How to Invest in Cryptocurrencies, But How Safe Are They?

• Alex Hartley
• 18th October, 2021
• Money & Finance

On April 14, 2021, Bitcoin made headlines for being the first and only cryptocurrency to hit $65,000 per unit. Viewing this crypto rally through the 2010 lens, when the first crypto investor decided to sell their Bitcoin holdings, swapping 10,000 units for just two pizzas, you may think what a missed opportunity! Well, the same could be said of those who are selling their Bitcoin now, because projections from industry experts have it that bitcoin could hit $397,000 by 2030.

That having been said, there are many stories and perceptions out there when it comes to cryptocurrencies. Some view them as nothing but currencies, others as something to bet on, and finally there are those who believe they are solid investment opportunities. In this article, we shall cover these alternatives and in the case of investments, how you should approach crypto investing against a backdrop of volatility and regulatory crackdowns.

The Crypto Universe

As of October 2021, there were more than 6,700 cryptocurrencies actively trading with a total market capitalization of slightly over $2.3T. The top five cryptocurrencies according to data from crypto exchanges are Bitcoin (BTC), Ether (ETH), Cardano (ADA), Tether (USDT) and Binance Coin (BNB). Others worth keeping a tab on are XRP, Solana, USD coin, Polkadot, and Dogecoin.

It is also worth mentioning that crypto transactions (buying, selling, storage, and transfers), are done on specific networks also known as distributed ledgers. For instance, Bitcoin transactions are executed on the blockchain network while Ether transactions are done on the Ethereum network. Apart from hosting cryptocurrencies, decentralized ledgers have other applications such as decentralised finance (DEFi), gaming, and governance.

With this background in mind, let us now look at crypto and whether they are currencies or investments or both.

Are Cryptos Assets or Simply Digital Currencies?

Well, this is the big debate and how you interact with crypto will depending on the side of the argument you align with. Thanks to big names such as Tesla and Ark Invest putting their cash into crypto investments, the growing belief is that crypto is an asset class just like any other where investors can buy low and sell high.

Those against crypto as an asset are clear in their argument that, unlike traditional assets, cryptos do not generate cash flows. An asset is a resource with an economic value where those controlling it (organisations, individuals, and governments) expect a future benefit.

On the other side of the divide, the general lack of exchange of crypto limits its use as a currency. Even though institutional players such PayPal, MasterCard and Square have integrated the use of crypto as a currency, there is still doubt as not everybody agrees on the transactional value of digital currencies.

For instance, the volatility of cryptocurrencies has made it hard to predictably hold their value. In the same vein, cryptos are based on decentralised networks with no central government backing their issuance and acceptability. This is in sharp contrast to traditional currencies such as the dollar, sterling, euro, and many other major currencies.

What If Crypto Is an investment?

Thanks to the crypto rally and the fact that you can buy low and sell high, investing in this asset class can be attractive. However, if you are to do it, you must do it right. Before we come to the step-by-step guide on how to invest in crypto, here are a couple of quick things you must know about this form of investment.

Asset Value

Cryptocurrencies are subject to the forces of supply and demand much like commodities. As people anticipate the rise in the global adoption of crypto for eCommerce and as hedging instruments, their values will continue appreciating. However, unlike gold, cryptos have no intrinsic value. You hold them for what they can be exchanged for. This view was reiterated by Andrew Bailey of the Bank of England in May 2021.

Volatility

Cryptocurrencies are highly volatile with swings of up to 10%, albeit some more than others. For instance, Bitcoin started 2021 with a solid stance hitting a maximum high of $65,000 only for it to close the first half 47% down. This is one area you’ll have to keep tabs on as you put in your hard-earned money.

Regulatory Risk

Central regulatory authorities around the world are becoming increasingly interested in cryptos, but it is how they view them that is a little concerning. For example, the Financial Conduct Authority (FCA) in the UK issued a statement back in January 2021, stating that cryptos are neither commodities nor currencies for regulatory purposes. In October 2020, the FCA banned certain cryptocurrency investment products including the sale of exchange-traded notes and derivatives to retail investors.

That notwithstanding, you can still invest in crypto in the UK and make money out of it. However, the question is, how do you invest in cryptocurrencies without exposing yourself to all these risks? In the section that follows we shall get straight into that.

The ABC of Investing in Cryptocurrencies

If you need a quick summary of how to get into crypto investments; making a purchase and getting on with your day, here it is.

Step1: Open an account

As an investor, you need to open an account with a crypto brokerage or exchange. Through the account, you can purchase cryptocurrencies of your choice, store them, and transfer them as desired. Look for an exchange that gives you the simplest time to sign up, has low fees, is secure, and supports lots of cryptocurrencies.

Step 2: Provide and verify your ID

As part of the know your customer (KYC) process, many exchanges require that you provide proof of ID which could be a passport, national ID or driver’s license.

Step 3: Fund your account

For you to start trading, you must make a deposit to your account. There are many ways you can fund your account the most common of which are wire transfer, debit, and credit card payments. Some exchanges may also have a minimum deposit requirement and preferred currencies.

Step 4: Make your purchase

Once you’ve funded your account, you can now proceed to make your crypto asset purchases. You can choose the number of units of cryptocurrency you want to buy or put in the amount you want to spend and the exchange system will tell you how many units you can purchase.

Which Cryptocurrency Should You Buy?

Well, there are lots of cryptocurrencies you can buy but not every one of them is for you. For the best results, you must have a strategy. For instance, you can look at the crypto’s user community, its price performance, the buzz around it and the team behind it. You can start with the most common ones like Bitcoin and then spread gradually to alternative coins.

Can You Invest in Crypto Without Buying Crypto?

Yes, you can invest in cryptocurrencies without actually buying them. For instance, you can buy shares in a company that has exposure to crypto in its portfolio. Alternatively, you can invest in ETFs or Index funds such as Bitcoin ETFs. Most of these ETFs have stakes in companies involved in cryptocurrency mining, blockchain technology development, or directly hold crypto assets in their balance sheets.

Are Crypto Gains Taxed

The HRMC considers cryptocurrencies to be either utility tokens, exchange tokens, stablecoins or security tokens. If you are a resident in the UK for tax purposes, any gains you make on crypto trading are taxed in the same way as bonds and shares. The most interesting bit is that even if you use your crypto holdings to buy another item say a car or phone, that is considered a disposal transaction and hence the proceeds must be assessed for capital gains tax.

For instance, if you buy a Tesla for £50k using bitcoin that you acquired for £40k, the £10k is considered as a gain under capital gains tax rules.

Conclusion

Crypto exchanges never sleep, and you can invest 24/7 from any part of the world as long as the exchange allows it. Whether you look at crypto as an asset or simply a digital currency, the reality is that you can invest and speculatively make money from price movements. However, before you invest, you must take note of factors such as price volatility, regulatory risk, and expert projections on the cryptocurrency movements. Choose the best exchange, open an account, verify your identity and begin trading!

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