Crypto: This story is part of Power Money Moves, CNET’s coverage of smart money decisions for today’s changing world.
For the first time in five weeks, the cryptocurrency market reached $1 trillion in market capitalization (the total dollar value of the crypto market today). But that rebound fell short of the market’s November peak of $3 trillion. In an economy with high inflation and the risks of a looming recession, is it still worth diving into the crypto waters?
After strong highs in 2021, the cryptocurrency has fallen to pessimistic lows this year, falling into bear market territory that investors are calling the next “cryptozyme”. The $2 trillion crypto market crash wiped out investors’ profits, put thousands out of work, and destroyed once-stable digital currencies, including the luna crypto token, which lost all value following the collapse of the terraced stablecoin in May.
While cryptocurrencies have been falling, volatile highs and lows are nothing new in crypto markets – and skeptics have long described the cryptocurrency as an empty bubble destined to burst. Critics call bitcoins, stablecoins and NFTs a new digital version of an old scam ready for scams and scams. However, investors see the world of digital currencies as a step forward, a kind of “Money 2.0” that will democratize finance and strengthen metaversions. Amid changing prices and fluctuating moods, one thing hasn’t changed: Cryptocurrencies remain controversial, risky and volatile.
Simply put, a cryptocurrency is a digital token whose ownership is recorded on the blockchain, a distributed software ledger without control. It is designed to be theoretically safer. bitcoin and ethereum are the two most well-known cryptocurrencies, but more than 18,000 tokens are sold under different names (dogecoin is a popular example).
Despite rising 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 the digital U.S. dollar following multimillion-dollar Super Bowl ads underscore the growing desire of powerful governments and corporations to soon legitimize cryptocurrencies in the same way that stocks and bonds are.
But it’s worth considering whether cryptocurrency is a smart investment for you… especially in light of the current downturn and the ever-present potential for a major crash (in crypto and the US economy in general).
“Cryptocurrency is one of the investment categories without traditional investor protections,” said Gerri Walsh, senior vice president of investor education at the Financial Industry Regulatory Authority. “They are out of the realm of securities trading. It’s an emerging area in terms of regulation.”
Professionals warn that investors should not put more than they can afford to lose into cryptocurrencies, which offer few guarantees, many pitfalls and spotty results. If you’re thinking about adding cryptocurrencies to your portfolio, here are five important questions to consider before you get started.
What are the risks of investing in cryptocurrencies?
Before investing in cryptocurrencies, you should know that there is almost no protection for cryptocurrency investors. And because this virtual currency is so volatile and hype-driven, that’s a problem. It’s easy to get caught up in tweets, TikToks and YouTube videos announcing the latest coin – but the adrenaline rush of a market surge can quickly overshadow a dramatic crash.
You should watch out for crypto scams. A commonly used method is pump and dump, where fraudsters invite people to buy a particular token, increasing its value. When this happens, cheaters sell out and often push the price down for everyone. These scams are prominent and have made more than $2.8 billion in cryptocurrencies in 2021.
From the current perspective of US government policy, you’re on your own. Currently, the government does not offer deposit protection for cryptocurrencies like it does with bank accounts. That could change following Biden’s executive order in March, which directs government agencies to examine the risks and potential benefits of digital assets.
As far as we know, only one company offers crypto insurance: Breach Insurance, which has a Crypto Shield offering that promises to cover your accounts from hackers. Some companies like Coincover provide anti-theft protection that alerts you when there is suspicious activity on your account. Coincover maintains an insurance-backed guarantee that if its technology fails, it will refund you the amount you earn, which depends on the level of protection offered by the wallet you use. (Neither Coincover nor Breach Insurance covers you against fraud.)
Despite all the hype, scams, regular crashes (and ongoing risks) in this market, Cesare Fracassi, who heads the Blockchain Initiative at the University of Texas at Austin, still thinks cryptocurrencies have a viable future.
How can I start investing in cryptocurrency?
If you’re considering buying cryptocurrencies now that prices have fallen, it’s worth remembering that there’s no guarantee the market will recover. The easiest way to get your feet wet in crypto investing is to use US dollars to buy cryptocurrency from a popular exchange like Coinbase, Binance, or FTX. Some well-known payment apps—including Venmo, PayPal, and Cash App—allow you to buy and sell cryptocurrencies, though they typically have limited functionality and higher fees.
If you use Coinbase, Binance, Venmo, or PayPal, you’ll need to provide some sensitive personal and financial information… including an official ID form. (So much for Bitcoin’s reputation for anonymous transactions.) Once your account is set up, it’s easy to transfer money from your bank. And the barrier to entry is relatively low: the minimum trade amount is $2 on Coinbase and $15 on Binance.
Also Read: Saarthi app which is an educational application launched by SEBI to provide investors with knowledge about the securities market.
Crypto is so new that Fracassi says there isn’t enough data yet to decide how much you “need” in your crypto portfolio. “We need decades of returns to understand whether a particular asset in a portfolio is good,” Fracassi said. “We know that stocks yield an average of 6% more than bonds.
That’s because we have 60 to 100 years to see the average return on stocks and bonds. ” As with all investment decisions, how well you shine in cryptocurrency will depend on your risk tolerance. However, investment professionals suggest that investors keep their exposure low, even for any area of technology. Anjali Jariwala, a certified financial planner and founder of Fit Advisors, advises clients not to allocate more than 3% of their portfolio to cryptocurrencies.
If I make money trading cryptocurrencies, do I have to pay taxes?
Yes. If you buy, sell, or exchange cryptocurrencies, the IRS wants to know. Your tax liability depends on your particular situation, but crypto investments are generally treated like other investments, including stocks and bonds.
Unless you sold it or exchanged it for another type of cryptocurrency, you don’t need to list crypto on your tax return. Purchases and property also do not need to be reported. However, if you trade or exchange cryptocurrencies, you must report any realized gains or losses, just as you would with stocks and bonds.
Adding crypto stores will not make your tax return any easier. However, popular tax software like TurboTax, CoinTracker, and Koinly now connect with wallets and exchanges to automatically track your cryptocurrency holdings, sales, and transfers.
Is there a way to learn about cryptocurrencies without investing in the currencies themselves?
Buying tokens is the easiest way to experiment with cryptocurrencies. However, there are other opportunities to explore the world of cryptocurrency while potentially protecting your money from fluctuations. Here are some alternatives: Buy shares of crypto companies. Many companies in the crypto space are publicly traded. Buying shares of Coinbase Global or PayPal Holdings instead of the currency itself allows you to benefit from the trading profits of these companies, which are partially generated by cryptocurrencies.
You can also buy shares of companies that make cryptocurrency-related hardware, such as Nvidia and AMD. Invest in crypto ETFs or derivatives. There are specialized exchange-traded funds, or ETFs, for cryptocurrencies. ETFs are baskets of securities such as stocks, commodities and bonds that track an index or sector; in this case cryptocurrency. Futures and options are also available for some crypto products, although these advanced types of investment instruments have their risks.
Get a job in cryptocurrency. LinkedIn, Indeed and Monster list thousands of crypto jobs. Whether you have a traditional finance background or a software engineer, the blockchain job market is booming. There is also Cryptocurrency Jobs, a job board dedicated to blockchain careers.
Whether you dive into the crypto waters is up to you; but remember that this is not the only place you can start your investment journey. And in addition to cryptocurrencies, there are other digital assets to consider, including NFTs. But when you shower, don’t forget to invest in a good wallet to keep your digital currency safe. Read more: Air travel to cost more in 2022: Here are smart ways to save money
Also Read: How to get the job you want