Headline: Beginner Crypto-investing
Date: 11/5/2022
Body: My buddy once wanted to buy a Ferrari. Being a non-fool, the first thing he did was educate himself on all of the models available, and decided on the model he was looking for Then, he looked for good ways to get a good deal on a Ferrari (no, he didn’t go to Italy.) He discovered a few good auction areas, but he also read that if one is willing to do a little work (He’s a gearead, so, he really looked forward to this challenge) the government will often have auctions where they sell off cars seized in criminal busts. He found a relatively local site for this, and waited until the next sale. He got the program and looked for the Ferrari he was looking for, and learned that “garage kept” was a useful attribute to look for. He found one and put a pretty strong offer on it. He won!! (Yes, I did get to ride, and placed my backpack in the storage compartment in the front, very strange.) Point is, when he was interested in making a large investment, he educated himself first, was patient, and then got precisely what he wanted. With cryptocurrency, you should probably do something similar.
Ok, the first decision is to see if you wish to invest in cryptocurrency at all.
There are advantages and disadvantages:
| Advantages of investing in cryptocurrencies. | Disadvantages of investing in cryptocurrencies. |
| Diversification—The idea here is that as some investments go up, some go down or stay the same. Diversification allows you to take advantage of more market movements, and shields you from overloading on one particular investment. | Limited regulation—The protections offered to investors who invest in cryptocurrency are very thin on the ground. It is the Wild West here. Further, when regulation might take effect is highly uncertain, as it the effect it might have on pricing. |
| Return potential—Remember, this is return POTENTIAL. And it is very high, as is the possibility that your cryptocurrency becomes worthless. | High price volatility—Prices can change A LOT, day to day, and hour to hour. If you value your sleep, you might want to consider keeping your crypto investment relatively small. |
| Additional Utility—Egad, “utility!!!” It simply means that you get something else of value too. Let’s say that Bruce Springsteen starts “Boss bucks” when you invest, you might be invited to special parties, or given advance notice of other projects. |
OK, cute story, and I too love Ferraris, but how do I do the nuts and bolts of cryptocurrency investment.
- Decide where to buy it. There are many places to buy cryptocurrency. Some make it very easy and are relatively expensive. Some offer other investments as well. So, read some good articles and decide carefully where it is best to purchase.
- Decide how you’ll pay. If a beginner, this will likely be trading a fiat currency (e.g. USD) for the cryptocurrency, but, as you diversify, you might want to trade one cryptocurrency for another.
- Add value to your account. OK, it’s time to purchase a wallet. Then you need to load it with currency.
- Select a cryptocurrency. This is a very personal decision. Perhaps you want BTC because it has the longest track record. Perhaps you want ETH because of its use within many metaverses. Perhaps you want to invest in a more speculative cryptocurrency, like Dogecoin or Cardano. The choices are nearly endless.
- Make the trade.
So, how much of my investable assets should be invested in cryptocurrency?
I have seen many answers to this question. The key attribute of crypto, to my mind, is how variable it can be day to day and even hour to hour. Given this volatility, I think it’s a conservative estimate to limit yourself to 5-10% of your investable assets.
What should I do once I decide on a dollar amount to invest?
- Get the whitepaper. Every time there is an initial coin offering (ICO) the management team will write a whitepaper explaining the attributes of this coin. You should feel totally comfortable with the identities of the management team, the purpose of the offering, and the systems used to distribute the coins. Be sure to take note of any major investors and their possible agendas.
- Make sure that your exchange supports the currency you are investing in. While you’re at it, make sure that there is indeed an active market for that currency. If it is thinly traded, perhaps you might consider a different currency.
- Be sure to understand how cryptocurrency is taxed. If you are trading, then, you will pay a capital gains tax, assuming that you make money. If you receive currency as a reward for mining or something similar, you’ll be taxed on the value at the time you received them. So the bottom line here is to keep careful records on your own. Back these up with documents from your exchange.
What if I am reticent about investing in crypto, but, I want to obtain some of the upside potential?
There are a number of options here. You could invest in an ETF which in turn invests in several cryptocurrencies. You could also invest in a company that has a large investment in cryptocurrency, like Paypal. You could also invest in a bitcoin trust. These are offered through normal retail investment firms.
The Verdict
Cryptocurrency investing is very exciting. Consider it like driving a seriously over-powered sports car. Can it be a lot more fun than driving a Toyota or Honda? Yes, it can be. As you see valuations going up and up, quickly, it can be very exciting. Can you get into much more trouble much more quickly driving that over-powered muscle car than when driving a Toyota or Honda? Yes, you can find yourself in a world of hurt where you only wake up in a hospital. This is why allocation is so important. I think that cryptocurrency investing is a bit like Brill cream. A little dab will do ‘ya.
REFERENCES
https://www.nerdwallet.com/article/investing/cryptocurrency
https://www.investopedia.com/tech/what-you-must-know-investing-crypto/
https://www.businessinsider.com/how-to-buy-cryptocurrency
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.