What You Should Know Before Investing in Cryptocurrencies

What You Should Know Before Investing in Cryptocurrencies

I’ve recently been inundated with questions about investing in cryptocurrencies. So let’s go there.

So far, I haven’t gotten much into the whole cryptocurrency thing here. I’ve covered the subject other places, especially during the Bitcoin runup at the end of 2017. I even talked about it with my friend Ashe in 2016 for the Money Tree Investing Podcast. But investing in cryptocurrencies hasn’t really been a focus here.

However, I’ve received a number of questions from readers, via email, about the subject. Most of them go something like this:

It seems like Bitcoin and other cryptocurrencies are evening out. Is now the time to invest?

As always, I hate trying to time any market, and investing in cryptocurrencies is something that you have to decide you’re comfortable with. So let’s look at some things you should know.

It’s Possible to Make Money Investing in Cryptocurrencies

Yes, you can make money investing in cryptocurrencies. There are some different ways to do this. Here are three of the more common ways to do so:

  1. Buy and sell cryptocurrencies: You can buy and sell cryptocurrencies like Bitcoin, Ethereum, and Litecoin on exchanges that specialize. As with any investment, though, you should understand the basic principles underlying the crypto, and do your best to buy low and sell high.
  2. Mine cryptocurrencies: A few years ago, many people got into mining Bitcoin. Today, though, it’s difficult to make money this way. Instead, some folks mine different cryptocurrencies that are easier to get. Mining can be expensive, taking up a lot of energy, and creating a rig can cost thousands of dollars. But if you do it right, there’s a chance at profitability.
  3. Accept cryptocurrencies in exchange for products or services: Finally, you can actually accept crypto as payment. Instead of buying something directly, you can receive it from someone else as payment for something you provide. Later, you can decide if you want to sell it on an exchange for a more traditional currency.

However, even though it’s possible to make money on cryptocurrencies, that doesn’t mean it’s guaranteed. Before you invest in anything — including cryptocurrencies — you need to be prepared for the possibility that you will lose what you put in.

Cryptocurrency Regulation is Uncertain

It’s impossible to tell what’s next for cryptocurrencies like Bitcoin in the regulatory environment. Different regulatory agencies in the United States and around the world are trying to figure out how to classify cryptos.

Some proponents of cryptos, see some of them as a new asset class. Bitcoin, especially, is starting to be seen as a store of value, similar to gold. Before investing, understand that the current “wild west” state of things might not continue.

In fact, you do need to be aware of some of the tax consequences associated with Bitcoin and other cryptocurrencies. The IRS is eying gains from transactions involving cryptos, so be aware of how that could change in the future as various agencies get involved.

Cryptos are Both Assets and Mediums of Exchange

Before investing in cryptocurrencies, it’s important to understand how you want to use them. Decide what aspect you of cryptocurrency you are most interested in.

Proponents of cryptos talk about them as assets. Some believe that cryptocurrencies represent a new asset class. If you believe that you are buying (and eventually selling) an asset class, you need to research accordingly.

Pay attention to the realities of the situation. Understand the principles involved with the cryptocurrency you choose. Just because Litecoin is cheaper, it doesn’t mean that it’s like buying a more affordable version of Bitcoin. Be clear about your goals in trading (or mining) cryptos.

You can also use cryptocurrencies for exchange. I know people who prefer to use Dash to pay virtual assistants, rather than viewing it as an asset to buy and sell for profit. Some of these same folks invest in Ethereum in the hopes that it will rise in value and offer a return.

Get clear on your goals with cryptos. Make sure you understand them. And then use them in accordance with your values.

Will Cryptos Go Mainstream?

Don’t forget to consider the potential impact if cryptocurrencies go mainstream. Who knows what the future of money looks like?

On one hand, investing in cryptocurrencies could be easier with a mainstream approach. However, when everyone’s interested, it could mean a bubble. You could easily get caught up and buy high — and lose out.

You also have to consider that cryptos won’t go mainstream. That’s a real possibility as well. Even though cryptocurrencies, especially Bitcoin, have reached national consciousness, the reality is that they still aren’t mainstream.

If you get in on something early enough, you can score a jackpot when it goes mainstream. The very early adopters of Bitcoin made a killing, even if they didn’t sell at the height of 2017’s craze and sold for smaller profits.

But what if Bitcoin and other cryptos don’t go totally mainstream? If you buy in now, and the price doesn’t go much higher (or even drops), you lose out.

Assessing the Risk of Investing in Cryptocurrencies

Even though many people view cryptocurrencies as entirely speculative, and others see them as an exciting new asset class, the reality is that you need to figure out your own risk tolerance.

Do you think cryptos will be a good bet in the long run? Do your research, try to back it up, and make a purchase.

But, at the same time, remember that any investment comes with risk. You run the risk of loss, no matter your situation and what you attempt. Cryptos are no different. However, their newness, as well as the uncertain regulatory environment, are among the factors to consider when assessing risk.

Only do what you feel comfortable with. And, as always, only invest what you can afford to lose.

What do you think about investing in cryptocurrencies? Is it something you’d try? Or do you think that they are a risk you don’t want to take?

 

Written by Miranda Marquit

Miranda Marquit is a freelance writer and professional blogger, specializing in personal finance, small business, and investing topics. She writes for a number of financial web sites and blogs, and has been featured in numerous media. Read about life as a freelancer at MirandaMarquit.com and in her book Confessions of a Professional Blogger.

3 Responses to What You Should Know Before Investing in Cryptocurrencies

  1. I truly believe that cryptos will eventually become the mainstream means of transacting. Fiat money is inefficient and I think people are waking up to the fact that the devaluing inflationary pressures on their savings and income are controlled by central bankers. Crypto offers an alternative. It might not be Bitcoin, Ethereum or Litecoin….but it will be something…

  2. I still have my doubts with cryptocurrencies. Maybe I could invest a little but not massive amount. If this will go mainstream, I guess in the next 20-50 years? I still need a lot of reading and researching about this cryptocurrencies.

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