You’ve made the decision to learn more about cryptocurrency. A personal financial counselor might not be very useful in this more recent environment. Unless you are a client of one of the select group of forward-thinking Swiss private banks that support cryptocurrency trading, neither will your banker. Now what? This article offers helpful advice and resources on how to invest in cryptocurrencies, how to acquire, sell, store, and monitor them, as well as the applicable tax laws.
Cryptocurrency Investing: Active vs Passive
In order to compare cryptocurrency investment strategies to those of more well-established asset classes like stock investments, I find it helpful to think of cryptocurrencies as a new asset class. For instance, the advantages of passive vs. active investing are one of the most hotly debated issues in the stock investment industry. The discussion of the relative pros and hazards of the two approaches would make a good dissertation and is outside the purview of this article. But in general, passive investment is more long-term and calls for a “buy-and-hold” mindset, whereas active investing is more hands-on.
In the case of equities investment, for instance, you would have to choose between purchasing a broadly diversified fund, such as an S&P 500 index fund, and an actively managed fund where the fund management makes stock selections. As an alternative, you might actively manage the portfolio yourself by selecting and tracking your own stocks. The cryptocurrency industry uses the same strategies, but many of the products are still in the early stages of development.
Storage and Monitoring for Cryptocurrencies
Security is crucial when it comes to cryptocurrencies, which may come as no surprise. You’ve probably heard of bitcoin thefts, such the $4 billion BTC laundering incident at the Mt. Gox cryptocurrency exchange. You might have to take a chance and leave your bitcoins “on exchange,” where they are more exposed, if you engage in a lot of trading. The safer way to store cryptocurrencies, meanwhile, is “cold storage,” in which the crucial private keys—which give you ownership of the currency—are kept in some form of offline storage if you plan to hold them even slightly longer. Private keys can be written down on paper, kept on a hardware device like a Trezor or Ledger, or used with a cold storage service like Xapo or Swiss Crypto Vault (which store your BTC private keys in Swiss bunkers). You normally just send your money to the public address of your storage for either sort of storage. When you require your coins, you can transfer them to the appropriate location, such as an exchange account.
The trade-off here is between security and liquidity because retrieving your coins from more safe storage may take hours, which might feel like an eternity in the world of cryptocurrency trading (verify precise time with your cold storage provider). Therefore, deciding how much of your cryptocurrency portfolio should be stored in what kind of storage will partly depend on your trading style and how you perceive impending market changes. Still, your crypto to-do list should prioritize security and storage.
Even if you are a long-term holder, you should check your investment just like you would if you were investing in any asset class. This involves keeping tabs on pricing data on websites like coinmarketcap.com. Personally, I really enjoy the smartphone application Blockfolio, which enables you to enter your cryptocurrency portfolio and view its current worth in real time.
Social media sites like Twitter, Reddit, and Medium are essential for keeping up with the news in a field that is continuously expanding. Join the relevant Reddit boards, and on Twitter, look for relevant hashtags (such #BTC or #bitcoin for BTC or #LTC or #Litecoin for Litecoin) and follow people who frequently make informed comments on the topic. There are further websites that offer more technical information (for example, number of transactions or hash rate). These websites frequently vary depending on the particular cryptocurrency you are interested in, however for BTC, helpful websites include bitinfocharts.com and fork.
Move forward and learn
Undoubtedly, there is a lot to take in. If you invest in stocks, however, there undoubtedly was a point when you understood very little about the markets. It’s possible that you cautiously opened your first brokerage account, purchased your first mutual fund, followed by your first domestic and foreign equities, before finally moving on to options and futures.
Does it merit it? I ask because I have a bias. Although there is a steeper learning curve, you are also entering a new asset class at a young age, which may present you with possibilities that are more difficult to come by in the generally efficient world of existing asset classes. For the record, I do not suggest replacing all other asset classes with cryptocurrency; rather, I suggest that you give cryptocurrency some thought while being mindful of its risks. If you decide to invest in cryptocurrencies out of curiosity, you might want to start out small and easily. I personally began by investing a sum of money that I was willing to lose entirely in one of the reputable exchanges, purchased a small number of the popular cryptocurrencies, and soon began to determine whether this was for me. Naturally, the optimal course of action for you will depend on your unique circumstances and tastes, and it could not even involve investing in cryptocurrencies at all. Just be careful not to disregard the area and dismiss it out of hand without first conducting some independent study. Good fortune.