Cryptocurrency investing offers many options to get in on the exciting digital currency explosion sweeping the planet. These cryptocurrencies offer security, convenience, and growth potential in other areas. However, there are also many problems to look for, such as the risks involved.
IS CRYPTOCURRENCY INVESTING STILL A THING? 11 THINGS TO KNOW
- Over 2,500 Cryptocurrencies Valued at Over $120 Billion
- Top 5 Cryptocurrencies Equivalent to over 80% of Market
- Bitcoin Highest Value $19,780 on December 17, 2017
- Bitcoin Highest 2018 Value: $17,000
- Bitcoin Lowest 2018 Value: $3,700
- Bitcoin Current Value $8,200 as of May 15, 2019
- Total Number of Bitcoins at Max Supply: 21 Million
- Total Lost or Stolen Bitcoins: 6 Million
- Taxed as Property
- Subject to Capital Gains Taxes
- Can Claim Cryptocurrency Losses on Taxes
What are Cryptocurrencies?
Cryptocurrencies have been garnishing attention in recent years as an alternative to traditional currency options. Basically, these currencies use cryptography or coding and encryption to allow for transactions independent of a centralized authority. Digital currencies that use blockchain technology allow peers to validate transactions in a unique way.
These currencies include digital money, such as Bitcoin, which is the most well-known and valuable of the cryptocurrencies. Bitcoin uses a blockchain method which is like a public ledger of transactions. Miners can verify transactions and add blocks to the chain in order to create bitcoins.
One major benefit of cryptocurrencies is that they can offer anonymity to buyers and sellers. Digital currencies also offer a convenient worldwide payment system and ease of use but suffer from some drawbacks. Cryptocurrencies are not widely accepted as a payment method and raise taxation issues. There are also many different digital currency options to choose from, many with low values. Bitcoin has seen spectacular growth since inception but also has faced serious drops in value since its peak at the end of 2017. It is this growth which spawned the cryptocurrency market.
Cryptocurrency Investing is Alive and Well
Cryptocurrency investing has grown into a large crypto market equivalent to $120 billion in U.S. dollars. There are currently over 2,500 cryptocurrencies, though the majority of the market is comprised of these top five:
Combined, the above 5 digital currencies account for 83% of the market and a total value of roughly $89 billion. The majority is made up of Bitcoin with a $67 million value for 31.4% of the market. Clearly, there is money to be made investing in digital currency and blockchain startups are being created rapidly.
The Bitcoin price rose sharply to $19,780 on December 17, 2017. Trading cryptocurrencies became very popular during this time. Since then, the price has dropped sharply. The beginning of 2018 saw Bitcoin drop to $16,665 before falling to under $4,000 later that year. As of March 01, 2019, Bitcoin is trading around $3,800–far below its peak of almost $20,000. The explosion of growth in the cryptocurrency market highlights the value that is being placed on this technology.
Blockchain and other cryptocurrency features have a wide variety of applications in which many are investing. For example, some are looking to adapt blockchain technology to the medical field. Managing patient records in a secure but convenient fashion is a major concern for healthcare companies. The success of cryptocurrency is paving the way for broader applications of this technology into other areas of our daily lives.
Cryptocurrencies are secure and private in most cases, which give buyers and sellers some freedom from oversight. These digital assets also offer the possibility of low fees and decentralized currency, separate from a bank or government interference. As an investment choice, Bitcoin and Ethereum, and other cryptocurrencies, are considered property by the Internal Revenue Service (IRS). This means that gains or losses are considered capital gains or losses. In order to benefit from favorable taxation, property must be held for a certain time period (one to two years, depending on the investment) before qualifying for the long-term capital gains rates. These can range from 0% to 20% tax, depending on income.
Short-term capital gains are taxed as ordinary income, which can be much higher. Ordinary tax brackets from the 2019 tax year are 10%, 12%, 22%, 24%, 35% and 37%. Depending on your income, it may be more beneficial to hold onto your cryptocurrency. However, if you receive cryptocurrency as a payment, you may have to pay income tax and self-employment taxes. To make matters more complicated, some cryptocurrencies allow the sale of fractions of the basic units, such as a Bitcoin. To ensure proper taxation, investors will want to record the prices at purchase and sale of a cryptocurrency.
Unfortunately, the worth of Bitcoin and blockchain currencies have dropped in value. Bitcoin’s drastic decline from almost $20,000 to under $4,000 in a year caused many to incur losses. A positive outcome of this situation is that cryptocurrency losses can be claimed as capital gain losses. This means the losses can be applied to offset other capital gains during tax season. If there is a net capital loss for the year, excess losses can be applied to other sources of income up to $3,000. Any amounts over this may be rolled forward to future years.
The startling growth and volatile nature of cryptocurrency have created a large market that is rather risky. However, depending on your unique investing goals and risk tolerance, this may be an investment you want to consider. Check out this article to compare cryptocurrency to the stock market volatility. You may also be interested in “mining” a cryptocurrency, which is the process of creating a unit of that currency such as a Bitcoin. This takes computing power to calculate and verify transactions.
Cryptocurrency Investing is Dead
Before filling your virtual wallet with digital assets or buying stocks in a blockchain company, consider the following arguments. Cryptocurrencies have had a great deal of trouble in recent years. The price of Bitcoin fell almost $17,000 in value per coin. That’s a drop from a $415 billion bull market to a $74 billion bear market over a few short months. Those that choose to invest in Bitcoin during that time lost money. This sort of volatility is an example of why investing in cryptocurrency is so risky. There are no centralized actors to stabilize the value or who can print more money.
Some cryptocurrency, like Bitcoin, have a limited number of units available to be mined. This means there are 21 million Bitcoins available unless the process used to verify these coins is altered drastically. Some people believe the scarcity factor will moon Bitcoin or cause Bitcoin to soar in price. Other cryptocurrencies offer more options due to different methods of utilizing blockchain or similar technology. The rapid increase of different cryptocurrencies has flooded the market with a variety of options. However, not all of these blockchain companies are going to last. A challenge virtual currency will face is obtaining market acceptance around the world. Many vendors and retail locations do not have the capabilities or interest in using cryptocurrency or integrating them as a payment option yet. While Bitcoin leads the market in acceptance, there are major issues that are raised by these currencies.
Mining these cryptocurrencies takes computation equipment and a great deal of power which produces a lot of heat. Miners can take advantage of economies of scale to increase production or productivity. This means it may become harder to get in on the mining side of cryptocurrency. The rapidly changing price of these currencies is leading to increased risk for investors. Do you have the money to lose? Some investors are even setting up retirement accounts to buy cryptocurrency and take advantage of special rules to limit taxes on these investments. Be sure to carefully consider all of the fees that you will face including account management fees, holding fees, transaction fees, and so on.
A problem with the anonymity that cryptocurrency provides is that terrorists and hate groups can use them as funding sources worldwide to avoid tracking or frozen accounts. Cryptocurrencies can also be used to launder money or for other illegal activities. In fact, some countries are banning cryptocurrencies!
Another major problem with cryptocurrency is that the security inherent to the process also leads to lost digital currency which may not be recoverable. Bitcoin blockchain is limited to 21 million coins, but leading estimates point out that almost 6 million of these coins are lost and or stolen. At today’s prices, that is the equivalent of almost $21 billion that cannot be recovered. Bitcoins have been stolen from a variety of exchanges. They have also been hacked from user “wallets,” which are digital ways to hold cryptocurrency and other assets.
One method to prevent online theft is to download the access code to a hard drive or USB “wallet.” However, these have been lost or stolen, as well. Some users report horror stories, such as overwriting a USB that held their code with something else. There have been a slew of cryptocurrency exchanges which have been closed or disappeared after their cryptocurrency was hacked or lost. This is why it is important to choose a cryptocurrency exchange that is reputable as well as one that has stood the test of time through the rollercoaster of value. Instead of investing in Bitcoin, there are reasons to invest in other options. The recent drop in value highlights a decline of investor willingness to value these crypto assets highly as well as changes in their investment strategies. Leading currencies like Bitcoin may have a higher chance of being accepted in more locations. Choose your investment carefully since some of these currencies, especially the low-value options, may not last.
Things to Know about Cryptocurrency Investing
Investing in cryptocurrency or blockchain projects can offer exciting growth opportunities, but also intense risk. The total market is very large, with over 2,500 cryptocurrencies worth around $120 billion. Many people have made fortunes investing in this market, but others have lost a great deal of money.
Cryptocurrency offers convenient, worldwide currency with anonymity and security. Benefits include the future possibilities of blockchain technology, as well as tax benefits of smart investing practices. On the other hand, keeping track of each cryptocurrency sale, the basis you paid, the value at which it sold, and the subsequent tax implication can be intensive. Digital cash held for more than a year can be taxed as long-term capital gains rates which are generally lower than short-term rates which are taxed as ordinary income. You can even sell cryptocurrency at a loss in order to offset capital gains or even other income in some cases. If you want to buy Bitcoin, make sure you are using an exchange that has a proven track record and experience selling virtual currency.
There is also the possibility of terrorists and criminals using the currency for illegal activities. Even more frightening are the many cases where hackers or thieves have stolen the digital codes or key which identify the owner of a cryptocurrency. While some methods allow crypto investors to recover codes, some are lost forever. Security and ease of access are concerns that every cryptocurrency will face. These currencies are unsecured and do not have a centralized authority regulating their value. Buying Bitcoin has its risks. You have to decide if the risk is worth the reward or if a more traditional investment option would be better.