Investing money is essential to survive the tides of inflation and live a comfortable life. But with all the upheaval in the financial market, many people have come to doubt centralized banks and the traditional government-controlled financial institutions. Wouldn’t it be better to invest in something decentralized, such as cryptocurrencies? Because cryptocurrencies aren’t controlled by any one organization, they can’t be manipulated easily. Before diving into crypto trading, you should understand the basics of cryptocurrency and how people profit from virtual transactions.
What Exactly is Cryptocurrency?
Cryptocurrency is a digital medium of exchange that uses cryptography (encryption technology) to verify the transfer of funds and control the generation of currency units. Cryptocurrencies use blockchain technology to gain transparency, immutability, and decentralization. Cryptocurrencies can be exchanged directly between two parties using public and private keys. The processing fees are very minimal, unlike those charged by traditional financial institutions.
How Do I Get Started?
Crypto trading can earn you excellent returns, but it’s still a risky business. The concept of crypto trading is similar to stock trading. Instead of shares, you exchange cryptocurrencies such as Bitcoin and Ethereum. Of course, you have to pay a fee to the exchange for every trade that you make.
Like stock trading, Crypto trading is all about picking the right currency at the right time. However, the volatility in the case of cryptocurrencies is very high when compared to stocks. To play it safe, start by investing only the amount that you can afford to lose.
To start crypto trading, the first thing you need to do is find an exchange where cryptocurrencies are traded. By running an online search, you’ll find more than 200 different exchanges, all of which fall into one of two categories:
- Fiat to crypto exchanges
- Crypto to crypto exchanges
If you’ve never used cryptocurrency before, you’ll have to start with a fiat to crypto exchange. Fiat currencies include any government-issued currency not backed by intrinsic value, such as the U.S. dollar and the Euro.
Once you decide on the exchange, your next step is to create an account. Fill in your details, verify your identity, and start adding funds to your account using whatever fiat currency you use. You can now proceed towards buying your first cryptocurrency.
Buying any random cryptocurrency coin may not be a wise move. You’ll have to evaluate the currency thoroughly if you want to make sure you don’t lose money. Start looking for trustworthy sources that can give you all the information you need to know about that coin. Dig into social media and follow blogs and popular publications in the industry.
Once you have bought the cryptocurrency, you’ll have to store it. This is where your cryptocurrency wallet comes into play. A cryptocurrency wallet is a digital wallet in which you can drop off all your cryptocurrency coins. You can choose from official cryptocurrency wallets, multi-currency wallets, and built-in wallets of exchanges, depending on what currency you’ve purchased. If you plan to use or trade your currency frequently, consider using a “hot wallet” that’s always connected to the Internet.
If you aren’t comfortable keeping your cryptocurrency in an exchange, you can store it in a hardware wallet or even a paper wallet. Hardware wallets are like USB sticks that store cryptocurrencies. However, if you chose to use a paper wallet, you will have to print out your public and private keys and keep them in a safe place.
What About Taxes?
Any tax consultant who has experience dealing with crypto should be able to clarify all your queries about cryptocurrency taxes. Keep in mind the rates and the rules might differ from one jurisdiction to another.
For anyone filing taxes in the U.S., the Internal Revenue Service requires you to treat cryptocurrency like property. In 2014, the IRS released a notice stating, “In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.” It also said, “For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”
Choose a Reputable Exchange
Crypto trading is comparatively a new form of trading, meaning expertise in the field is limited. Also, the high volatility factor makes it riskier to invest in cryptocurrencies. When getting started in crypto trading, you should find a reputable exchange that helps you track of your cryptocurrencies and provides you complete support services. Do some research and read through a few reviews before you choose the Crypto exchange that is best suited to your investment needs. Always go with a trusted exchange that is well-known.