Personal Finance: since 2009, when Bitcoin launched, cryptocurrency has grown significantly. It’s had huge highs and deep lows. Investing in it carries risk. Yet, those who can manage that risk might find great opportunities.
The SEC is cautious about cryptocurrency. SEC Chair Gary Gensler notes that crypto businesses must follow the law. Risks from investing in cryptocurrency include losing money, dealing with government regulations, fraud, and hacks.
But, for some, including cryptocurrency in their investment mix might be beneficial. It’s another asset to consider. This choice depends on your goals, how much risk you’re okay with, and other investment thoughts. Just like stocks or bonds, investing in cryptocurrency is a personal decision.
Key Takeaways
- Cryptocurrency is a highly volatile and risky investment, with the potential for significant losses.
- Regulation of the cryptocurrency market is evolving, which could impact the value and tradability of cryptocurrencies.
- Cryptocurrency exchanges have been subject to fraud, hacks, and cybercrime, which can result in the loss of invested funds.
- Despite the risks, some experienced investors may choose to allocate a portion of their portfolio to cryptocurrency as an alternative asset.
- Careful consideration of one’s financial goals, risk tolerance, and other investing factors is crucial when deciding whether to invest in cryptocurrency.
Understanding Cryptocurrency
Cryptocurrencies have changed the finance world fast. They are grabbing the interest of many people. These include investors, entrepreneurs, and regular people. At the center is the idea of a cryptocurrency. It’s a digital currency that uses secure codes to keep it safe. This safety makes it hard to copy or use the same coin twice.
What Is Cryptocurrency?
Most cryptocurrencies work on networks that use blockchain technology. This is like a big online book. But, it’s checked by many different computers. A big deal with cryptocurrencies is they usually don’t come from a single place. This means they don’t depend on one government. So, theoretically, no government can are control it. The lack of central control makes transactions secure, clear, and fast without the extra cost of middlemen.
Types of Cryptocurrency
There’s a lot in the world of cryptocurrency. Each type serves a different goal. There are: utility tokens for using a specific service, transactional tokens for direct exchanges, governance tokens for decision-making in platforms, platform tokens that power blockchain networks, and security tokens representing ownership shares in assets or companies.
To get these, people use cryptocurrency exchanges. These are places online where you can buy, sell, and check the prices of different cryptocurrencies. Once you have some, you keep them in a digital wallet for safety and easy use.
Risks of Investing in Cryptocurrency
Investing in cryptocurrency has many risks you should know about. You could lose a lot of money. The market can be very volatile. This means the prices can change a lot, and quickly.
Also, there’s the risk of government rules. Many places don’t yet have clear laws on how to use or trade cryptocurrencies. Some have even talked about banning them. If this happens, it could drop their value a lot.
Then, there’s the risk of fraud. The industry isn’t regulated well. This opens the door for scams and frauds. In 2022, many people lost money to these schemes.
And, we can’t forget about hacks. Hackers can steal digital coins. Over $3.2 billion was stolen in 2021. Even if an exchange has insurance, getting your money back after a hack is tricky.
Investing in cryptocurrency is risky but not all bad. Knowing your risk tolerance is important. It’s wise to learn about the market and maybe get advice from experts. This way, you can try to avoid the dangers and enjoy the new financial world.
Cryptocurrency Adoption
The current price of Bitcoin hovers around $17,000, a drop from its peak of over $65,000 in November 2021. Initially, Bitcoin was praised as digital money. However, it needs to be easily usable to buy things. Out of over 22,000 cryptocurrencies, only a few can you use widely. By the end of 2020, about 2,300 businesses in the U.S. were taking crypto as payment. This is a small number compared to the over 35 million businesses in the U.S.
The world of cryptocurrencies has boomed with new ideas and growth. Yet, most of these haven’t become common for buying and selling. Widespread use of cryptocurrencies as money is still a big challenge. To be a real game-changer, more companies and people need to trust and use cryptocurrencies. Thus, the dream of a full cryptocurrency economy might be far from real today.
Could Crypto Become the New Global Currency?
Crypto has been highly discussed as a potential global currency. But, most experts don’t see it happening soon. Procasky notes, “I don’t think governments will allow a competing currency on such a large scale.” He points out, “A global currency has to be very liquid and very deep. No currency can beat the U.S. dollar yet.”
Money is strictly monitored and regulated. The recent 2022 scandals with Terra Luna, Celsius and FTX showed crypto’s risks. Most governments won’t risk their financial systems on this. Niestradt predicts it’s “years away.” He adds, “It’s still up for speculation. Nothing is certain.”
Is Crypto a Hedge Against Inflation?
Do you think Bitcoin and other cryptocurrencies protect against inflation? Think again. The U.S. Bureau of Labor Statistics shows that in Nov. 2022, core inflation was over 7% higher than the previous year. During this same period, Bitcoin’s value dropped by more than 65%.
“Crypto failed the test as an inflation hedge. If it’s possible to give it an F-, that’s how it performed,” says Procasky. Why? Because Bitcoin’s value doesn’t directly connect to the worth of things we buy. So, using it to fight inflation is risky and not reliable.
In 2021 and 2022, while inflation grew, Bitcoin saw big value changes. These changes included both big spikes and big drops. Because of these inconsistent moves, we can’t count on cryptocurrency to protect us from inflation.
Cryptocurrencies and Taxes
Investors need to pay capital gains taxes on their cryptocurrency earnings. Any change in crypto ownership, like mining or staking, counts as a taxable event. The tax on capital gains is typically around 15%. But, it might climb up to 20% or even more. When buying something with crypto, it’s often necessary to change it to fiat currency. This extra step means using crypto for purchases comes with tax costs. This makes buying items with crypto costlier than using cash.
Taxation of Cryptocurrency ETFs
The IRS hasn’t given clear rules on how to tax cryptocurrency ETFs. Instead, they’re seen as securities for tax purposes, much like stocks or bonds. This could make things tricky for investors. The IRS hasn’t explained if selling one cryptocurrency ETF and then buying a similar one would break the wash sale rule. Investors are advised to talk to a tax expert. They can help understand the tax rules for cryptocurrency ETF trades.
Personal Finance: Investing in Cryptocurrency
Putting money into cryptocurrency can be risky. Any investor should think hard about this. Before adding it to their investment list, they need to be sure.
Financial Loss
The value of Bitcoin and other cryptocurrencies can change a lot. This means you might sell at a bad time and lose money. It’s wise for new investors to be careful to avoid big financial hits.
Future Regulation
Right now, not many rules are out there for cryptocurrency. But, rules will probably become stricter in the future. This might change how much your cryptocurrency is worth. It could also make it easier or harder to buy or sell.
Fraud and Cybercrime
Sometimes, there are too many people trying to buy or sell cryptocurrency. This can lead to problems on the exchange website. A big cyberattack could also cause issues if many people suddenly can’t access their accounts. Plus, fraud is a big concern in the world of cryptocurrencies. Without strong rules to follow, many investors have lost money.
Theft or Loss
For using a cryptocurrency exchange, you usually need a username and password. If you lose or someone steals these, you could lose access to your account. Just like paper money, digital currencies can be lost or stolen. This is a real threat to an investor’s financial security.
Given these dangers, approaching cryptocurrency with caution is smart. It’s best to view it as a special kind of investment, not like your regular ones. Investors need to think about what they want, how much risk they can handle, and other important details before jumping in.
Also Read: How Does Real Estate Financing Work?
Is Cryptocurrency Legal?
Cryptocurrency laws change from place to place. In the U.S., the Securities and Exchange Commission (SEC) and others are setting rules. They are worried about illegal use and the SEC thinks many crypto offers are risky.
In the U.S.
In America, you can use and trade cryptocurrencies legally, but the rules are still growing. The SEC, with Gary Gensler leading, is watching closely. They say most cryptocurrencies are actually like stocks and should be treated as such. Companies dealing with crypto must also follow rules against money laundering.
In Asia
Countries in Asia are split on cryptocurrency. China has banned their everyday use and made trading and mining tougher. Yet, Japan, South Korea, and Singapore have friendlier rules, making them good places for crypto.
In Europe
Europe is working together on a solid plan for digital coins. They want to regulate all of the EU with the Markets in Crypto-Assets (MiCA) proposal. Countries like Germany and Switzerland have their own crypto rules. Meanwhile, France and the U.K. are still figuring their rules out.
FAQs
Q: What is cryptocurrency and should I invest in it as part of my personal finance strategy?
A: Cryptocurrency is a digital form of currency that operates independently of a central bank. Investing in cryptocurrency can be risky due to its volatile nature, so it’s important to thoroughly research and consider your financial goals and risk tolerance before investing.
Q: How can I improve my credit score to better manage my personal finances?
A: You can improve your credit score by paying bills on time, keeping credit card balances low, not opening multiple new accounts at once, and monitoring your credit report for errors.
Q: Should I take out a loan to pay off my debt?
A: Taking out a loan to pay off debt can be a helpful strategy if it reduces your overall interest rate and helps you consolidate and manage your debt more effectively. However, it’s important to carefully consider the terms of the loan and ensure you can make the payments on time.
Q: What are some key areas of personal finance that I should focus on?
A: Key areas of personal finance include budgeting, saving for retirement, managing debt, building an emergency fund, improving your credit score, and understanding investing.
Q: How can a personal finance course or app help me manage my money better?
A: Personal finance courses or apps can provide valuable education and tools to help you understand and improve your financial situation, including budgeting, investing, debt management, and retirement planning.
Q: What is the significance of the year 2024 in personal finance?
A: The year 2024 is significant in personal finance as it may mark important changes in tax laws, retirement planning strategies, investment opportunities, or economic trends. It’s important to stay informed and adapt your financial plans accordingly.
Q: How can I determine the best personal finance advisor for my financial needs?
A: When choosing a personal finance advisor, consider their qualifications, experience, track record, fees, communication style, and whether they align with your financial goals and values. It’s important to find an advisor who can help you make informed financial decisions and achieve your financial goals.
