What do you need to know to start adding a little crypto to your portfolio?
The idea of investing in cryptocurrency has gained a lot of currency lately, especially during the Russian invasion of Ukraine, which has made its value of not being a banking currency more critical.
But, what is crypto? What do you need to know to start investing with it? What are its advantages and disadvantages? This beginner’s guide provides some answers..
- What is cryptocurrency?
Cryptocurrency, or crypto, is a digital currency designed to allow you to purchase goods and services. Unlike money, it doesn’t rely on various governments’ central banks to verify transactions or create new currency units. Instead, it uses cryptography to confirm transactions on a publicly distributed ledger, called a blockchain.
- What should you know about crypto?
- Cryptocurrencies are very volatile. Bitcoin, for instance, can drop 30% in a week, and then skyrocket. Buying it is still very speculative because the returns are neither stable, nor guaranteed. If you want to try it out, you should only allocate a very small portion of your portfolio to it. Some advisors are trying 1% for their clients who want to try it out.
- Cryptocurrency gains are taxed at the regular capital gains rate if you sell crypto for cash, exchange it for another crypto, use it to pay for goods or services, get paid in crypto or by airdrop, or receive crypto as a bonus or reward. If you don’t declare your holdings, you can be penalized – just as you would be for unpaid taxes. That include both fees and interest, which can add up..
- What are the advantages and disadvantages of investing in cryptocurrency?
- Possibility of great gains: Crypto, such as Bitcoin, is the best-performing investable asset of the last decade, but it can also quickly tank, leaving you with nothing.
- Support an emerging technology: Blockchain technology is impacting almost every sector of the economy and your investment would help to support those.
- Diversify your portfolio: Even if you’re a cautious crypto investor, you can consult with your advisor about the benefits of adding a little crypto to your portfolio to diversify it with this new theme.
- High risk and volatility: crypto is very unpredictable, which is why most wealth advisors still recommend only investing a little in it, so you don’t compromise your long-term goals if you lose it all.
- Vulnerability: There’s often news about theft, fraud, scams – and people even forgetting their passwords – so there’s more chance you can lose your money here than with more traditional investing.
- If your bank fails, the Canadian Deposit Insurance Corporation will insure up to $100,000 per insured category - including savings and chequings account, guaranteed investment certificates and other term deposits, and foreign currency – for each member institution. But crypto isn’t covered. So, if your crypto exchanges goes bankrupt, gets hacked, or closed down with no notice, you lose it.
- How can you buy cryptocurrency?
- Choose a reputable exchange where you’ll buy, sell, and store your crypto. The bigger ones have become quite user-friendly, so check them out. Check:
- Is it a publicly traded company?
- Who regulates it?
- How many users does it have?
- How many cryptocurrencies does it offer?
- How easy is it for you to use?
- What fees does it charge?
- Does it offer any “reward” features for the amount of crypto that you buy?
- Can you extract your private key to a cold wallet to take it offline?
- Decide how much crypto you should have in your portfolio: This is where your financial advisor can definitely help you find the right balance. Given how risky and volatile crypto is, you want to put a minimum in your portfolio if you’ve identified in your financial plan that your goals are to grow your money and invest it to meet your long-term purposes, whether it’s buying a house or retiring.
- Safely store your private keys in a wallet: Once you buy some crypto, you need to figure out how to store your private keys, so you are ensured access to your investment. Hot wallets allow you to easily access and trade your crypto and now have more security protection. But hackers are also getting more sophisticated, so more long-term holders are choosing to save their private keys to a cold walled – a USB or hard drive that they keep safe.
- Maintain your investment: Don’t, whatever you do, buy the crypto and forget about it. You can:
- Add to your crypt to your main investing dashboard to monitor its long-term performance,
- Regularly check the news headlines to monitor regulatory scrutiny of your chosen exchange,
- Monitor which governments are banning or blessing crypto,
- Keep learning about new cryptos and the changes in the form that you’ve chosen.
- What are the top currencies beginners should consider?
There are currently about 7,500 cryptos, but many of them won’t last. While Bitcoin is one of the better-known, most exchanges only offer a couple of dozen. Before you make your choice, make sure you do your due diligence to ensure that you buy one that is legitimate and viable for the long-term.
Some of the top-rated cryptos today are:
- Bitcoin: You’ll find it on every popular exchange.
- Ethereum: It’s the second most popular crypto.
- Dogecoin: Dogecoin was created in less than two hours as cryptocurrency satire – or joke. But it’s grown exponentially with speculation and internet chatter.
- Binance Coin: Binance, the world’s largest coin exchange, owns this coin. But it’s become popular because it’s been widely accepted and reduces Binance’s trade fees.
Given the range, it’s hard to know which one to buy, particularly since this whole asset class is very speculative and volatile. So, it may come down to the ones you believe in. Two that are often mentioned in the wealth management world, and built into some mainstream funds, are Bitcoin and Ethereum. Ethereum may have more technical merit, but Bitcoin may have more real-world applications. Do your research to ensure you’re choosing the right one.