55% of Bitcoin investors started in the last year. 5 things you need to know if you’re new to crypto
If it seems like a lot of people bought Bitcoin for the first time last year, that’s probably because they did.
Fifty-five percent of Bitcoin investors say they started investing in 2021, according to a to study by crypto firm Grayscale Investments. With Ethereum, experts generally consider Bitcoin to be better suited to hold and increase its value than other altcoins, which remain much more speculative and unpredictable.
“Bitcoin is definitely the friendliest crypto out there, but you can really get into the weeds really quickly. And there’s a lot of unregulated risk in crypto, so if you’re not a seasoned investor, you could be in trouble,” says Humphrey Yang, the personal finance expert behind Humphrey speaks.
If you’ve recently incorporated crypto into your investment portfolio, or are considering investing in Bitcoin or Ethereum for the first time, here are five things to keep in mind.
5 things new crypto investors should know
1. Build your cryptography knowledge
OK, you own some Bitcoin or Ethereum. But now what? Before trying to move on to more advanced crypto investments, Yang recommends doing your research and understanding what you are investing in. It can take time to gain the knowledge you need to make a decision, so think long term and don’t go for a quick and easy buck.
“If you don’t know what you’re buying, even with Bitcoin and Ethereum, that’s a good sign that you shouldn’t be playing with some of the smaller altcoins. Many of the altcoins are just small projects started by Joe Schmoe and Jim Schmoe in their garage.
The same advice applies to more complex crypto investments – like staking, mining, or crypto cash pools – and investments in general. You never want to invest your money in something you don’t fully understand, says Doug Boneparthfinancial adviser and president of Bone Fide Wealth in New York.
“Before you invest your money, invest your time and energy in learning more,” says Boneparth. “You don’t have to be an expert, but you have to understand the basics.”
2. Eliminate noise
There are over 15,000 different cryptocurrencies, and it can get “very noisy” and “confusing”, according to Boneparth. This is why educating yourself about crypto and cutting out the noise is so essential.
Stay the course and don’t let the hype of some crypto investments lead to fear of missing out (FOMO). Maintain a healthy dose of skepticism with tips from crypto influencers, and watch out for strangers writing to you directly about get-rich-quick crypto schemes. Experts recommend most investors stick with the two most established coins – Bitcoin and Ethereum.
“It can create a very confusing environment for figuring out what’s what and who’s who, especially when a lot of people are really pumping it or being really zealous about it,” he says.
3. When trading crypto, keep the taxman in mind
Another thing to keep in mind if you’re a new crypto investor is taxes, says Yang. Crypto holdings are taxed, the same way other assets like gold and stocks are taxed. If you bought and sold Bitcoin, Ethereum, or any other crypto in 2021, you’ll need to report any profit or loss to the IRS during this year’s tax season, which began January 24.
You might be wondering if you can file your own taxes or if you need to hire a crypto tax professional for help. According to the experts we spoke to, it’s relatively easy to account for crypto on your tax return if you’ve only been buying and trading crypto on online exchanges. There are plenty of free software available, such as CoinTracker and TokenTax, that can help you generate the cost basis of your crypto trades and determine your capital gains and losses. Many of them are compatible with regular tax programs such as TurboTax or TaxAct, so you can easily import the gains and losses they report into your tax return.
It’s when you become more active that it gets complicated. For example, if you do day-to-day trading or even cryptocurrency mining, you may need to hire a tax professional who understands the tax code related to virtual currencies and has experience in tax reporting. cryptocurrency gains and losses.
If you’re not sure where to start, take a look at our crypto tax guide and check out our tips for finding a tax expert who knows crypto.
4. Prepare for volatility
If you’re invested in crypto, you’re in for a wild ride. Cryptocurrencies are notoriously volatile investments, and you’ll have to be able to tolerate it because “any new technology is going to have some growing pains,” says Boneparth. This is all the more reason for investors to play a steady long game, instead of trying to make a quick buck. If you’re in it for the long haul, you don’t have to worry about short-term fluctuations. In fact, the best thing you can do is adopt a “set it and forget it” mantra with your crypto, says Boneparth.
“We’ve seen epic rallies and huge corrections before, and if you’re not disciplined, you won’t be able to handle this,” says Boneparth. “And if you can’t deal with it, your emotions will take over. If they take over, you could be making an emotional decision about your money. Investing based on emotion can lead to bad, impulsive financial decisions, which can get in the way of your long-term financial goals.
Just take a quick look at Bitcoin’s price history to see how volatile it is. This is why experts say that cryptocurrency investments should be no more than 5% of your total portfolio.
5. Protect your crypto investments
Scammers stole a record $14 billion worth of crypto assets in 2021. To protect yourself from hacks and scams, prioritize protecting your crypto by implementing good digital security habits and monitoring common alarm signals. For example, avoid promises of free money or any contractual obligations that require you to hold crypto but not be able to sell.
If you are trading more than a few hundred dollars worth of crypto, consider getting a crypto wallet for added security. There are two types of crypto wallets: hot wallets and cold wallets. A hot wallet stores crypto online, while a cold wallet stores your crypto offline on hardware. If you put your crypto in a hot wallet, see that it has robust security measures, including two-factor authentication, allows part stored in a cold wallet, and private insurance policies in case of theft or of hacking.
You get a unique key to access your wallet, which means you have to be very careful not to lose your key or have it stolen. Avoid sharing your private key with anyone and keep strong, regularly updated passwords.