|12||Bitcoin Cash / BCC||BCH||$143.9||0.81973%||$11,508,900||$2,754,801,798|
Cryptocurrencies have been a hot topic the past several years during which they’ve become an increasingly popular method for online payments and an alternative to both fiat money and traditional investment assets (like stocks and bonds).
In this article we’ll go through the basics of cryptocurrency, as well as how to invest in them (safely!).
What is cryptocurrency
A cryptocurrency is a digital currency, an alternate method of payment established using encryption techniques. The encryption technology enables cryptocurrencies to function as both a currency and a virtual accounting system, also making counterfeiting or double-spending practically impossible. There are two ways to acquire cryptocurrencies – mine them or buy them at cryptocurrency exchanges.
The defining aspect of cryptocurrency is the fact that they’re not issued by a central authority. As a type of digital asset built on a network that’s dispersed across a great number of devices, they’re basically immune to government intervention or manipulation.
To use any cryptocurrency, you'll need a cryptocurrency wallet. The wallets can be software that is a cloud-based service or one that's stored on your PC or mobile device. Wallets are the tools that you use to store your encryption keys, which prove your identity and link to the cryptocurrencies you own.
What is a blockchain
Blockchain technology is the essential thing behind cryptocurrencies that allows for secure and decentralized record of data and cryptocurrency transactions.
Blockchain, as the name implies, is simply a set of linked blocks or an online distributed blockchain ledger. Each block comprises a collection of transactions that have been independently confirmed by each network participant. Every new block issued must be validated by each node before being confirmed, making forging transaction histories very difficult.
Basically, what this means for cryptocurrencies is that, due to blockchain’s decentralized nature, no individual or group has control, instead all users hold control collectively. Also, the data entered in these blockchains is irreversible, meaning that all crypto transactions are permanently recorded and visible to everyone.
Ways to use cryptocurrency
Obviously, most of the current focus is on cryptocurrencies as an investment. Still, at its essence, cryptocurrency is a virtual currency, and as time goes by, an increasing number of businesses are allowing people to use it for purchasing products and services.
To begin, it is important to note that cryptocurrencies are frequently considered as a «store of value» today, and so it is more comparable to gold than it is to, say, the dollar or euro. Because of the huge fluctuations in value and sentiment concerning potential price rallies, many investors are hesitant to use their cryptocurrencies for purchases.
A rising number of businesses are accepting Bitcoin and other cryptocurrencies as payment.
Purchasing items from online merchants that accept cryptocurrency is simple if you have a cryptocurrency wallet that incorporates an integrated browser or browser extension. If not, most wallets include simple copy-and-paste SegWit (segregated witness) addresses with a QR code to allow you to transfer and receive certain cryptocurrencies online and offline.
The transaction normally entails navigating to the wallet's «send» option, inputting the recipient's wallet address, selecting which currency and how much to transfer, and then approving the transaction.
If this sounds too complicated for you, don’t worry. We’re yet to talk about the easiest way to use cryptocurrencies: crypto debit cards. These cards come pre-loaded with the cryptocurrency you choose. So, while you pay with crypto, the retailer receives fiat money in exchange. These products are available from major processors such as Visa (V) and Mastercard (MA), and you may use them for everyday spending just like a traditional debit card.
The following are some of the most notable online retailers that allow customers to fund their accounts with Bitcoin and/or other cryptocurrencies:
Some service providers, including AT&T and ProtonMail, also accept payments with Bitcoin, either directly or through third-party providers.
How to buy / sell cryptocurrency
Those who are new to the cryptocurrency realm may be unsure about where to begin. We'll walk you through a few simple steps to get started:
1. Decide which cryptocurrencies you wish to buy.
The first thing to do is research. There are many cryptocurrencies on the market, some like Bitcoin or Ethereum are pretty well known, but some new ones are constantly showing up as well. Keep in mind that new cryptos are more volatile and less accepted by retailers for online payments.
2. Choose a broker or a crypto exchange
Cryptocurrencies are traded on cryptocurrency exchanges. Although they usually have low fees (as compared to broker platforms), their interfaces can be very complex, especially for new cryptocurrency investors. Some offer more straightforward purchase options for beginners, but, as you may guess, those come at a substantially greater cost. The best would be first to learn some basics about how to get around the trading platforms and then start buying.
Another option is brokers, whose main advantage is convenience, and they're much more suitable for crypto-beginners. Some of the best brokers for crypto include Robinhood, Interactive Brokers, eToro and Coinbase. However, be aware that most of them don't let you move your cryptocurrencies off the account. Those with significant cryptocurrency investments sometimes prefer to hold their coins in a crypto wallet for extra security.
3. Create an account
The next thing you'll have to do is create an account. Typically, a verification process is required where you'll be asked to provide a government-issued photo ID (passport or social security card). This process might also include other steps like entering an email or SMS code to verify your account or uploading a selfie.
4. Select your preferred method of payment
Once you establish an account, you'll have to put funds in it. There are usually several payment methods to choose from, including connecting a bank account, wire transfer, and using a debit or credit card. Some exchanges might even allow PayPal payments. Note that it might take several days until the processing is completed, and only after that will you be able to make purchases.
Tip: If you can, try not using a credit card as a payment method. Credit card issuers consider cryptocurrency purchases to be cash advances, and the standard cash advance fee of most credit cards is 5%. Add to that any additional fees imposed by the exchange or broker, and you'll end up losing a big chunk of your funds. Of course, there are exceptions to this: on Myfin we review some cards that even earn you cash back on crypto purchases. Two such cards are the BlockFi Rewards Visa® Signature and the Bitcoin Rewards from Sutton Bank.
5. Place a cryptocurrency order
Now that your payment is all set, you can finally purchase your desired cryptos. You'll choose the cryptocurrency you want and specify the number of coins (or fractions of a coin) you wish to buy. Some platforms might even let you determine the amount of money you want to spend, and then the amount of cryptocurrency you get in exchange will depend on the cryptocurrency's value.
6. Store your cryptocurrencies
As we mentioned, cryptocurrencies are stored in digital wallets, which can be on a computer or a mobile device, or you can choose to keep your private keys and access addresses on paper. Without these private keys, you cannot access your stored cryptocurrencies.
You can store your cryptos in cold or hot wallets. While a hot wallet is stored online and requires an internet connection, cold wallets are an external device, like a USB drive. For easier comparison, we've come up with a table with the main characteristics of both.
|Hot Wallet||Cold Wallet|
|Connected to the internet||Not connected to the internet|
|Easy to use and better for everyday crypto-traders||Impractical for everyday use, better for long-term cryptocurrency investments|
|More exposed to security threats (hacker theft, cyber attack)||A more secure storage option|
|Easier to recover if you get locked out of your account||Might be lost forever if you forget/lose your private keys or the device breaks|
The best might be to store your cryptos in both a hot and a cold wallet. Keep the more stable and valuable cryptos in a cold wallet and leave those that you often trade with in a hot wallet. Keep in mind that if you opt for a broker instead of an exchange, you might be forced to keep your cryptocurrencies in a hot wallet anyway, as they don't allow you to transfer them.
How to invest in cryptocurrency
The most straightforward way to invest in cryptocurrency is to buy it by following the steps we outlined in the previous section. Of course, there are also some other options like:
- Investing in crypto-focused companies – These could be cryptocurrency mining companies, companies that support crypto, and many others with different levels of cryptocurrency exposure. We recommend companies like Nvidia, a leading manufacturer of graphic processing units which are the key hardware components of crypto mining. Another great example is PayPal which supports crypto payments.
- Investing in cryptocurrency ETFs – Crypto ETFs allow you to manage risk by diversifying and investing in crypto through portfolios that don’t hold crypto directly but rather crypto-based securities like futures. Some of the most popular ones include ProShares Bitcoin Strategy ETF (BITO) and Valkyrie Bitcoin Strategy ETF (BTF).
- Mining cryptos – Miners of cryptocurrencies get rewards in crypto which they can then hold for themselves or sell it for another crypto or fiat money.
Buying cryptocurrencies is simple, but you must understand how investing in cryptocurrency works to profit from them.
Another risk of cryptos is regulations. They're not heavily regulated, so you don't have the protections typical for a heavily regulated stock market. On the other hand, there's also the prospect that they will become illegal in the future and lose all their worth.
So, make sure that you research the cryptocurrencies you're interested in well and inform yourself of the many things that can impact their prices and development.
How is cryptocurrency taxed in the US
The IRS taxes cryptocurrencies not as a currency but as a traditional investment like stocks and bonds. So, when you sell a cryptocurrency, you'll pay capital gains tax rates that will depend on the length you've held it. If you've had it for less than a year and sell it for profit, you'll pay a short-term capital gains tax rate ranging from 10% to 37%, based on your income. If you've held it for more than a year, you'll pay long-term capital gains tax rates of 0%, 15%, and 20%. Please refer to the following two tables to find out in which tax bracket you belong:
Short-Term Crypto Capital Gain Tax Rates in 2022
|Rate||Single filer||Married filing jointly||Household head|
|10%||Up to $10,275||Up to $20,550||Up to $14,650|
|12%||$10,275 – $41,775||$20,550 – $83,550||$14,650 – $55,900|
|22%||$41,775 – $89,075||$83,550 – $178,150||$55,900 – $89,050|
|24%||$89,075 – $170,050||$178,150 – $340,100||$89,050 – $170,050|
|32%||$170,050 – $215,950||$340,100 – $431,900||$170,050 – $215,950|
|35%||$215,950– $539,900||$431,900 – $647,850||$215,950– $539,900|
Long-Term Crypto Capital Gain Tax Rates in 2022
|Rate||Single filer||Married filing jointly||Married filing separately||Household head|
|0%||Up to $40,400||Up to $80,800||Up to $40,400||Up to $54,100|
|15%||$40,401 – $445,850||$80,801 – $501,600||$40,401 – $250,800||$54,101 – $473,750|
Now, the thing is that you also pay taxes when you spend cryptocurrency. You'll pay taxes on the increased value of the cryptocurrency. For example, if you've bought Ethereum for $200, but it's now worth $400, and you use it to buy something, you'll pay taxes on the $200 of «profit.»
Tips for investing in cryptocurrency safely
We've already established that cryptos are risky investments, so here are some tips on safely investing in them. Well, as safe as possible.
- Research, research, research – We can't stress enough how important this is. Before putting your money in any cryptocurrencies, look well into all crypto exchanges and brokers. They're often victims of security attacks, so make sure to choose one with excellent safety features, as well as low fees and a user-friendly interface. The best way would be to check what other users have to say about the platform. Of course, also research the cryptocurrencies you want to buy. You should first read the currency's whitepaper to understand its uses and plans for future developments. Then, you can also connect with more experienced crypto investors online through forums and get tips and advice from them. However, anything they say should be taken with caution and not too seriously, because as we already mentioned - no one can predict the price of any currency, stock, or digital asset.
- Safe storage – The different types of cryptocurrency storage options were already explained, and it's on you to check them out and choose the one that'll best fit your needs.
- Diversify risk – It would be best not to put all your money in crypto, especially not in only one cryptocurrency.
- Store your crypto in a safe wallet – At least some of your crypto should be stored in a cold, hardware wallet to mitigate the risk of an online hack.
Top 5 cryptocurrencies: (short overview)
Let's take a look at the «hottest» coins on the cryptocurrency market.
Market cap: $386 billion (July, 6)
Bitcoin is the original first cryptocurrency created in 2009 by a person under the pseudonym Satoshi Nakamoto. In April 2017, the price of one Bitcoin was around $1,300, while in April 2022 it was around $40,000. That's more than a 3,000% increase.
Market cap: $139 billion (July, 6)
With a market cap of $136 billion (as of July 2022), Ethereum is right after Bitcoin on the cryptocurrency market. It's both a cryptocurrency and a blockchain platform, and it's a programmers-favorite due to its many potential applications (like non-fungible tokens (NFTs)). In April 2017, you could buy one Ethereum for $50, and in April 2022 it is worth around $3,000, representing a 6,000% price increase.
Market cap: $66 billion (July, 6)
Tether is backed by dollar, so its value is always $1. For this reason, Tether is the best choice for people who want to use crypto mostly for online payments and other transactions rather than investing.
Market cap: $32 billion (July, 6)
Ripple is a cryptocurrency, as well as a digital payment network. While Bitcoin allows anyone to process power and validate transactions, Ripple allows that only to selected network members.
Market cap: $8 billion (July, 6)
Polkadot is a blockchain system that allows many chains to coexist on a single network. Its objective is to solve an issue in the existing blockchain landscape: hundreds of blockchains operate in isolation with minimal capacity to connect with one another.