Cryptocurrency: 4 things you need to know before you invest in it
Since the introduction of Bitcoin in 2009, cryptocurrencies have come a long way. These days, the global crypto ownership rates are at an average of 3.9%, with more than 300 million crypto users worldwide and about 18,000 businesses accepting cryptocurrency payments. Obviously, digital currency is a hot topic. However, experts continue to caution investors about the unpredictability and volatile nature of cryptocurrencies.
If you have decided to invest in crypto, it is important to do your research and be well prepared for the risk and pitfalls ahead of you. In this post, we are exploring what you need to know before investing in crypto.
1. Crypto is taxable
Ethereum, Bitcoin, and other cryptocurrencies are taxable. The IRS considers cryptocurrency to be “property” for tax purposes, meaning your digital currency is taxed in the same way as any other assets you own, such as gold, real estate, or stocks. When you trade cryptocurrency, you have to pay tax on the difference between the selling price and purchasing price. This is called a Capital Gains Tax and has to be paid in most countries such as the USA, Canada, and the UK.
So before investing, make sure to conduct thorough research on crypto tax or even consult a tax professional if you need personalized advice so that you are well prepared. Failing to report your crypto earnings could result in large fines or even criminal prosecution.
2. There’s a risk of scams
Scams are everywhere online, and cryptocurrency is no different. You should bear in mind that cryptocurrency trading is not backed by the government, and therefore, you will be putting your money into a largely unregulated area. In 2020, over half a billion dollars in cryptocurrency was stolen in a total of 86 attacks, whereas in 2021, scammers around the world stole $14 billion in cryptocurrency.
One of the most common crypto-related frauds is when someone creates a seemingly valid new virtual currency encouraging people to invest in it. Once they have taken your money, the company will shut down and you will lose your money. One example of such a scam is Theodex, a company that scammed people out of $2 billion.
Another example of a scam is when someone impersonates a celebrity and encourages people to invest in the next big virtual currency, claiming that its value is expected to rise rapidly. The scammers will withdraw the tokens at the peak, causing the value to drop and investors will lose out.
3. It comes with an environmental cost
The most obvious environmental impact of crypto is the electricity required for the mining process. This is especially true for Bitcoin. The preprogrammed scarcity (Bitcoin was capped at 21 million units) combined with the potential high returns (one Bitcoin is worth more than $42,000) means that people are using more electricity to mine what is left. It is estimated that Bitcoin mining uses more power in one year than entire countries like Pakistan and the Netherlands.
However, certain companies have shown willingness to move towards greener blockchains. One of the most prominent examples is Ethereum, which is transitioning from PoW to a PoS system with an aim of reducing its energy consumption by 99.95%.
4. There are age restrictions
While there are technically no age restrictions for trading cryptocurrency, most reputable exchanges in the United States, like Paypal and Coinbase, require you to be at least 18 years old. Parents can also open custodial accounts for their kids where the kids will own the crypto assets, but the account will be managed by the parent.
There are also ways of purchasing cryptocurrencies that don’t require you to be 18, such as the site Purse.io which has a lower age restriction of 13 and allows you to transfer the cost of an Amazon gift card into cryptocurrency.
Final thoughts
Crypto is becoming increasingly popular and easy to trade, but it doesn’t come without risks. If you have decided to invest in cryptocurrency, be sure to do enough research. Think about what you want to accomplish with this investment and familiarize yourself with blockchain technology. This will ensure that you are fully equipped to determine whether crypto is a worthwhile opportunity for you.