Investing in cryptocurrencies… how it works

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Cryptocurrencies are often called the currency of the future, as they are fully digital and completely different from traditional money, which have both their enthusiasts and opposers. More importantly, e-coins belong to the most popular investment assets of the 21st century. Because of this, more and more people wonder: how to start investing in it if someone never had anything to do with cryptocurrencies?

Forms of investing

There are many asset classes that have the continued interest of investors. A good example of that is real estate. Investing in real estate brings a steady profit and rarely loses value in the long run. Unfortunately, investing in real estate is a game for the wealthy, as it requires a considerable own contribution.

Alternative investments are playing an increasingly bigger role on the market. Buying rare coins, comic books, stamps or figurines is a great way to multiply your savings. However, it requires a lot of knowledge on a very specific topic and coming to terms with low liquidity. Additionally, the collectible and alternative goods market is quite small. Despite that, alternative investments are a great choice for people who have a bit of time to spare and a knack for collecting. Another new, interesting type of investing is crowdfunding. Alternative investment methods are becoming a real competition to selling stock. Many companies obtain funds through shareholder crowdfunding, In the long term such an investment can generate a lot of profit, but on the other hand it is much less liquid than selling traditional stocks and bonds. Before investing via crowdfunding it’s important to calculate all the pros and cons and keep in mind that selling shares obtained that way might be difficult. Among the more classic ways to invest, buying gold and silver is almost a surefire way to profit. Additionally, this year both long- and short-term investments look promising. Experts are reporting a decrease in the prices of precious metals.

Despite that, specialists still consider cryptocurrencies to be the most innovative among alternative assets and identify them as a way for securing long-term profit. The advantage of e-coins seems to be the potential for growing with time and a relatively low price.

Investing in cryptocurrencies

Cryptocurrencies are a speculative asset, so investing in them should be based on the “buy cheap, sell high” strategy. This kind of investing is called buying the dips. It’s a basic investment technique, which means buying more crypto as their price is falling and during corrections. Using the “buy the dips” method requires the expertise to analyze charts, average long- and short-term moves and historical trends in cryptocurrencies. In this strategy, you can “buy big dips” or “small dips”. Big dips occur when the price falls below the average, while small dips happen when the price falls from the previous height. Investors buying in accordance with the “buy the dips” approach can decide on selling it quickly (short-term investing) or holding onto it to create a long position (long-term investing). All in all, the bottom line of investing in cryptocurrencies is buying at a lower price to sell at a higher one.

Another strategy is buying when the rate is lower than the average historical results: buying assets using the “buy the dips” method is a good strategy,  but it’s not easy to know how will the price of a cryptocurrency change within the next hour or in a day. Which is why there is another strategy, which is based on the historical values.  Many cryptocurrency websites display the “moving average” table, which illustrates the best buying and selling points of the cryptocurrency market.

So when is the best time to sell the amassed cryptocurrency? First of all, it’s important to consider finances, risk tolerance, tax consequences and the reason you invested in crypto in the first place. It’s worth to remember that cryptocurrencies have a lot of potential, both technology-wise and investment-wise, but managing them requires basic skills and knowledge that allows for independent cryptocurrency trade.

Investing and its legal aspects

Different countries have different approaches to cryptocurrency trading. In Poland, both buying and trading cryptocurrency is fully legal. The income from e-coin transactions are taxed at two brackets, 18 and 32%. Additionally, the process of buying or selling digital currencies is considered to be a transfer of property laws, which is taxed at 1% of the transaction value. This income should be demonstrated and accounted for in the annual income tax return.

In Great Britain, cryptocurrencies are treated as derivative income. The Bank of England took into consideration the risk that e-coins pose to the stability of the finance market in Great Britain and concluded that the size of the cryptocurrency market currently isn’t big enough to threaten the monetary or financial stability. That means that the government won’t interfere in the cryptocurrency trade with any additional regulations.

In the European Union no concrete laws were made concerning cryptocurrencies as means of payment. It was, however, stated that VAT does not apply to converting traditional (fiat) currency into cryptocurrency. This rule is valid throughout the Union. So in that aspect it is possible to use cryptocurrency as a payment method. VAT and other taxes, such as the income tax, still do apply to transactions made with the use of tokens exchanged for goods and services. A more detailed description of the legal aspects is available here…

Cryptocurrency trade – where to start?

Investors usually agree that starting to invest in cryptocurrencies on your own is not easy. Mainly because this market is still very prone to scams and fake offers of buying new, supposedly futuristic e-coins. More and more investors and private persons decide to take an investment course, there is also a growing market for such materials. In comparison with the situation from a few years ago, people on average are better prepared to face challenges and less likely to fall victim to a scam.

Specialists suggest buying your first e-coin in a good online crypto-cantor. There are two kinds of transactions you can make in a cantor: fiat to crypto and crypto to fiat. Every cantor sends the cryptocurrency to the user’s designated cryptocurrency wallet.

So, to invest in cryptocurrency, you should register an account on an online crypto-cantor platform. Next, there is a verification requirement – it is mandatory due to the European Union law. But it is possible to buy cryptocurrency in a cryptocurrency cantor without registration, bypassing the registration and verification processes. Cryptocurrency that is being used on a regular basis should be stored on a “hot” type cryptocurrency wallet. Hot wallet is one that is installed on a device connected to the internet – as a mobile application, for example, or an online account. It is very easy to do transactions with the use of a hot wallet, but they are relatively easy to hack.

Storing cryptocurrency on an offline device is called a “cold wallet”. They are the best pick for investors who seek the safest storage method. Cold wallets are also recommended for long-term investors, who don’t need to access their cryptocurrency for many months or years.

Cold wallets are not free from their own risks (like being physically stolen), but if the investor follows the guidelines and takes all the necessary precautions, they are minimalized.

Does it have a future?

It’s not unheard of that a digital currency gets wiped out due to a computer error or stolen by a hacker. Fortunately, the technological advance grants investors an increasingly higher degree of security. It also applies to the developments of an e-coin in itself.

Any cryptocurrency that aims to be truly successful in the future may be forced to adhere to many inconsistent criteria. It would have to be mathematically advanced (to avoid scams and hacker attacks), but easy for the consumers to understand; decentralized, but with good security systems and user protection. It’s quite complicated to check all of these boxes.

While considering investing in cryptocurrencies it’s best to treat it as any other speculative venture. In other words, remember that you risk losing most, if not all of your savings. Cryptocurrency doesn’t have any external, objective worth aside from however much someone is willing to pay for it. That makes it very prone to sudden price fluctuations. It can be both an upside and a downside – depending on how much an investor gained or lost because of it. In the case of cryptocurrencies and most other modern investment assets, you have to remember that first and foremost they do not exist in a vacuum: they can get taxed, pressured, and influenced by establishing an internal goal. So it’s only after understanding the market that you can risk investing in e-coins.