Crypto For Beginners
First Things First
This section is an introduction to how you invest in cryptocurrencies. Thanks to by BlockGeeks , forbes.com and various other crypto-gurus for contributors to this page. It's packed with some very helpful information. OK, let's get started.
We'll also cover some benefits you may enjoy by investing in them. The question remains, "Which ones do you invest in"? Well, the analytical programs and market research tools we use gives us the edge in that we won't have to guess about which ones we should consider investing in. That's part of the privilege of being a member of this group. We do have an edge over other investors in that we will have strong indications of which cryptocurrencies we should include in our portfolio. As far as where can you buy them and how can you store them, we'll provide some guidance on that as well. We try to give answers to the most urgent questions about investing in cryptocurrencies.
Disclaimer before continuing: We are not a financial institution: All we are proving is educational material: Do not take this information as professional investment advice.
Virtual or crypto currencies like Bitcoin and Ethereum are definitely by far the hottest investment product currently available. These immutable and exchangeable cryptographic token promise to become a hard and non-manipulatable money for the whole world. Their advocates see a future in which Bitcoin or other cryptocurrencies will substitute Euro, Dollar and so on and create the first free and hard world currency.
Holding Bitcoin means to have a share in this venture. If Bitcoin ever replaces monetary reserves of central banks or becomes the dominant currency for international trades – just to name two examples — the value of one Bitcoin will be far beyond 10,000 Dollar. Buying and keeping cryptocurrencies is a bet on the success of this silent revolution of money. It’s like a security of a large ecosystem.
In the past, investors in cryptocurrencies have been ridiculously successful. Since 2011, Bitcoin generated an increase in the value of at least 25,000 percent. That kind of hyper-exponential growth was almost unheard of. Now with these cryptocurrencies, we're starting to see that more frequently than ever before. To prove that point, since May 2016, Ethereum value shot up by 2,700 percent. That’s maybe the fastest rally a cryptocurrency ever demonstrated. The complete market cap soared by 10,000 percent since mid-2013.
This said we need to note that cryptocurrencies are not a normal investment. The volatility grossly exceeds that of any other investment class. It is to some parts unregulated. There is the risk that cryptocurrencies get outlawed, that exchanges get hacked or that you lose your cryptocurrency key. Cryptocurrencies are a high-risk investment.
So an important advice is to only invest as much that you can keep on living and be if all of it goes to zero. Like Wence Casares, CEO of Xapo, said in an AMA on bitcoin.com:
“I always tell them [my family] that the second most stupid thing they could do right now is to own an amount of bitcoins they cannot afford to lose and the most stupid thing they could do would be to not own any. “
A Guide For Investing In Cryptocurrencies
Why Invest in Cryptocurrencies And Why Not?
There are several major good reasons to invest in cryptocurrencies. First, the return on investment (ROI) you probably will enjoy now is better than you probably could have imagined. Consider this point. According to an October 16, 2020 post on HelpNetSecurity.com in which they answered the question, "How will blockchain impact the global economy?", the response was as follows:
"An analysis by PwC shows blockchain technology has the potential to boost global gross domestic product (GDP) by $1.76 trillion over the next decade." That is significant. Now, let us just compare Bitcoin’s rate of return with that of S&P 500 stocks, which is the leading indicator of the performance of U.S. equities from the year 2010-2020. The average stock market return for the last 10 years was 9.2%, according to Goldman Sachs data. Bitcoin returns far outpaced that. Say you invested $500 in early 2010 in U.S. stocks, by 2020 your total investment value would be around $1,800. But if you invested the same $500 in Bitcoin instead, you would be worth a whopping $3,166,673,000. Which would you choose?
Secondly, there's a huge growth potential. The crypto world is extremely intimidating, due to the complexities in understanding the technology. The use of technical computing terms can confuse and deter outsiders. This is the main reason why many stay away from Cryptos. The fact that the Cryptos intimidate most people is the very reason why you would want to be in it. Jumping on the bandwagon earlier than most would give you an edge, both in terms of potential gains and experience. It can be a steep learning curve, but it would all be worth it. Once there’s adequate mainstream coverage on cryptos, the masses will start pouring in, purely because the rates of returns are relatively astounding! Our advice? Learn the ropes of crypto investing now, and reap your sweet rewards. (See more: Guide to Common Crypto Terms)
Third, you want to hedge your net-worth against the fall of the Dollar imperium, which is assumed by many people to inevitably happen at some time.
Fourth, at this point, it's wise to support the social vision behind cryptocurrencies – that of a free and hard money for the whole world.
However, there are also very bad reasons to invest in cryptocurrencies. Many people fall victim to the hype surrounding every cryptocurrency-bubble. There is always somebody captured by FOMO (fear of missing out), buying massively in at the peak of a bubble, just in hope to make quick money, while not understanding cryptocurrencies at all. That’s a bad reason. Don’t do this. Learn before you invest.
Again, read this disclaimer before continuing: We are not a financial institution. All we are proving is educational material. Do not take this information as professional investment advice.
What Cryptocurrencies Should I Buy? Building your Portfolio.
The majority of this information is available on the monthly "Hot Pick" report that each paid member in this group will receive.
The former only crypto has been Bitcoin. Up until late 2016 Bitcoin was the cryptocurrency, and there was not much besides it. If you wanted to invest in the success of cryptocurrencies, you bought Bitcoin. Period. Other cryptocurrencies – called “Altcoins” – have just been penny stocks on shady online-markets, mostly used to keep miner’s GPUs working, pump the price and dump the coins.
However, this has changed. While Bitcoin is still the dominant cryptocurrency, in 2017 its share of the whole crypto-market has rapidly fallen from 90 to around 40 percent. Many people saw this coming as a result of the growing popularity of Ethereum and the ongoing self-tearing of the Bitcoin community over the blocksize issue. Now fast-forward to 2020. In July of 2020, Forbes.com reported that according to the new measure of bitcoin dominance, bitcoin currently makes up 79% of the cryptocurrency market—up from the 62% bitcoin market share calculated by the oft-cited crypto data website CoinMarketCap, which takes into account hundreds of cryptocurrencies that are all created and issued in different ways. This again shows that it is important to keep your eyes open and listen to what the communities say.
If you want to invest in cryptocurrencies, Bitcoin is still a standard item of every portfolio – but it is no longer the onliest asset. In every well-balanced crypto-portfolio today you find other coins, like:
A good starting point to put together your portfolio should be the website coinmarketcap.com
See the Coin Market Cap shortlist of cryptocurrencies here. "Market cap" means the value of all token available. It is not a perfect metric, but likely the best we have to recognize the value of a cryptocurrency.
If you want to have a balanced portfolio at one point in time, it might be a good strategy to simply reflect the ten most valuable currencies in your portfolio. More interesting however is it to take some time, read about those coins, decide, if their vision gets you, and make this to the base of your asset selection.
For example, you’ll find some coins focused on privacy, like,e:
Some on smart contracting, like Ethereum and Ethereum Classic, and some on scaling payments, like Litecoin and, again, Dash. Some coins, like Ripple or Nem or Bitshares, seem to be less open and decentralized as Bitcoin and other coins.
If you buy altcoins, there are some rules to discriminate the good from the bad. Good coins have a transparent technical vision, an active development team, and a vivid, enthusiastic community. Bad coins aren't transparent, promote fuzzy technical advantages without explaining how to reach them, and have a community that is mostly focused on getting rich. Beware of them!
How to buy Cryptocurrencies?
While some years ago it was a real Odyssey to buy cryptocurrencies, today you have a full scope of options.
Exchange-traded notes and more
Let’s begin with buying Bitcoin. That’s the easiest part. Some people want to invest in Bitcoin without having the trouble of storing them.
They can use investment vehicles like the XBT tracker (available on Swedish and German exchanges), the Bitcoin investment trust on Second Markets (USA), the Bitcoin ETI (Gibraltar and Germany), and some more. As Bitcoin rises, more and more brokers and exchanges try to set up a Bitcoin-based financial product.
All these investment products have in common that they enable investors to bet on Bitcoin’s price without actually buying Bitcoin. While most cryptocurrency-fans think that this takes away the whole fun and sense of it, for many people it is the easiest way to invest in Bitcoin’s success. You can use the investment channels you already are used to, and if something goes wrong, you have your certificate and someone to take to the court.
Currently, no such investment product exists which covers more cryptocurrencies. But there are some in progress, both in the USA and in Europe.
Buying Real Bitcoin on Exchanges
If you want to experience possessing real Bitcoins – or if you want to avoid paying the partly high fees for investment products – you should start buying Bitcoin directly. For doing so, you have a lot of options all over the world. Just look at this guide listing a large part of the world’s Bitcoin exchanges.
For example, in Europe, you can use:
in The USA
Mostly buying Bitcoin is not a big problem. You open up an account at the exchange, verify your identity – this is required due to Anti-Money-Laundering rules in most jurisdictions – and fund your account with Dollar or Euro or whatever paper money you use. On some exchanges, like Bitcoin.de, you don’t need to fund your account, but trade directly with other users.
The question, what exchange to use depends mostly on where you live. It’s always better to use an exchange physically close to you. If it is located in the same jurisdiction as you, you have the best chances to get money legally back if some bad things happen. If no exchange is located in your jurisdiction, it is better to use exchanges based in stable countries with a good legal system.
Another factor to decide which exchange you use is some coins you want to buy and your patience. If you want to acquire large sums of Bitcoins fast, you need to use one of the major exchanges which provide enough liquidity. If you only want to buy small amounts of coins and if you are not in a hurry, you can try to buy them on small exchanges. If your order gets filled, you most likely will get better prices than on big exchanges.
Buying other Cryptocurrencies
Other than Bitcoins Altcoins are somehow harder to acquire. Some major exchanges like Kraken, BitFinex, and BitStamp, have started to list some popular Altcoins, like Litecoin, Ethereum, and Ripple. If they are part of your portfolio, don’t hesitate to buy all at one stop shop.
But there are hundreds of cryptocurrencies out there. If you want to go to a crypto supermarket, where you can buy and sell most of them, you need to register at what is usually called an altcoin exchange.
Again, the site coinmarketcap is useful, as it lists all crypto exchanges, sorted by trade volume.
The Altcoin exchanges have less strict KYC (know your customer) rules, as here you usually don’t trade with fiat money. You can fund your account with Bitcoin, which serves as a unit of account for the altcoin markets, similar to the Dollar’s function on the Forex markets.
Like with Bitcoin exchanges you should be careful to choose an exchange with a high trust level. However, most altcoin exchanges are not regulated, and many are located in Asia. So you never should place too much trust in them, as you have nearly no chance to get anything back if they are hacked or file bankruptcy. But an exchange like Bittrex is based in the US and have a long history of providing a secure and safe trading environmental
How To Store Cryptocurrencies?
After you acquired cryptocurrencies, the most important question is how to store them. You have several options that enable you to find your balance of risks.
Keep them off an Exchange
If you invested not only in Bitcoin but in several Altcoins, there is usually no way around keeping coins on an exchange. You don’t want to get in the trouble of installing, compiling, malware checking, using, syncing and updating the software for every coin you invested in.
More as in the process of buying, the trust in an exchange becomes very important, when you store your coins there. There is a long history of hacks and bankruptcies in cryptocurrency markets, most famous the hack of Mt. Gox, which sucked up hundreds of millions of customer’s Dollars. So if you use an exchange to store your coins, you should gather some information:
Where are they located?
Are the owners known?
Since when do they operate?
Do they provide some audits to ensure you that all the coins are available?
How do they react to customer’s requests?
For example, for people in the EU, Bitcoin.de enjoys a strong trust level. The exchange operates without loss of customer’s funds since 2011, the owners are well known in the German and European community, and an annual audit by external company checks if all coins are available. This level of trust, however, can rarely be achieved when you hold a lot of altcoins. That’s the risk you need to take.
Recommendation: Store them by yourself
The real revolutionary property of cryptocurrencies is the autonomy they grant the individual. This property can be found also and above all when it comes to storing cryptocurrencies. You don’t need anybody. Not to help, and not to trust. All you need is to download free and open software.
Again, you have most options with Bitcoin. For the most famous cryptocurrency, there exist a lot of wallets for every device. This software can be used to receive, store, and send Bitcoins. There is the Bitcoin client, the so-called full node, which grants the highest level of autonomy, but also requires a lot of time to sync and disk to store the blockchain. Easier to use are thin clients like Electrum. These are available for every device.
It’s important to know that when storing crypto by yourself, it is solely you who is responsible for the safety and security of your coins. If your smartphones fall in the water, your coins could be gone. If you get malware on your computer, your coins could be gone. And so on.
Fortunately, you have more than one option to make a backup. First, you can copy your wallet file on a USB stick. Better use two or three. Second, you can print out your private key. This is the onliest information you need to reconstruct access to coins belonging to a certain address, everywhere and every time. Third a lot of wallets support so-called seeds, which are sentences of 12 to 24 random words. With them, you can not only rescue a single address, but every address ever made with this wallet. If you print them out, you don’t need to worry about your coins.
One of the safest options to store Bitcoins is hardware wallets like Trezor or Ledger. These are either smartcards or micro machines, which can generate keys and sign transactions without the main computer directly involved. The most vulnerable parts of Bitcoin – the private keys – don’t get in touch with the internet at all. However, deemed as even safer are paper wallets. This simply means you print out your backup and delete the wallet from any machine which is connected to the Internet. No connection, no computer, no hacker. Just a piece of paper, which can store millions or billions of dollars. As far as cold storage wallets, we suggest the Trezor One wallet as the solution for both the beginner and expert. You can buy it from a trusted source here.
Like with most things, the infrastructure of Altcoins can’t compete with Bitcoin’s. Some popular altcoins, like Litecoin, Ripple, and Ethereum, can be stored in hardware wallets. If you know what you do, you can also use paper wallets for any Altcoin, as the fundamental cryptographic concepts remain the same.
Some Lightwallet, for example, Exodus, can store several coins beside Bitcoin, for example, Ethereum, Dash, Litecoin, and Dogecoin. Also, Electrum can be used to store Litecoins and Dash.
But there is no easy one-stop-shop to store a huge variety of Altcoins by yourself. If you want to do so, you need to download the client of all these coins, download its blockchain and keep it updated. If your portfolio consists of 10 or 20 coins, and playing around with software is not your hobby, you can safely cut this option and use exchanges.
What’s with Taxes and so on?
Disclaimer: We are no tax bureau nor tax consultants. If you have issues with taxes, and if large sums are at stake, you better ask your local tax consultant.
Right now there are only a few tax consultants who know how to deal with cryptocurrencies. But it can be safely assumed that the number is growing quickly and that cryptocurrencies will soon be a standard issue for tax experts like securities, shares, ETFs and real estates are.
All we can provide here is an overview of the typical issues with cryptocurrencies and taxes.
No free lunch
Nothing is for sure, except death and taxes. The same goes on with cryptocurrencies. If you earn money by investing in cryptocurrencies, you likely have to pay taxes. Like it is with everything else.
How you need to tax cryptocurrency investment returns is up to your national tax jurisdiction.
The Good News …
There is some good news about the topic of cryptocurrencies and taxes. First, in nearly every country of the world cryptocurrencies are VAT exempt. Like with every financial product you don’t need to pay VAT when selling Bitcoin. There have been some ideas of tax authorities in Poland, Estonia, Germany, Australia and Sweden to demand VAT on crypto sales, but after the European Court smashed this down in an important decision, VAT for Bitcoins seems to have become a non-topic.
Another good news is that in some jurisdictions you have to pay nearly no taxes. Amazingly Germany, a country usually known for very high tax rates, has become a tax haven for cryptocurrencies. Like the USA and many other countries, Germany considers Bitcoin not a financial product, but a property. This means that if you earn money by trading it, you don’t pay a flat tax for financial income – which is 25 percent, for example for bank account interest – but you have to tax the profit of buying and selling cryptocurrencies like income.
It’s more as you sold your house than a security.
You bought 10 Bitcoins for 1,000 Euro and sold them for 2,000? Your taxable income increased by 10,000 Euro.
You bought one bitcoin for 100 Euro and ordered a 10-Euro-pizza when the price was 1,000 Euro? Your income increased by 9 Euro. In most cases, the tax rate for this is higher than for financial gains.
However, there is a loophole. If you hold your coins for more than 1 year, you don’t need to pay taxes at all when you sell it. This rule was added to dis-incentivize day trading of other properties and stabilize prices by incentivizing holders. For cryptocurrencies it made Germany, and also the Netherlands, which apply the same rules, to tax havens. Some countries might have similar rules. In doubt, your tax advisor can help you out.
One problem the one year rule poses is that you need to prove that you hold the crypto for this timeframe. Usually, exchanges can help you with prints of your trade history. Also, you can use the public blockchain as a proof of storage. In most cryptocurrencies, it is transparent when coins are received and spent by a particular address. But not in all. For example, Monero uses Ring Signatures and Confidential Transactions, which are great tools to maintain anonymity. But the downside is that they make it more or less impossible to prove that you hold coins more than one year. Maybe you take this into account when selecting coins for your portfolio.
For more information, review Top 5 Resources For "Crypto Investor" Beginners