Is Crypto Winter Starting To Thaw? What investors need to know
This story is part of Power Money MovesCNET’s coverage of smart money decisions for today’s changing world.
For the first time in five weeks, the cryptocurrency market reached a market cap of $1 trillion (the total market cap of crypto today). But this rise comes below the market’s peak last November, which reached $3 trillion. In an economy with high inflation and recession risks to loomingis it still worth diving into crypto waters?
After bullish peaks in 2021, cryptocurrency fell to pessimistic lows this year, falling into bear market territory that investors are calling another “crypto winter.” The $2 trillion crypto market crash wiped out investor gains, cost thousands of people their jobs, and wiped out once-staple digital currencies, including crypto token luna, which lost all of its value after stablecoin terraUSD’s collapse in May.
While crypto is starting to trend upwards, volatile highs and lows are nothing new in the crypto markets – and skeptics have long characterized crypto as an empty bubble destined to burst. Critics have chimed in bitcoin, stable coins and NFTs simply a new digital version of an old scam 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 power the metaverse. Amid fluctuating prices and vibrating emotions, one thing hasn’t changed: Cryptocurrency remains controversial, risky and wildly volatile.
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Simply put, cryptocurrency is a digital token, the ownership of which is recorded on a blockchain, a distributed software ledger that no one controls. This is designed to make it safer, in theory. bitcoin and ethereum are the two most famous 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 financial frontier. Developments such as President Joe Biden’s desire to explore a digital US dollar to Multi-million dollar Super Bowl ads underlines a growing desire by powerful governments 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 crypto and the American economygenerally).
“Cryptocurrency is one of those investment categories that doesn’t have the traditional investor protections,” 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’re thinking about adding crypto to your portfolio, here are five key questions to consider before you begin.
What are the risks 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, that’s a problem. It’s easy to get caught up in tweets, TikToks and YouTube videos showing off the latest coin – but the adrenaline rush of a market rally can easily be washed away with a dramatic crash.
You should be on the lookout for crypto fraud. A commonly used scheme is a pump and dump, where scammers encourage people to buy a certain token, causing its value to increase. When that happens, the scammers sell out, often driving the price down for everyone else. These scams are prominent, taking in more than $2.8 billion in crypto in 2021.
From the US government’s current policy perspective, you are on your own. At this time, the government does not provide deposit protection for crypto as it does for bank accounts. This may change following Biden’s executive order from March, which instructed government agencies to 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 offering that promises to cover your accounts from hacks. Other companies, such as Coincover, provide theft protection, which alerts you if there is suspicious activity on your account. Coincover maintains an insurance-backed guarantee that if the technology fails, it will pay you back up to the amount you’re eligible for, which depends on the level of protection the wallet you’re using offers. (Neither Coincover nor Breach Insurance will cover you against fraud.)
Despite all the hype, scams, periodic crashes (and persistent risks) in this market, Cesare Fracassi, who runs the Blockchain Initiative at the University of Texas, Austin, still believes crypto 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’s slow and expensive and incumbents, including big 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’re considering buying crypto now that prices have fallen, it’s worth noting that there’s no guarantee that the market will recover. But the easiest way to get your feet wet with crypto investing is to use US dollars to buy a cryptocurrency using a popular exchange like Coinbase, Binance or FTX. A handful of well-known payment apps – included Venmo, PayPal and Cash App — allows you to buy and sell cryptocurrency, 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’s easy to transfer money to it from your bank. And the barrier to entry is quite low: The minimum trade amount is $2 on Coinbase and $15 on Binance.
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What percentage of my portfolio should be in crypto?
Crypto is so new that there isn’t 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 stocks, on average, return about 6% more than bonds. That’s because we’ve had 60 to 100 years to see the average returns of stocks and bonds.”
Like all investment decisions, how much you put into crypto will depend on your risk tolerance. But investment experts suggest that investors keep exposure low, even for those who are fully on board with the technology. Anjali Jariwala, a certified financial planner and founder of Fit Advisors, recommends that clients allocate no more than 3% of their portfolio to crypto.
If I make money from crypto trading, do I have to pay taxes?
Yes. Whether you buy, sell or trade crypto, the tax authorities want to 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 your tax return any easier. But popular tax software as TurboTax, CoinTracker and Koinly now connects to wallets and exchanges to automatically track your cryptocurrency holdings, sales and transfers.
Is there a way to learn about crypto without investing in the currencies themselves?
Buying tokens is the most straightforward approach to experiment with cryptocurrencies. But there are other ways to explore the world of crypto while potentially protecting your money from fluctuations.
Here are a handful of options:
Buy shares in crypto companies. Many companies in the crypto space are listed on the stock exchange. Buy shares in Coinbase Global or PayPal Holdings instead of the coin itself, you can benefit from the business income of these companies, which is partially 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 baskets 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 crypto products, although these advanced types of investment vehicles come with risks.
Get a job in crypto. LinkedIn, Indeed and Monster list thousands of crypto jobs. Whether you have a traditional finance 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 dive into crypto waters is ultimately up to you, but remember that it’s 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 do take the plunge, be sure to invest in one good wallet to keep your digital currency safe.
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