As Crypto Prices Seesaw, Every New Investor Should Ask These 5 Questions


This story is part of Powerful money movesCNET’s coverage of smart money decisions for today’s changing world.

The cryptocurrency reached new highs at the end of 2021, but this year has not had the same luck. Bitcoin it fell below $20,000 for the first time since 2020 on Saturday and continued to drop to a low of $17,786 on Sunday. Although the popular cryptocurrency has since managed to recover above the $20,000 markit remains far from its November peak of more than $67,000. Bitcoin It is not the only cryptocurrency to see a recent drop, the price of Ethereum has similarly plunged this month. As such, crypto investors are navigating a whole new landscape.

What hasn’t changed is that cryptocurrency remains controversial, risky, and highly volatile. That became especially evident in May, when the the cryptocurrency market crashed by more than $200 billion in one day, spurred by the collapse of the major stablecoin TerraUSD.

Of course, ups and downs are nothing new in crypto markets, and skeptics have long characterized crypto as an empty bubble destined to burst. Critics have called bitcoin, stable coins Y NFT simply a new digital form of an old scam prepared for scam and scam. But investors see the world of digital currencies as a step forward, a kind of “Money 2.0” that will democratize finance and empower the metaverse.

In simple terms, cryptocurrency is a digital token, the ownership of which is recorded on a blockchain, a distributed software ledger that no one controls; this is designed to make it more secure, in theory. Bitcoin and Ethereum are the two most popular types of cryptocurrencies, but more than 18,000 tokens are traded under different names (doecoin is a famous example).

Despite fluctuating 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 a digital us dollar a multi-million dollar Super Bowl ads they underscore a growing desire by powerful government and corporate institutions to quickly legitimize cryptocurrencies in the same way as stocks and bonds.

But it’s worth considering whether cryptocurrency is a smart investment for you, especially in light of the current recession and the ever-present potential for a big drop (in crypto and the economy of the united statesusually).

“Cryptocurrency is one of those investment categories that doesn’t have those traditional investor protections,” said Gerri Walsh, senior vice president of investor education at the Financial Industry Regulatory Authority. “They’re outside the realm of securities trading. It’s an area that’s changing, as far as regulations go.”

Professionals warn that investors should not put more than they can afford to lose into cryptocurrencies, which offers few safeguards, many traps Y a spotty history. If you’re thinking of adding crypto to your portfolio, here are five key considerations 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 since this virtual currency is extremely volatile and driven by hype, that’s a problem. It’s easy to get caught up in tweets, TikToks, and YouTube videos promoting the latest coin, but the adrenaline rush of a surge in the market can easily wear off with a dramatic drop.

You should keep an eye on cryptocurrencies scams. A frequently used scheme is a pump and pull, in which scammers encourage people to buy a certain token, causing its value to increase. When it does, the scammers sell out, often driving down the price for everyone else. These scams are prominent and took more than $2.8 billion worth of crypto in 2021.

From the current political perspective of the US government, you are on your own. At this time, the government does not provide deposit protection for cryptocurrencies like it does for bank accounts. This can change by following Biden’s March Executive Orderwhich ordered government agencies to research the potential risks and benefits of digital assets.

As far as we know, only one company offers safe crypto: breach insurance, with a Crypto Shield offer that promises to protect your accounts from hacks. Other companies, like Coincover, provide theft protection, which alerts you if there is suspicious activity on your account. Coincover maintains an insurance-backed guarantee that if its technology fails, it will return the amount you are eligible for, depending on the level of protection offered by the wallet you use. (Neither Coincover nor Breach Insurance will cover you against scams.)

Despite all the hype, scams, periodic crashes and persistent risks in this market, Cesare Fracassi, who runs the blockchain initiative at the University of Texas, Austin, still believes that cryptocurrencies have a viable future.

“I think cryptocurrencies have a possible solution to some of the problems in the traditional financial sector,” Fracassi said. “The current traditional financial system is not inclusive, it is slow and expensive, and the incumbents, including the big banks and financial institutions, basically have a lot of control. I think that cryptocurrencies are a means through which the system can be broken.”

How do I start investing in cryptocurrencies?

If you are considering buying crypto now, as prices have dropped, it is worth noting that there is no guarantee that the market will recover. But the easiest way to get your feet wet with crypto investments is to use US dollars to buy a cryptocurrency using a popular exchange like base of coins, Binance either FTX. A handful of popular paid apps, including Venmo app, PayPal and cash — will allow you to buy and sell cryptocurrencies, though they generally have limited functionality and higher fees.

Whether you’re using Coinbase, Binance, Venmo, or PayPal, you’ll be asked to provide certain sensitive personal and financial information, including an official form of identification. (Both for bitcoin’s reputation for anonymous transactions.)

Once your account is set up, it’s simple to transfer money from your bank. And the barrier to entry is quite low: the minimum trade amount is $2 on Coinbase and $15 on Binance.

read more: Best Bitcoin and Crypto Wallets for 2022

What percentage of my portfolio should be in cryptocurrencies?

Cryptocurrencies are so new that there isn’t yet enough data to decide how much of your portfolio “should” be in crypto, according to Fracassi.

“We need decades of returns to understand if a specific asset is good in a portfolio,” Fracassi said. “We know that, on average, stocks return 6% more than bonds. That’s because we’ve had 60 to 100 years to see average returns on stocks and bonds.”

Like all investment decisions, the amount you invest in cryptocurrencies will depend on your tolerance for risk. But investment professionals suggest that investors keep their exposure low, even for those who are fully into the technology. Anjali Jariwala, certified financial planner and founder of fit consultantsrecommends that clients allocate no more than 3% of their portfolio to crypto.

If I make money trading cryptocurrencies, do I have to pay taxes?

Yes. Whether you’re buying, selling, or trading cryptocurrency, the IRS wants to know. Their fiscal responsibility It depends on your particular situation, but cryptocurrency investments are treated broadly like other investments, including stocks and bonds.

You do not need to report cryptocurrency on your tax return if you did not sell or exchange it for another type of cryptocurrency. It is also not necessary to report on the purchase and possession. However, if you sold or traded crypto, you will need to report any realized gains or losses, just as you would with stocks and bonds.

Adding crypto transactions will not make your tax return any easier. But popular tax software I like it TurboTax, Coin Tracking Y 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 coins themselves?

Buying tokens is the easiest approach to experimenting with cryptocurrencies. But there are other opportunities to explore the world of cryptocurrencies while potentially protecting your money from the swings.

Here are a handful of alternatives:

Buy shares of crypto companies. Many companies in the crypto space are publicly traded. Buy Coinbase Global stock or PayPal Holdings instead of the currency itself, it allows you to benefit from the trading income of these companies, which is partly generated by crypto. You can also buy shares of companies that make crypto-related hardware, such as Nvidia and AMD.

Invest in crypto ETFs or derivatives. Specialized ETFs, or ETFs, are available for cryptocurrencies. ETFs are baskets of securities, such as stocks, commodities, and bonds, that track an index or sector, in this case, crypto. Futures and options are also available for some crypto products, although these advanced types of investment vehicles come with risks.

Get a job in crypto. LinkedIn, Indeed, and Monster list thousands of jobs in crypto. Whether you have a background in traditional finance or are a software engineer, there is a boom in the blockchain job market. There’s also cryptocurrency jobsa job board dedicated to blockchain careers.

Whether you dive into crypto waters is ultimately up to you, but keep in mind that it’s not the only place to start your investment journey. And beyond cryptocurrencies, there are also other digital assets to consider, including NFT. But if you decide to take the plunge, be sure to invest in one. good wallet to keep your digital currency safe.

read more: Air travel is more expensive in 2022: here are smart ways to save money when you fly

The editorial content on this page is based solely on objective and independent evaluations of our writers and is not influenced by advertising or associations. It has not been provided or commissioned by any third party. However, we may receive compensation when you click on links to products or services offered by our partners.