Buying Cryptocurrency for the First Time? Here’s What You Should Know
Cryptocurrency has been the rage for the past couple of years, with the value of currencies such as Bitcoin shooting up by thousands of dollars in just a few months. It is now more widely talked about throughout the financial world. Those who took a gamble on digital currencies early, in the 2010s, stand to reap huge returns.
However, unlike the traditional stock exchange, the cryptocurrency market is still shrouded in mystery. Many still don’t know how to get started trading in Bitcoin or any of the altcoins. There are some pointers you can take if you’re considering this form of investment.
What is Cryptocurrency?
Despite the ‘currency’ in its name, cryptocurrency operates very differently from fiat currencies such as the dollar and euro. It is not centrally regulated by the Federal Reserve or any central bank. It’s value is not pegged on any precious commodity like the dollar’s is on gold. Most cryptocurrencies are built around blockchain technology; the blockchain is a decentralized public ledger on which transactions are updated.
This is not to say crypto has nothing in common with traditional currencies; you can use it to buy and sell goods and services. However, acceptance of virtual currencies for payment is not yet widespread. The fact that transaction information for cryptocurrency transactions is encrypted gives its users some comfort level regarding its security.
Cryptocurrency users also prefer using it to transact for the privacy it promises. You can transact without having to divulge sensitive personal information. Besides its confidentiality, cryptocurrency appeals to investors as a way of preparing themselves for a future where fiat currencies will no longer exist.
The volatile nature of cryptocurrency appeals to investors with an appetite for risk. Crypto investments have the possibility of earning you thousands of dollars in just a few weeks or days. However, the reverse can happen just as easily.
Types of Cryptocurrency
Though Bitcoin was the pioneer digital currency, there are now many others in existence. A few popular altcoins include Ether, Litecoin, Binance Coin, XRP, and Bitcoin Cash.
- Ethereum– Ethereum is the second-largest cryptocurrency after Bitcoin in terms of market capitalization ($263.4 million). Unlike Bitcoin, which is limited to 21 million coins, Ethereum tokens are continually mined. In the five years since its invention, this cryptocurrency has grown in value to over $2,500 per unit.
- Bitcoin– Twelve years after its invention, Bitcoin is still the largest cryptocurrency globally, with a market cap of $1.2 trillion. It is also the most valuable; a unit is priced at over $60,000 currently. When it was unveiled in 2008, it opened the world’s eyes to a future where money was not controlled by vaulted banks or government agencies but by ordinary citizens. Bitcoin’s inventors achieved this using open-sourced peer-to-peer technology for the recording and validation of transactions.
- XRP– XRP ranks fourth among digital currencies in terms of market capitalization ($81 billion). The beauty of this cryptocurrency is that it allows you to trade with other XRP holders, holders of other cryptocurrencies, and fiat currency. You can also trade with holders of commodities such as gold. The inventors of XRP envisioned a system of international payment that would replace the traditional SWIFT (Society for Worldwide Interbank Financial Telecommunication) system, charging lower fees.
How to Buy Cryptocurrency
To convert your dollars into cryptocurrency, you must do so through a cryptocurrency exchange. Coinbase is among the more popular exchanges, and for a good reason. To learn more, check out Coinbase reviews. After creating your account with the exchange, you will have a virtual wallet from which you can trade in Bitcoin and other digital currencies.
As much as cryptocurrency transactions are considered safer because they are encrypted, you still need to take some measures to protect your crypto investment. If you plan on investing by participating in an initial coin offering (ICO), you need to do some due diligence on the cryptocurrency first.
Find out the company behind the cryptocurrency and who owns that company. If there are some well-known figures on the board or top management, that is a good sign. Another good sign is if prominent investors are participating in the ICO. Also, be sure the crypto is fully developed before you get involved.
Cryptocurrency exchanges provide the option to withdraw Bitcoin or whichever other crypto you have from your wallet. They usually charge a fee for this service. As you withdraw your dollars, bear in mind that you may be liable to the Internal Revenue Service (IRS). Hence the need for you to file cryptocurrency taxes.
To do this, you need all your transaction data, which your exchange should allow you to download from their online platform. You will then use the information to fill a Form 1099-K or 1099-B, or both. If you don’t have an accounting background, you’re well-advised to call in a professional accountant for their expertise. Take precautions and stay knowledgeable on the volatile market to get the most out of your cryptocurrency endeavors.