1 year ago
97 6 Ways to Start Investing in Crypto
What is cryptocurrency?
Cryptocurrency is a form of digital currency and is based on a decentralized network backed by blockchain technology. They don’t have a regulated central authority, and where most of the appeal lies as there is no government intervention. However, financial services have vastly evolved since the inception of the first cryptocurrency, Bitcoin, and now there are numerous governments, institutions and corporations that are beginning to comprehend the advantages of using blockchain technology and cryptocurrency. It is a peer-to-peer payment system that does not require a third-party intermediary. Payments are secured via cryptography, which means payments can not be duplicated or be open to counterfeiting.
The first cryptocurrency to launch was Bitcoin in 2008, and it remains the most popular and influential crypto. The first crypto was outlined in a whitepaper written by Satoshi Nakamoto. In this whitepaper, the premise of Bitcoin is described as ‘an electronic payment system based on cryptographic proof instead of trust.’ Bitcoin’s cryptography ensures absolute transparency as each transaction is approved, verified and recorded on the blockchain.
Since then, other digital currencies have emerged, such as Ethereum, to provide an alternative form of payment to fiat currencies.
If we look at market capitalisation, the four top cryptocurrencies include Bitcoin, Ethereum, Tether and USD Coin. Other cryptocurrencies are also popular and have additional features than just allowing users to transfer money.
Why invest in cryptocurrency
There are plenty of strategies for investing in a cryptocurrency such as Bitcoin, the most common one is to buy and hold the asset. Alternatively, trading cryptocurrencies is another way of taking advantage of the market’s volatility.
Cryptocurrency has massively expanded, and we have seen remarkable growth that is only set to continue. Currently, we have initial coin offerings, but investors have also turned to blockchain-backed investment products such as Non-Fungible Tokens (NFTs) and Defi applications. There are many reasons why there has been a vast increase in people wanting to invest in the digital currency market.
The benefit of investing in an asset with a long term store of value is one of the main reasons investors have turned to cryptocurrency. Fiat currencies are always subject to external factors such as inflation due to interference from government bodies. Therefore the value of certain currencies can drastically weaken due to these intermediary bodies. There is also a limited supply of cryptocurrency circulating, making it near impossible for third party interference to affect its value. Furthermore, there has also been the issue of tax on cryptos. Government bodies can’t tax tokens or confiscate them without permission from the owner, and this is because of cryptography securing the token.
For investors who are cautious about bank collapses and financial events that can cause fiat currencies to plummet, cryptocurrency has become the more attractive option. As the pandemic hit, the term ‘digital gold’ was coined for Bitcoin as speculators noticed that the value of Bitcoin wasn’t dropping even though economies worldwide were collapsing due to the Covid-19 pandemic. Investors started flocking to Bitcoin during market turbulence. As a result, we saw Bitcoin’s price skyrocket to an incredible all-time high in November 2021, as it reached the $68k mark after starting the year just under the $30k mark.
However, investors could also lose money if Bitcoin’s value dropped due to financial events. The volatility in the markets doesn’t make the cryptocurrency that stable. For that reason, some investors prefer to put their money in stablecoins. Stablecoins are assets that are pegged against fiat currencies.
Another key reason investors turn to cryptocurrency is the technology underpinning it. Blockchain technology has been recognised as a technology that completely transforms and revolutionises specific industries such as healthcare, finance and even shipping. This makes investors want to add cryptocurrency to their investment portfolios. They don’t want to miss out on the untapped potential of blockchain and receive high returns when blockchain technology is used more frequently worldwide.
Will I have to pay any taxes when investing in cryptocurrency?
Tax is another essential factor to consider before investing in cryptocurrency. Most countries will subject cryptocurrency investments to a Capital Gains Tax or Income Tax. Why? Well, you can mine cryptocurrency. The asset can also be bought and sold. Some people and businesses even accept crypto as a form of payment, making it like any other taxed asset.
However, there are a few crypto tax havens as well. Here is a quick breakdown of crypto taxes depending on where you are located.
The United Kingdom
Cryptocurrency is treated as a capital asset in the UK and therefore is subject to Capital Gains Tax. This is based on selling tokens for money, exchanging on a token-for-token basis, using tokens to pay for any goods or services, and gifting tokens. The current tax rate is 20% for higher-income taxpayers and 10% for basic taxpayers. However, there is also a tax-free threshold where you will not need to pay any Capital Gains Tax for returns of up to £12,300.
The United States
The Internal Revenue Service (IRS) has classed the buying and selling of crypto as property and views cryptocurrency as an investment, not a currency asset. The Notice 2014-21 published by the IRS addresses how existing tax principles should apply to digital currency transactions. The notice states, “Internal Revenue Service is aware that virtual currency may be used to pay for goods and services or held for investment. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account or a store of value”.
Australia
Like the US, Australia defines crypto as an asset. Therefore, it is subject to Capital Gains Tax when the cryptocurrency is disposed of by means such as selling tokens for money, exchanging on a token-for-token basis, using tokens to pay for any goods or services, and gifting tokens.
You will need to consider your objectives, financial situation and needs and obtain any appropriate independent financial and/or taxation advice you deem necessary before deciding that CFDs are suitable for you and before opening a Trading Account.
Options for investing in crypto
There are primarily two options when it comes to trading crypto. One is to trade crypto derivatives by speculating on their price. Trading derivatives essentially means you agree to exchange the difference of the asset from when you first open the position to when you close the position. If, for example, you go long and the price of the crypto increases in value, you will then make a profit. If it instead decreases in value, then you will make a loss.
Read more about how you can trade derivatives with Eightcap here.
The second option is to buy cryptocurrencies via an exchange. You will buy the cryptocurrency outright and hold it in a digital wallet. If the digital currency increases in value, then you will be in profit. Similarly, if the cryptocurrency decreases in value, then you will be at a loss.
More about IRAs (Crypto Individual Retirement Accounts)
Individual Retirement Accounts (IRAs) are used by many to provide a stable future form of financial security. With market volatility rapidly increasing, investors have started to look at alternative ways of diversifying their IRAs. This includes exploring different assets such as cryptocurrency.
Before choosing a cryptocurrency IRA it is important to consider the security, expertise and experience of the management looking after your IRA, fees and more.
An example would be a Bitcoin IRA which is a self-directed IRA. This means that it can include several different assets that usually wouldn’t be allowed in a standard IRA. Even though a custodian or trustee sets up this account, it would be managed entirely by the account holder; therefore, it is self-directed. It is important to note that you fully understand the alternative assets you can add to your account when opting for a self-directed IRA.
Crypto Health Savings Accounts (HSAs)
The intention of opening a standard health savings account is that you grow your wealth over time, but there are stipulations in place with this tax-advantaged account. For instance, you will need to have been enrolled on a high-deductible health plan. Also, in Australia, you can’t be signed up for medicare and contribute to an HSA at the same time. If you want to add cryptocurrency to your HSA, you will need to find a custodian who offers that. Standard HSAs will only be limited to stocks and funds for investment options, but you can diversify through a self-directed HSA. To add cryptocurrency to your HSA, you will need to set up a trading account that is purely owned by your HSA, and it is essential to note that this trading account will differ from any other trading accounts you may own.
How to begin investing in crypto?
If you are interested in trading crypto derivatives, you can do so with Eightcap. We also offer a demo account, where you can practise opening positions on the cryptocurrency market with virtual funds. Gain exposure to over 300 crypto derivatives from altcoins to crypto indices.
By trading cryptocurrency CFDs, you are trading on the movements of the underlying asset, meaning you can go both buy and sell the asset depending on whether you think its value will increase or decrease.
Learn more about trading CFDs over on our Education Hub, where we cover everything from trading strategies to how to read a price chart. You can also subscribe to Eightcap’s Week Ahead Newsletter for more trading insights.
