments such as stocks, shares, and real estate which are more reliable and easier to track.
Which cryptocurrency to choose?
We’ve spoken a lot about Bitcoin in this guide so far, but there are in fact hundreds of cryptocurrencies to choose from with more coming online all of the time. At present, Bitcoin remains the largest cryptocurrency, followed by Ethereum and then others such as Zcash, Dash, Ripple, and Monero, but these trail in popularity in comparison to Bitcoin which is why it is the cryptocurrency most reported on in the media.
So which horse should you back?
Given how new cryptocurrency still is and your position as a new cryptocurrency investor, it is smartest to put most of your available portfolio on the favorite, Bitcoin, rather than gambling too much on outliers such as Ethereum, Dash or Ripple. Because of its popularity, Bitcoin is seen as one of the most reliable cryptocurrencies, however, in terms of performance, there is money to be made by backing an underdog who could in the next few years, come through to take the lead.
Once again, it’s important to remember that cryptocurrencies are very volatile, and choosing to back an underdog that is just emerging on the scene is a risky strategy with most newly founded cryptocurrencies flatlining or disappearing in their first few years.
How to buy and store cryptocurrency
Largely, cryptocurrencies are bought, held, and traded through dedicated cryptocurrency exchanges such as CoinDesk, Binance, Kraken, and Coinbase. CoinDesk remains the most popular choice and is the one most commonly cited in the media, but all of these exchanges trade in a number of cryptocurrencies and are used worldwide. It is also possible to buy and sell cryptocurrency directly with other people, but by doing this, you will need a wallet.
A cryptocurrency wallet is essentially a software program that stores your public and private signature and which connects you to the Blockchain where your currency exists. The wallet itself doesn’t hold your currency but provides you with access to the place where it is stored. There are four different types of cryptocurrency wallets available, including Desktop Wallets, Online Wallets, Mobile Wallets, and Hardware Wallets, and which you choose will largely depend on your preference for convenience and how secure you want your wallet to be.
Paying taxes to cryptocurrencies
Unsurprisingly, as the fuss surrounding cryptocurrencies has grown, governments have started to pay close attention to the potential profit that people are making, and taxes have been introduced. The current cryptocurrency tax guidelines can only be described as confusing at best, but it’s important to do what you can to make sure that you are on the right side of the law to avoid any fines or penalties.
In 2019, the IRS released new cryptocurrency tax guidelines defining what is classed as an income and what is not for crypto-traders in the US. Tax regulations vary from country to country, and so it’s important to do your own research for the area you live in. If you’re going to make a serious go at investing with cryptocurrency, then it’s wise to seek help from a financial advisor or to use a crypto tax calculator to help you work out what you may owe.
The best time to buy
When it comes to buying cryptocurrencies, as a general rule it’s best to try and buy when the market is stable at a relatively low level. Typically it’s best not to buy at the peak of a surge as you’ll just end up spending a fortune on an asset whose value will likely drop, and it’s also not recommended to buy during a crash (never catch a falling knife). The problem with cryptocurrency is that it can rise and fall within a single day and just when you think you are starting to see a pattern it could surge way up high or crash way down low.
The key to finding the right time to buy cryptocurrency is to spend some time watching and learning and becoming informed before you jump in, and remember never to compare a cryptocurrency bubble to the bubble of regular currencies as they differ tremendously.
The future for cryptocurrency investment
Cryptocurrency was never designed to be an investment, it was designed to be used for the exchange of goods. Presently, there aren’t that many retailers who take cryptocurrency as a form of payment, however, this is constantly changing. As more people start using and demanding the availability of cryptocurrency payment options, more retailers are accepting Bitcoin and other forms of cryptocurrency as payment.
Although the future of cryptocurrency may seem unclear, the progress that it has made in the last 10 years is obvious, and investing in cryptocurrency, although risky, appears to be a wise move to make for those interested in exploring alternative investment opportunities. Just remember – never invest more than you can afford to lose.
Have you ever invested in cryptocurrency before? Would you recommend it? Let us know in the comments.