7 things to know about cryptocurrencies
The world has been taken over by cryptocurrency fever, and it is easy to feel as if you are the only one who hasn’t been invited to the party. Those who sit in this position should take note of a few of the most important aspects of what cryptocurrencies are and why so many people are talking so much about them.
What are cryptocurrencies?
Let us start with the very basics, as in, what are cryptocurrencies anyway? Cryptocurrencies are a digital form of money that exists only in cyberspace. They use software that contains high-level encryption and additional security measures to make it easy and safe to trade these currencies for real-world goods. You may hear people refer to individual units of cryptocurrencies as “tokens” or “coins”. This is simply a short-hand way of referring to currencies. However, these currencies are not tangible goods that you can put your hands on, but that doesn’t mean they aren’t real or that they don’t contain the value. In fact, many cryptocurrencies today are some of the best-performing assets from a return standpoint of any asset that one could possibly buy.
How does one buy cryptocurrency?
To exchange in cryptocurrency, one must first own cryptocurrency. There are a number of platforms that now make it possible to exchange your fiat currency for cryptocurrencies including:
These are just a few examples. More are popping up all the time to try to satisfy the public’s desire to trade cryptocurrencies. The first time you make a purchase, you will very likely use your native currency. However, you will find that many platforms allow you to exchange one type of cryptocurrency for another. As you learn more and acquire more cryptocurrency, you may decide that you would like to exchange one for the other.
Which cryptocurrencies are the most popular?
Nerdwallet recently provide a summary of the vast amount of cryptocurrencies currently available to purchase by saying:
More than 17,500 different cryptocurrencies are traded publicly, according to CoinMarketCap.com, a market research website. And cryptocurrencies continue to proliferate. The total value of all cryptocurrencies on Feb. 16, 2022, was about $2 trillion, having fallen substantially from an all-time high above $2.9 trillion late in 2021. If that weren’t enough to navigate, there are millions of NFTs — or nonfungible tokens — which are based on similar technology and offer ownership of content such as pictures and videos.
With that many options, how are you supposed to know which to trade? New traders can start by reviewing the top cryptocurrencies by market capitalization. Sticking within the lines and only trading currencies that have a wide acceptance and a lot of liquidity is the best way to go when you are still learning how to trade these. The choices from the top of the heap include:
If you stick with these, you may still see a lot of volatility, but perhaps not quite as much as you would with some of the lesser traded currencies.
How can you keep cryptocurrencies safe?
Are you concerned that your cryptocurrencies could be in danger from people who might want to steal them for their own financial profit? You are not being paranoid if you think about things like this. There have been a number of scandals involving the theft of cryptocurrency in recent years including a $12 million dollar heist from a New York doctorand an estimated $25 billion dollars worth of stolen crypto in accounts around the world. This is exactly why it is so important to have security measures that will absolutely work perfectly every time to keep the cryptocurrencies safe and secure where they need to be.
Some choose to keep their cryptocurrency stored on the platform where they purchased it. That is not a bad plan, but hackers sometimes go after the platforms themselves, which could cause problems. Instead, you might consider non-custodial wallets. These are wallets that don’t have an online connection to the world. Thus, they are only available to the person who is in physical possession of them. It is not as easy to move your cryptocurrencies around when storing them in noncustodial wallets, but at least you will have better control over the wallet in general.
Upsides and downsides to cryptocurrency
There are always two sides to any new creation, and this certainly includes cryptocurrencies. There is currently a passionate debate between supporters of these currencies and detractors from them about what purpose the currencies serve and if they are a net positive for mankind or not.
- Central banks are taken out of the question leaving cryptocurrencies less subject to governmental decision-making.
- They are easy to exchange between users.
- They have a high potential to gain in value, making them an intriguing investment opportunity.
- They are not guaranteed by any bank or government
- They are highly volatile
- They are so new that much is still unknown about their value
People are clamouring to make decisions about what they think about the value and utility of cryptocurrencies, but there is still a lot to learn. It is important to recognize that no matter what anyone tells you, they do not have all of the answers about how cryptocurrencies will work going forward. You have to make your own calls on this.
Ideally, you should never risk more than 10% of your portfolio on something like cryptocurrencies. They are still a very speculative market with a lot of risks. You could hit it big in cryptocurrencies, but you could just as easily lose a lot of your money. You can get a home equity loan or a vehicle equity loan, so you can get the money that you need to invest. It is not worth putting up too much of that money in the hope that it will turn into a bigger pile when you know for a fact that cryptocurrencies are so dangerous. Therefore, it is your responsibility to make sure you only put down what you can afford to lose.
Legality and taxes
There is not a requirement in the United States at this time for any place of business to accept cryptocurrencies as legal tender. They may choose to do so on their own accord, but this is not a legal requirement. That is different from the legal requirement that they have to accept the US dollar. Therefore, you should understand that what you are buying is not a currency in the legal sense. It is an investment.
Additionally, be aware of your tax liabilities when it comes to cryptocurrencies. They are taxed when you sell them, so make sure you are fully prepared for the tax burden that you will call upon yourself when you make the sale. Under current tax law in the United States they are taxed as property instead of currency, so keep that in mind when running your figures.