Crypto Winter: Is It Worth Investing in a Cold Market?

This story is part Energy money movesCNET’s coverage of smart money decisions for today’s changing world.

From bullish highs in 2021 to bearish lows in 2022, the cryptocurrency is now at a bear market, and investors are calling it another “crypto winter.” The $2 trillion cryptocurrency market crash wiped out investor gains, cost thousands of people thousands of jobs, and destroyed once-basic digital currencies, including the luna cryptocurrency token — which lost all its value after the crash. stable currency The collapse of earthUSD in May. In this economy, is it still worth diving into cryptographic waters?

Ups and downs are nothing new in cryptocurrency markets, and skeptics have long characterized cryptocurrencies as an empty bubble destined to burst. The critics called bitcoin, stable coins and NFTs simply a new digital version of an old cheater set to cheat. But investors see the world of digital coinage as a step forward, a kind of “Money 2.0” that will democratize finance and fuel the metaverse. Amid the fluctuating prices and fluctuating sentiments, one thing has not changed: cryptocurrency remains controversial, risky and extremely volatile.

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In simple terms, cryptocurrency is a digital token whose ownership is recorded on a blockchain, a distributed software ledger that no one controls. This was designed to make it more secure, in theory. Bitcoin and Ethereum are the two best-known cryptocurrencies, but over 18,000 tokens are traded under different names (dogecoin is a famous example).

Despite price fluctuations and a relative lack of regulation, cryptocurrency is seen by many as the next financial frontier. Developments such as President Joe Biden’s desire to explore a digital american dollar for Super Bowl multimillion ads underscore a growing desire by powerful government and corporate institutions to quickly legitimize cryptocurrencies in the same way as stocks and bonds.

But it’s worth considering whether cryptocurrency is a smart investment for you… the US economygenerally).

“Cryptocurrency is one of those investment categories that doesn’t have these traditional protections for investors,” 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 warn that investors should not invest more than they can afford to lose in cryptocurrencies, which offers few safeguards, many traps and an uneven history. If you’re considering adding cryptocurrencies to your portfolio, here are five important questions to consider before getting started.

What are the risks of investing in cryptocurrencies?

Before investing in cryptocurrencies, you should know that there is almost no protection for cryptocurrency investors. And since this virtual currency is extremely volatile and driven by hype, this is a problem. It’s easy to get caught up in tweets, TikToks and YouTube videos touting the latest coin – but the adrenaline of a market spike can easily be washed away with a dramatic drop.

You should be aware of cryptocurrencies blows. A commonly used scheme is a pump and dispose, where scammers encourage people to buy a certain token, causing its value to go up. When this happens, scammers sell, often pushing the price down for everyone else. These scams are prominent and raised over $2.8 billion worth of cryptocurrencies in 2021.

From the current political perspective of the US government, you are alone. At this time, the government does not offer deposit protection for cryptocurrencies as it does for bank accounts. That could change after Biden’s executive order in March, which directed government agencies to investigate the potential risks and benefits of digital assets.

As far as we know, only one company offers encryption insurance: Breach Insurance, with a Crypto Shield offer that promises to cover your accounts against hacks. Other companies, like Coincover, provide theft protection, which alerts you if there is suspicious activity on your account. Coincover maintains an insurance-backed guarantee that if your technology fails, it will pay you back up to the amount you are eligible for, which depends on the level of protection that the wallet you use offers. (Neither Coincover nor Breach Insurance will cover you against scams.)

Despite all the hype, scams, periodic dips (and lingering risks) in this market, Cesare Fracassi, who runs the Blockchain Initiative at the University of Texas, Austin, still thinks cryptocurrency has a viable future.

“I think cryptocurrency has a possible solution to some of the problems of the traditional financial sector,” Fracassi said. “The current traditional financial system is not inclusive, it’s slow and expensive and holders, including big banks and financial institutions, basically have a lot of control. I think cryptocurrency is a means by which you can really break the system.”

How to start investing in cryptocurrencies?

If you are considering buying crypto now, as prices have dropped, it is worth noting that there is no guarantee that the market will recover. But the simplest way to start investing in cryptocurrencies is to use US dollars to buy a cryptocurrency using a popular exchange like Coinbase, Binance or FTX. A handful of popular payment apps – including Venmo, PayPal and Cash App – will allow you to buy and sell cryptocurrencies, although they usually have limited functionality and higher fees.

Whether you’re using Coinbase, Binance, Venmo or PayPal, you’ll need to provide some sensitive personal and financial information… including an official form of identification. (So ​​much for bitcoin reputation for anonymous transactions.)

Once your account is set up, it’s simple to transfer money from your bank to it. And the entry barrier is quite low: the minimum trade amount is $2 on Coinbase and $15 on Binance.

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What percentage of my portfolio should be in cryptocurrencies?

Cryptocurrency is so new that there is still not enough data to decide how much of your portfolio “should” be in cryptocurrency, according to Fracassi.

“We need decades of returns 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 for stocks and bonds.”

Like all investment decisions, how much you invest in cryptocurrencies will depend on your risk tolerance. But investment professionals suggest investors keep their exposure low, even for those who are fully familiar with 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 cryptocurrencies.

If I make money trading cryptocurrencies, do I have to pay taxes?

Yup. Whether you’re buying, selling, or exchanging cryptocurrencies, the IRS wants to know about it. Your fiscal responsibility It depends on your particular situation, but cryptocurrency investments are largely treated like other investments, including stocks and bonds.

You do not need to report the cryptocurrency on your tax return if you have not sold it or exchanged it for another type of cryptocurrency. Purchase and retention also do not need to be reported. However, if you have sold or traded cryptocurrencies, you will need to report any realized gains or losses, just as you would for stocks and bonds.

Adding cryptocurrency trades will not make your tax return any easier. But popular tax software like TurboTax, Coin Tracker and Koinly now connect to wallets and exchanges to automatically track your cryptocurrency holdings, sales and transfers.

Is there a way to learn about cryptocurrencies without investing in the coins themselves?

Buying tokens is the most straightforward approach to trying out cryptocurrencies. But there are other opportunities to explore the world of cryptocurrencies and at the same time protect your money from fluctuations.

Here are some alternatives:

Buy shares of crypto companies. Many companies in the crypto space are publicly traded. Buy Coinbase Global shares or PayPal Shares rather than the currency itself, it allows you to benefit from these companies’ trading revenues, which are in part generated by cryptocurrencies. You can also buy shares in companies that make crypto-related hardware, such as Nvidia and AMD.

Invest in Cryptocurrency ETFs or Derivatives. Specialized exchange-traded funds, or ETFs, are available for cryptocurrencies. ETFs are baskets of securities, such as stocks, commodities, and bonds, that follow an index or sector, in this case, crypto. Futures and options are also available for some crypto products, although these advanced types of investment vehicles come with their risks.

Get a job in cryptography. LinkedIn, Indeed and Monster list thousands of cryptocurrency jobs. If you have a traditional financial background or are a software engineer, there is a boom in the blockchain job market. There is also Cryptocurrency Jobs, a job board dedicated to blockchain careers.

Whether you will dive into cryptographic waters is up to you, but remember that it is not the only place to start your investment journey. And in addition to cryptocurrency, there are other digital assets to consider as well, including NFTs. But if you take the risk, make sure you invest in a good wallet to keep your digital currency safe.

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