Cracking into cryptocurrencies – what you need to know
(with thanks to Chartered Accountants Ireland)
Recent reports have made Bitcoin and other cryptocurrencies sound like the holy grail of investments, even if risky. We explain what it takes to get into investing in this new digital gold, and how to prepare yourself for the highs and lows.
Entrepreneur and life coach Tony Robbins says investing in cryptocurrencies (digital currencies operating independently of a central bank) is like going to Vegas: it’s fun but you are likely to lose. Cryptocurrency values are not based on the same economic drivers as traditional investing, so one needs to be careful. Do not assume you can translate your stock trading experience into trading in cryptocurrencies.
There are thousands of cryptocurrencies, but rather than refer to the blockchain technology which underpins a particular cryptocurrency, I am going to be referring to currencies like Bitcoin, Litecoin, Ripple and Ethereum.
Why would people invest in cryptocurrency? Anonymity was the initial driver which invited vice into the arena. Others felt they could avoid taxes on capital gains. Idealists pointed to the universal access of cryptocurrencies, providing banking for the unbanked. Cryptocurrencies can and do protect against fraud, and there are huge efficiencies with shoppers buying across distances with a single currency. However, uninsured billions have been stolen, and more billions have been lost by people forgetting the password to their crypto wallet. Before you start, though, there are some things you need to know about investing in cryptocurrencies for the first time.
As with most investments, knowing whether cryptocurrency is a good investment or not depends on your outlook on the growth potential of that cryptocurrency. Past growth is no indicator of future performance when it comes to an investment like this, and you should be prepared to lose 50% or more on day one.
As with all new investments, it is important to invest only a small amount (3% is about the maximum) of your portfolio in cryptocurrency if you want to dip your toe in. Just because an investment seems more solid than others does not mean you should invest more.
Do your homework
Research your coin yourself – don’t believe the hype on blogs and forums. The management team behind a coin does not indicate the security of your investment. Get advice from others who have invested in the type of coin you are interested in and what their experience has been like.
While cryptocurrency exchanges, like Coinbase, Changelly, Binance, CEX.io, Kraken or Geminii, will transform your euro into your cryptocurrency of choice for trading, watch out for high fees, deposit ceilings, speed (slow banking or bitcoin processing) and integrity (support and regulation). For safety, always deal with at least two backup coin exchanges in case there are issues with one and, of course, always pay your taxes.
Don’t chase the peak
Just like in Vegas, only put in what you can afford to lose. Less profit is always better than a big loss, so never chase the peak of your coin. Be sure to use stop/loss rules to avoid the volatility of peaks and troughs and never borrow to invest. Put any profits made to good use by reinvesting in safer options – retrieving your initial principal should be a top priority.
It is important to note that if you invest in currencies that are outside the law, you are probably investing in criminal activities like money laundering and could be held accountable.
Tony Robbins was only being funny, of course. You are more likely to maintain some of the value of your investment in cryptocurrency with a far greater chance of getting a good return than you would be by investing in slots or blackjack. It might be a gamble, but why not buy a small amount of a coin you think has the potential to win big?
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