Bitcoin
teetered above and below $20,000 this week. If you're thinking about investing,
here's what to know first.
Cryptocurrency hit new highs in late 2021, but this year
hasn't had the same luck. Bitcoin dipped
below $20,000 for the first time since 2020 on Saturday, and continued to drop
to a low of $17,786 Sunday. Although the popular cryptocurrency has since
managed to rebound above the
$20,000 mark, it remains far from its November
peak of more than $67,000. Bitcoin isn't
the only cryptocurrency to experience a recent dip, the price of ethereum has
similarly torpedoed this month. As such, crypto investors are navigating a
whole new landscape.
What hasn't changed is that cryptocurrency remains
controversial, risky and wildly volatile. That was made especially evident in
May, when the crypto market
plummeted by more than $200 billion in one
day, spurred by the collapse of
the important stablecoin TerraUSD.
Highs and lows
are nothing new in the crypto markets, and skeptics have long been
characterizing crypto as an empty bubble destined to burst. Critics have
called bitcoin, stablecoins and NFTs simply
a new, digital form of an old con primed to swindle and scam. But investors see the world of digital
coinage as a step forward -- a kind of "Money 2.0" that will
democratize finance and power the
metaverse.
In simple terms,
cryptocurrency is a digital token, 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 widely known flavors of crypto, but more than 18,000 tokens are traded
under different names (dogecoin is
one famous example).
Despite seesawing
prices and a relative lack of
regulation, cryptocurrency is seen by many as the next financial
frontier. Developments like President Joe Biden's desire to explore a digital US
dollar to multimillion-dollar
Super Bowl ads underscore a growing desire from powerful
government and corporate institutions to quickly legitimize crypto in much 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 downturn and the ever-present potential for a major
crash (in crypto and the US
economy, generally).
"Cryptocurrency
is one of those categories of investing 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 in flux, as far as regulations
go."
Professionals
caution that investors shouldn't put more than they can afford to lose into
crypto, which offers few
safeguards, plenty of
pitfalls and a spotty
track record. If you're thinking about adding crypto to your
portfolio, here are five key considerations before you begin.
What are the
risks of investing in crypto?
Before investing in crypto, you should know there's almost
no protection for crypto 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 touting the latest coin -- but
the adrenaline rush of a market spike can easily be washed away with a dramatic
crash.
You should be on the lookout for crypto scams.
One often-used scheme is a pump and dump,
in which scammers encourage people to buy a certain token, causing its value to
rise. When it does, the scammers sell out, often pushing the price down for
everyone else. These scams are prominent, and they took in more than $2.8 billion in crypto in
2021.
From the US government's current policy perspective, you're
on your own. At this time, the government provides no deposit protection for
crypto as it does for bank accounts. This may change following Biden's March executive order,
which directed government agencies to investigate the
risks and potential benefits of digital assets.
So far as we can tell, only one company offers crypto insurance: Breach Insurance,
with a Crypto Shield offering that promises to cover your accounts from hacks.
Other companies, such as Coincover, provide theft protection, which alerts you
if there's suspicious activity on your account. Coincover maintains an
insurance-backed guarantee that if its technology fails, it will pay you back
up to the amount you're eligible for, which depends on the level of protection
the wallet you use offers. (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 thinks crypto has a viable future.
"I think crypto holds a possible solution to some of
the problems of the traditional financial sector," Fracassi said.
"The current, traditional financial system is noninclusive, it's slow and
expensive and incumbents, including large banks and financial institutions,
basically have a lot of control. I think crypto is a venue through which you
can actually break the system."
How do I
start investing in cryptocurrency?
If you're considering buying crypto now, as prices have
dipped, it's worth noting that there's no guarantee the market will recover.
But the simplest way to get your feet wet with crypto investments is to use US
dollars to buy a cryptocurrency using a popular exchange like Coinbase, Binance or FTX.
A handful of well-known payment apps -- including Venmo, PayPal
and Cash App -- will let you buy and sell
cryptocurrency, though they generally have limited functionality and higher
fees.
Whether you're using Coinbase, Binance, Venmo or PayPal,
you'll be required to provide some sensitive personal and financial information
-- including an official form of identification. (So much for bitcoin's
reputation for anonymous transactions.)
Once your account is set up, it's simple to transfer money
into it from your bank. And the barrier to entry is quite low: The minimum
trade amount is $2 on Coinbase and $15 on Binance.
What
percentage of my portfolio should be in crypto?
Crypto is so new, there isn't enough data yet to decide how
much of your portfolio "should" be in cryptocurrency, according to
Fracassi.
"We need decades of returns in order to understand
whether a specific asset is good in a portfolio," Fracassi said. "We
know that on average stocks return about 6% more than bonds. That's because we've
had 60 to 100 years to see the average returns on stocks and bonds."
Like all investment decisions, how much you pour into
crypto will depend on your risk tolerance. But investment professionals suggest
that investors keep their exposure low -- even for those who are all-in on the
technology. Anjali Jariwala, a certified financial planner and founder of Fit Advisors, recommends
that clients allocate no more than 3% of their portfolio to crypto.
If I make
money on crypto trades, do I have to pay taxes?
Yes. Whether you're buying, selling or exchanging crypto,
the IRS wants to know about it. Your tax liability depends
on your particular situation, but crypto investments are broadly treated like
other investments, including stocks and bonds.
You don't need to report crypto on your tax return if you
didn't sell or exchange it for another type of crypto. Buying and holding also
doesn't need to be reported. If you did sell or exchange crypto, though, you'll
need to report any gains or losses realized, just like you would for stocks and
bonds.
Adding crypto trades won't make your tax return any easier.
But 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 crypto without investing in the currencies themselves?
Buying tokens is the most straightforward approach to
experimenting with cryptocurrencies. But other opportunities exist for
exploring the crypto world while potentially protecting your money from
seesawing swings.
Source: CNET