Sunday, February 23

Everything You Need To Know Before Investing In Cryptocurrency

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ou If you’re thinking of investing in cryptocurrency, there are some essential things you need to know before you begin.

What cryptocurrency is and where to buy it

“Cryptocurrency” refers to digital money. These are currencies that exist entirely online, and independent of any country, bank, or governing body. They are not based on any physical asset, which means their value is determined entirely by public sentiment. In other words, they’re worth only what people are willing to pay for them. Which, if you’ve been watching the news lately, is quite a bit.

You cannot invest in cryptocurrency through your regular bank or brokerage account. You need to sign up for a cryptocurrency exchange platform like Coinsquare (Canada) or Coinbase (USA), which will let you invest in cryptocurrency through etransfer or credit card.

There are thousands of different cryptocurrencies. For the sake of keeping things simple in this article, when I refer to crypto, cryptocurrency, or cryptocoins, I’m talking primarily about Bitcoin, Litecoin, and Ethereum. The more obscure a cryptocurrency, the fewer advantages, and the more risks! If you’re eager to get on the crypto investing bandwagon, below are things you need to consider before buying in.

Does cryptocurrency have a place in your portfolio?

Whether or not cryptocurrency is a good investment for you depends entirely on what you think the future will look like and not what the past growth of cryptocurrency has been.

RELATED: Is Bitcoin a Good Investment?

It’s tempting to look at the hockey-stick growth curve of these coins and think they’re must-haves for your retirement plan. However, because of the nature, longevity, and future application of cryptocurrencies is largely unknown, it’s hard to say of what and how much you should have in order to meet your financial goals.

Will cryptocurrency replace traditional money? It’s possible. But it’s also possible money will change in other ways, such as the introduction of a universal basic income to cope with the elimination of jobs due to automation. It’s also possible the stock market will implode, there will be a nuclear war, and a whole bunch of other unpredictable events will drastically change the nature of money forever. You can’t know the future, but that doesn’t mean you can’t plan for it.

How much should you invest in cryptocurrency?

The most important thing is not to bet all your money on one outcome, while still putting forward enough not to get left in the dust. In other words, don’t take out a second mortgage on your house to buy Bitcoin, but also don’t feel bad about putting a few hundred or thousand dollars into crypto to “see what happens”. Cryptocurrency is trendy, it’s fun, and it might mean something in the long run.

If you’re looking for how much to invest, treat it as you would investing in any individual stock. My personal rule of thumb is:

never put more than 3% of your investment portfolio into a single investment

And that applies to cryptocurrency. 3% is enough to give you some skin in the game, while still being an amount you can afford to lose without wildly sabotaging your financial security. Now, you can bend this rule to suit your own needs. You can take it to mean 3% of your total wealth in cryptocurrency or 3% of your total wealth in each Bitcoin, Ethereum, and Litecoin. Whatever you choose, don’t invest more than you can afford to lose.

The advantages of investing in cryptocurrency

The reason cryptocurrencies have become so popular lately is that there are major advantages to using this technology in place of traditional currency and assets. Investing in cryptocurrency has a lot of perks, such as:

A way to protect against political instability. Cryptocurrency is a great way to tuck away wealth outside of the risk of regular currency volatility. This concept probably doesn’t make a lot of sense for North Americans who enjoy fairly stable currency, but in countries with less political and monetary stability, cryptocurrency offers an attractive way to protect your assets. If you live in a region where your money is becoming worth less and less in the global economy by the day, cryptocurrency can protect your personal and family wealth while giving you an asset your government cannot seize.

Anonyminity. The very nature of cryptocurrency, and what made it so attractive initially, is that it’s an anonymous currency. Within each coin is a record of every transaction, but it’s encrypted, so you can never know who bought or sold what. This is the complete opposite of our more traditional payment methods, like credit cards, that keep a record of as much data as possible about the buyer. Since most people enjoy keeping their private information private, especially depending on the purchase/sale of certain goods or service, the anonymity of cryptocurrency is a huge draw.

Protection against fraud. Hand in hand with its anonymous nature, cryptocurrency also cannot be counterfeited. In a world rampant with identity theft and counterfeit cheques, money, and credit cards, this is a huge advantage for both shoppers and merchants to ensure high-quality transactions.

Universal access. Because cryptocurrency is not bound by one country or government, it can be used globally. Or at least it will be able to once more places accept it. But in the meantime, anyone from any country with an internet connection can buy cryptocurrency. From a collaborative global-citizen perspective, that is pretty cool.

The downsides and risks of investing in cryptocurrency

The list of potential downsides and risks with cryptocurrency is unfortunately long, but it’s important to be aware of them before you buy any digital coins.

Volatility. While the overall trend of cryptocurrency values has been an upward trajectory, there’s plenty of large valleys and dips in that journey. It’s not uncommon for the price of a crypto coin to fall 10% or 20% or more in a single day. Everyone likes to see their investments go up, but few can handle even minor dips in value. Most people think they’re actually way more risk tolerant than they are. It only takes one bad day (or in the case of crypto, one bad minute) to let them know how much volatility they can actually stomach.

Theft. Because cryptocurrency is digital, it’s at risk of the same things that wipe out other digital assets: hackers and user error. Hacking is a big risk to cryptocurrency loss, particularly for the retail investor who doesn’t know how to take the necessary precautions to protect their coins. The average computer user has weak passwords a lack of understanding of web vulnerabilities. This leaves their cryptocurrency assets up for grabs. One of the most vulnerable places you can keep your cryptocurrency is on the exchange where you buy and sell it. In a recent hack, $60 million of worth of Bitcoin was stolen from NiceHash. Remember, because cryptocurrency is unregulated, it’s also uninusured. This means the users that had tens of thousands or even hundreds of thousands of cash in their NiceHash accounts lost it, and will never get it back.

Accidental loss or misplacement. You might be your own worst enemy when it comes to keeping your cryptocurrency safe. If your passwords are so good that it keeps both hackers and yourself out of your digital wallet, your cryptocoins are as good as nonexistent. Plenty of people have locked themselves out of their digital wallets, wiped hard drives, and otherwise eliminated cryptocurrencies from their ownership. Both I and Elon Musk are part of the many that have contributed to the approximately 3 million Bitcoins (about $20 billion worth) that are lost. Misplacing a Bitcoin isn’t the same as forgetting a $20 bill in the pocket of your winter jacket. If it’s gone, it’s gone for good.

Utility. One of the biggest hurdles to overcome with investing in cryptocurrency is you can’t spend it in very many places. Aside from select online retailers that take Bitcoin, very few places accept cryptocurrency. You cannot pay your cellphone bill or buy groceries with cryptocurrency. This fundamentally defeats its identity as a “currency” in the first place. If you can’t exchange crypto for goods and services, then it’s not really serving as a currency. It is possible to get debit and prepaid credit cards that will let you spend your cryptocurrency as cash. However, these convert your Bitcoin or other digital money to conventional cash first, then let you spend. This brings up the original problem of cryptocurrency’s volatility. How eager are you to spend something that can go up or down in value by as much as 20% in minutes? It also comes with currency exchange and transfer fees that you wouldn’t otherwise have to deal with.

Contributing to illegal and illicit activities. Because of the anonymous nature of cryptocurrencies, they’re a favorite for the global drug, sex, and illegal weapons trade. Maybe Americans wouldn’t have rallied the price of Bitcoin so high if they knew they were bankrolling terrorists. To put it simply: the increased value of cryptocurrency made many very bad people very rich. Whether or not you’re personally morally opposed to participating in the cryptofest when plenty is tied up in the black market is up to you. But be aware: plenty of it is dirty money.

Environmental destruction. Believe it or not, for all the high-tech talk of blockchain, cryptocurrency is energy intensive to mine. Bitcoin actually consumes enough energy to power 3 million homes. Maybe you’re a zero-footprint, tree-hugging vegan trying to make the world a better place. In that case, buying Bitcoin makes you a hypocrite. Other more modern cryptocurrencies show promise in less pollution and better scalability. But for now, the fuss is still all about the worst environmental offender, Bitcoin.

Hoarding. The “currency” in cryptocurrency is rapidly becoming a misnomer if no one spends their digital assets. With few retailers accepting cryptocurrencies and the ongoing wild volatility in coin prices, people are not investing in cryptocurrency with the intention to spend it. Instead, it’s becoming an asset to store value. There’s nothing wrong with this, but how something is used affects how it is valued. We will see that play out when it comes to these coins.

Final thoughts on investing in cryptocurrency

Blockchain technology is cool, digital money is fun, and everyone loves a good rollercoaster (even if they get on at the top).

If you’re ready to get started investing in cryptocurrency, check out Coinsquare (Canada) or Coinbase (USA) to set up an account and start investing. These are digital coin exchanges that you can fund with cash from your bank account, and then use it to buy Bitcoin, Litecoin, Ethereum, and more.

No one really knows what’s going to happen in the future, but it looks like cryptocurrency might be here to stay. It’s important to do your research and see how it fits into your own financial plan. At the very least, you can always buy a fraction of a coin if only to be part of the mania. However, always exercise extreme caution when investing in cryptocurrency!

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About Author

Student debt killer, super saver, and stock market addict. BSc. in Chemistry from the University of Alberta, MBA in Finance from the University of Calgary. CEO x 2 and MOM x 1. Currently residing in Calgary, Alberta, Canada, but hooked on travelling.

9 Comments

  1. Great article! I have also invested a small amount to have some skin in the game but less than 1% of my total portfolio.

    Your list of pros and cons is really comprehensive – thanks! As you mentioned cryptocurrencies are valued by market sentiment. This means investing in any one of them is more like investing in gold and the stock of a company. A company produces value and a stock is a portion of that value. Cryptocurrencies only have the value the market assigns them. This will lead to a lot more volatility than many other investments.

  2. Hi Bridget. You mentioned that there are no taxes on capital gains when selling cryptocurrency. Here in Canada, the CRA considers cryptocurrency to be a commodity. I’m far from being a tax expert, but I believe we are legally required to pay capital gains tax when we sell cryptocurrency for a profit in Canada. See https://www.canada.ca/en/financial-consumer-agency/services/payment/digital-currency.html#toc3

    That said, it’ll be interesting to see how the CRA handles this next tax season (especially after 2017’s boom in Bitcoin prices). Unless Canadian cryptocurrency exchanges are reporting each sale to the CRA, I don’t see how the government can detect and enforce taxation of cryptocurrency sales without auditing individual bank accounts.

    • You’re totally right! I didn’t know this until I read Barry’s post at moneywehave.com this morning. I was told it was tax-free in the USA, but now it looks like that’s not even true as of 2018.

      Not sure how they’re going to track it though.. I don’t think people are going to be honest about their profits!

  3. I’m not sure how you have the credibility to talk about cryptocurrency investing. You don’t own any, don’t have an investment background, and you’re just trying to ride the mania. This is why people get burned. They listen to people who have no idea what they are talking about trying to take advantage of a trend.

  4. Hello,

    According to the graphs, investment in cryptocurrencies is pretty risky right now.

    I prefer to collect them with the differents airdrops, as I believe the bubble will explode this year…

  5. Thanks for the article. I have very little knowledge of blockchain but would like to understand better. You say that it is dangerous to keep cryptocurrency on an exchange. If you sign up for Coinsquare and buy cryptocurrency, where do you put it? How does one store these things safely? Can the codes you and Elon Musk lose be stored offline? Perhaps ironically, on paper?

    • I move my crypto to a digital or hardware wallet. These exist offline, which reduces their vulnerability to hacking.

      All wallets should give you a series of 12 random words to help you unlock it should you ever forget your password!

      Not sure what Elon’s story is, but I don’t even remember what wallet I used or what email address I signed up with =p