Crypto Winter: Is It Worth Investing In An Ice Cold Market?

This story is part of Power Money MovesCNET’s coverage of smart money decisions for today’s changing world.

From bullish peaks in 2021 to pessimistic downturns in 2022, cryptocurrency is now in one bear market, and investors probably call it a “crypto winter.” The $ 2 trillion cryptocurrency market crash has wiped out investors’ profits, cost thousands of people their jobs and once wiped out digital currencies, including the luna cryptocurrency – which lost all its value after stablecoin terraUSDs collapse in May. In this economy, is it still worth diving into crypto waters?

Ups and downs are nothing new in the crypto markets, and skeptics have long characterized crypto as an empty bubble destined to burst. Critics have called bitcoin, stable coins and NFTs simply a new digital version of an old scam that is willing to scam and scam. But investors see the world of digital currency as a step forward, a kind of “Money 2.0” that will democratize finance and drive the metaverse. In the midst of fluctuating prices and vibrating emotions, one thing has not changed: Cryptocurrency is still controversial, risky and fiercely volatile.

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Simply put, cryptocurrency is a digital token, ownership of which is registered on a blockchain, a distributed software book that no one controls. This is designed to make it safer, in theory. Bitcoin and ethereum are the two most well-known cryptocurrencies, but more than 18,000 tokens are traded under different names (dogecoin is a well-known example).

Despite fluctuating prices and a relative lack of regulation, cryptocurrency is seen by many as the next economic frontier. Developments such as President Joe Biden’s desire to explore one digital US dollar to Million-dollar Super Bowl ads emphasizes the growing desire of powerful authorities and corporate institutions to quickly legitimize crypto in much the same way as stocks and bonds.

But it’s worth considering whether cryptocurrency is a smart investment for you … especially in light of the current downturn and the ever-present potential for a major crash (in cryptocurrency and the US economygenerally).

“Cryptocurrency is one of those investment categories that does not have the traditional investor protection,” said Gerri Walsh, senior vice president of investor education at the Financial Industry Regulatory Authority. “They are outside the area of ​​securities trading. It is an area that is changing, as far as the regulations go.”

Professionals warn that investors should not put more than they can afford to lose on crypto, which offers get security measures, many pitfalls and a spotty track record. If you are thinking of adding crypto to your portfolio, here are five key questions to consider before you begin.

What is the risk of investing in crypto?

Before investing in crypto, you should know that there is almost no protection for crypto investors. And since this virtual currency is extremely volatile and driven by hype, it’s a problem. It’s easy to get caught up in tweets, TikToks and YouTube videos showing the latest coin – but the adrenaline rush of a market leader can easily be washed away with a dramatic crash.

You should be looking for crypto fraud. A frequently used scheme is one pump and drain, where scammers encourage people to buy a particular token, which increases the value. When that happens, scammers sell out and often push the price down for everyone else. These scams are prominent, and they raised more than $ 2.8 billion in crypto in 2021.

From the current political perspective of the US government, you are alone. At this time, the authorities do not provide deposit protection for crypto as it does for bank accounts. This may change following Biden’s executive order from March, which imposed on public agencies survey the risks and potential benefits of digital assets.

As far as we can see, only one company offers crypto insurance: Breach Insurance, with a Crypto Shield offer that promises to cover your accounts from hacks. Other companies, such as Coincover, provide theft protection, which alerts you if there is suspicious activity in your account. Coincover maintains an insurance-backed guarantee that if the technology fails, it will pay you back up to the amount you qualify for, which depends on the level of protection the wallet you use offers. (Neither Coincover nor Breach Insurance will cover you against fraud.)

Despite all the hype, fraud, periodic crashes (and persistent risks) in this market, Cesare Fracassi, who runs the Blockchain Initiative at the University of Texas, Austin, believes crypto still has a viable future.

“I think crypto has a possible solution to some of the problems in the traditional financial sector,” Fracassi said. “The current, traditional financial system is non-inclusive, it is slow and expensive and established, including large banks and financial institutions, basically have a lot of control. I think crypto is an arena where you can actually break the system.”

How do I start investing in cryptocurrency?

If you are considering buying crypto now, as prices have fallen, it is worth noting that there is no guarantee that the market will recover. But the easiest way to get your feet wet with crypto investments is to use US dollars to buy a cryptocurrency using a popular exchange such as Coinbase, Binance or FTX. A handful of well-known payment apps – included Venmo, PayPal and Cash App – allows you to buy and sell cryptocurrencies, although they generally have limited functionality and higher fees.

Whether you use Coinbase, Binance, Venmo or PayPal, you will be required to provide sensitive personal and financial information … including an official form of identification. (So ​​much for bitcoin’s reputation for anonymous transactions.)

Once your account is set up, it is easy to transfer money to it from your bank. And the entry barrier is quite low: the minimum trade amount is $ 2 on Coinbase and $ 15 on Binance.

read more: Best Bitcoin and Crypto Wallets for 2022

What percentage of my portfolio should be in crypto?

Crypto is so new that there is not enough data yet to determine how much of your portfolio “should” be in cryptocurrency, according to Fracassi.

“We need decades of returns to understand whether a specific asset is good in a portfolio,” Fracassi said. “We know that equities on average yield about 6% more returns than bonds. That’s because we’ve had 60 to 100 years to see average returns on equities and bonds.”

Like all investment decisions, how much you invest in crypto will depend on your risk tolerance. But investment experts suggest that investors keep exposure low, even for those who are fully involved in the technology. Anjali Jariwala, a Certified Financial Advisor and Founder of Fit Advisors, recommends that clients do not allocate more than 3% of their portfolio to crypto.

If I make money on cryptocurrencies, do I have to pay taxes?

Yes. Whether you buy, sell or exchange crypto, the tax authorities will know about it. Your tax liability depends on your particular situation, but crypto investments are treated broadly like other investments, including stocks and bonds.

You do not need to report crypto on your tax return if you have not sold or exchanged it for another type of crypto. Purchases and inventory do not need to be reported either. However, if you sold or traded crypto, you must report realized gains or losses, just as you would for stocks and bonds.

Adding crypto traders will not make the tax return easier. But popular tax software as TurboTax, CoinTracker and Koinly now connects to wallets and exchanges to automatically track your holdings of cryptocurrencies, sales and transfers.

Is there a way to learn about crypto without investing in the currencies themselves?

Buying tokens is the simplest approach to experimenting with cryptocurrencies. But there are other ways to explore the crypto world while potentially protecting your money from fluctuations.

Here are a handful of options:

Buy shares in crypto companies. Many companies in the crypto area are listed on the stock exchange. Buy shares in Coinbase Global or PayPal Holdings Instead of the coin itself, you can take advantage of the business income of these companies, which is partly generated by crypto. You can also buy shares in companies that make crypto-related hardware, such as Nvidia and AMD.

Invest in crypto-ETFs or derivatives. Specialized exchange traded funds, or ETFs, are available for crypto. ETFs are curves of securities, such as stocks, commodities and bonds, that follow an index or sector, in this case crypto. Futures and options are also available for some cryptocurrencies, although these advanced types of investment cars come with risk.

Get a job in crypto. LinkedIn, Indeed and Monster show thousands of jobs in crypto. Whether you have a traditional financial background or you are a software engineer, there is a boom in the blockchain job market. There is also Cryptocurrency Jobs, a job board dedicated to blockchain careers.

Whether you want to throw yourself into crypto waters is ultimately up to you, but remember that this is not the only place to start your investment journey. And beyond crypto, there are other digital assets to consider as well, including NFTs. But if you take the plunge, be sure to invest in one good wallet to keep your digital currency safe.

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