Maybe you’ve thought about investing in cryptocurrency and are wondering: “What should I know before I invest?” This article will cover five things you should consider before you invest in cryptocurrency.
Assess Your Risk Limits
Just like any investment, there’s always some amount of risk. Stock market prices, for example, can drop dramatically without warning. Investing in cryptocurrency is no exception.
Even though cryptocurrency offers promising returns, it can be quite volatile at times. That means the losses can be severe, which is why it’s crucial to diversify your investments so you don’t lose everything.
Knowing how much you’re willing to risk and that you have a reserve of finances available in case an investment fails can help you remain financially stable despite possible losses.
Do Your Research Before You Invest in Cryptocurrency
There are thousands of cryptocurrencies that you can invest in, but not all cryptocurrencies are alike.
Although they generally function the same as each other, some offer better security. Others provide an easy way to convert your digital currency into cash within a short amount of time.
Likewise, not all cryptocurrencies are trustworthy or reliable. Some are scams. Looking up reviews of different cryptocurrencies will help you to sift out the good from the bad and will help you to avoid any traps laid out by scammers.
Each type of cryptocurrency has its pros and cons, but by doing your research, you’ll find the ones you can trust.
Some Cryptocurrencies May Not Exist 10 Years From Now
When assessing your limits of risk and doing your research on what cryptocurrencies you may want to invest in, you’ll want to consider this type of question: “Will this cryptocurrency be around ten years from now?”
Some cryptocurrencies that existed ten years ago now no longer exist or on the verge of extinction. The reasons for their failures vary, but here are some common reasons:
- The cryptocurrency creators were hacked
- The cryptos were scams
- The cryptos didn’t have enough popularity
You want to consider investing in not only trustworthy and reliable cryptocurrencies—ones that will guarantee growth and security—but ones that will be around for the long run.
Look into the cryptocurrencies that are well-established and indicate steady growth. If a cryptocurrency organization has had problems in the past (e.g., scammer-like or shady business behaviors, tendencies to be hacked—which could indicate complacency in protecting its customers, low reviews, etc.—then, you may want to consider other options.
Also, keep an eye out for those offering “too good to be true” promises or rewards. It’s likely a scammer trying to steal your information and money.
If you’re not sure whether or not it’s a scammer, look up reviews or complaints about their organization to see if they’re legit. But as a rule of thumb, if you’re hesitant or unsure, move on. It’s better to be safe than sorry.
Do You Want A Hot or Cold Wallet?
A question like this may sound silly and confusing, but it’s an important one to consider. Much like the wallet (or purse) that you use to store your cash, credit, and debit cards, when you invest in cryptocurrency, your earnings get stored in a digital wallet.
However, there are two different types of wallets you can choose from to store your digital currency: Hot or cold.
The hot wallet means your digital cash is stored online, via the internet. You can easily access it for later use to make and receive transactions. One issue with this, however, is that a hot wallet is more susceptible to attacks from hackers when connected to the internet.
The cold wallet, on the other hand, is an actual physical device (much like a regular wallet or purse) where you can store your digital currency. It’s not connected to the internet, making it difficult for hackers to access.
The downside is it’s more difficult for the user to access to make and receive transactions. For example, you have to plug it into your computer to gain access to your wallet.
Though the cold wallet is considered more secure and often recommended, a hot wallet can still be a safe option. Digital wallet exchange companies know that if they aren’t keeping up with security updates and they get hacked, their business will go down the drain—along with their reputation and trust.
Developing security habits will also prevent any loss of digital funds due to someone gaining unauthorized access to your online wallet. For example, frequently changing your login credentials or storing part of your digital cash in a cold wallet can prevent or minimize any loss from a security breach.
Both options offer positives and negatives. If you’re looking for convenience, then a hot wallet option may be for you. If you want security, then a cold wallet is the way to go. Or, if you choose to use both, you can do that too.
Being proactive with security measures, in the end, is what will matter regardless of what you choose.
Automated Cryptocurrency Tax Software
Each year, the U.S. government requires individuals to report their taxes based on their physical, capital gains, and losses. Likewise, the U.S. government requires individuals to report their cryptocurrency taxes on a document known as Form 8949.
For individuals unaware of this, filing taxes on your cryptocurrency investments can be a painful and confusing ordeal. And if done improperly, it could lead to fines imposed by the IRS.
If you shiver at the thought of filing another tax form for your cryptocurrency, you may want to consider using a Crypto Tax Software. It does most of the heavy lifting for you by accurately automating and generating your cryptocurrency tax forms for you.
All you have to do is import your exchange wallets, and it will start to sync up all of your transactions. Then, once it has calculated your taxes, it will fill out and generate your tax forms. From there, you can download these reports and send them to your tax accountant or upload them to your preferred tax filing software.
This method, if you have no experience or are new to filing cryptocurrency taxes, can save you hours you might have spent trying to do it yourself. And it can prevent you from potentially making a mistake on your tax forms.
Investing in cryptocurrency can seem a little daunting, but researching and planning out your options before you do can benefit you in the end. Considering the five points mentioned above will help you to make informed decisions moving forward.