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The price of Bitcoin has been up and down all year, from an all-time high of $60,000 in April to under $30,000 in July. Meanwhile, Americans’ interest in Bitcoin and cryptocurrency has only grown, at least according to their Google searches.
We’ve taken an interest in crypto this year, too — especially after noticing the lack of guidance for long-term investors more interested in retirement savings than getting rich quick with some new meme coin. Amid the constant price fluctuations, we’ve shared how investors can incorporate crypto into their portfolio without risking their other financial priorities — and weather the volatility along the way. Whether you’ve already invested and want to find the best form of wallet storage or you’re only beginning to explore how cryptocurrency actually works, we’re here to help guide you through the world of crypto.
Many of the topics we’ve covered are the same ones crypto-curious investors are asking about on Google. Based on Google autofill results, related search terms, and “people also ask” suggestions, we’ve rounded up some of the most common questions, along with the answers and expert advice that can help you be a smarter investor.
What is cryptocurrency?
Cryptocurrency is a completely digital, decentralized form of currency. It can be used as a means of payment or exchange (though that’s not a very practical use today), or as a potential store of value. Since it’s a digital currency, you can’t carry Bitcoins around physically in bill or coin form; all transactions take place online. Cryptocurrency is also decentralized, meaning it’s not backed by government authority the way the U.S. dollar, for example, is. Instead, it’s maintained by its users.
When you buy, sell, or trade crypto, those transactions are recorded on a decentralized ledger called blockchain, which is a permanent, unchangeable record. Any changes to a blockchain must be approved by a majority of users, which also makes it a highly secure form of record keeping.
What questions should I be asking about crypto?
For true crypto novices, just knowing where to begin your research can feel like an uphill battle.
The questions you should ask about crypto will depend largely on your financial situation and goals. If you’re just beginning to explore digital currencies, you may want to start by learning the important terms and getting more familiar with how crypto works as an investment. If you’ve covered the basics and you’re considering buying crypto, these are the four most important questions you should ask yourself before you begin investing, according to experts we’ve spoken to:
- Why do you want to buy crypto?
- What is your risk tolerance?
- Where — and how — do you plan to buy cryptocurrency?
- Which cryptocurrencies would you buy?
Have a strategy before you put money down: Clarify your intentions, evaluate your ability to take the risk, and then make a buying plan.
What is the purpose of cryptocurrency?
The original intention behind Bitcoin, the first cryptocurrency, was to create an electronic cash system people could use in daily transactions. You technically can buy and sell things with it, but Bitcoin’s price fluctuates quickly, which makes it a poor fit for spending instead of cash. You could spend $50 worth of Bitcoin on something today that ends up being worth $20 tomorrow. It’s also not widely accepted as a form of payment yet, so you’ll have very limited purchasing power.
While it’s not a great means for exchange, Bitcoin and Ethereum have shown investors they can be potentially valuable — if speculative — as investment assets. In other words, people purchase crypto in hopes of cashing out for a profit after it increases in value, just like more traditional investments. Bitcoin, for example, has already shown growth over time: just eight years ago, in late 2013, the price of 1 Bitcoin was around $200, and it now hovers around $30,000 (with plenty of ups and downs between).
Is cryptocurrency taxable?
Yes. But if all you do with crypto this year is use U.S. dollars to purchase crypto and then keep it in an exchange or your personal crypto wallet, you won’t owe taxes on it. In general, the more active a crypto trader you are, the more tax implications there might be. Taxable crypto events include things like selling your crypto back into U.S. dollars, trading one crypto for another (for example, Bitcoin to Ethereum), earning crypto income, and using it to make purchases.
For tax purposes, the IRS treats cryptocurrency like other personal assets such as stocks or gold. If you sell or exchange your investment, that transaction’s capital gains are taxable. The complexity of your transaction history will determine how much you’ll need to do to prepare for tax season if you have crypto. While there are new companies that promise to organize your crypto for tax filing, it’s ultimately your responsibility to keep track of your crypto transactions and report them to the IRS; so if you’re making frequent crypto moves, you’ll want to stay on top of this.
Who controls cryptocurrency?
Cryptocurrency creators can set certain parameters when they make a new crypto — such as how much there will be or rules around buying and selling — and those typically cannot be changed. But because cryptocurrencies are decentralized, control of day-to-day operations is distributed among users, and any changes require majority approval from these users — known as nodes.
Because cryptocurrency is so new and different from traditional forms of finance, the world is in unknown territory when it comes to regulation. There’s little existing legislation around the ownership and trade of digital currencies, although the U.S. government has expressed interest in establishing cryptocurrency regulation.
Investing in Cryptocurrency
How to start investing in crypto?
- Choose an exchange: A crypto exchange is the online trading platform you’ll use to buy your crypto. Some details to consider include security, fees, and available coins.
- Fund your account: As you would with a traditional investment account, you’ll need to move U.S. dollars into your crypto exchange account.
- Place an order: This differs by exchange, but you’ll essentially trade the dollars in your exchange account for the cryptocurrency you want.
- Practice safe storage: Decide whether you want to keep your coins within your exchange account or move them into your own hot or cold wallet.
How much of my portfolio should I invest in crypto?
If you’re able to tolerate the risk that comes with crypto investment, experts say it can be a good diversifier for your portfolio. But the crypto market is extremely unpredictable, so you’ll only want to invest a small portion of your portfolio — and only after your other financial priorities are in order (things like saving for emergencies, paying down high-interest debt, and investing in a conventional retirement account).
Experts we’ve spoken to recommend investing anywhere from 1%-5% of your portfolio in crypto, depending on your financial situation. The volatility level of crypto is high, so you don’t want to risk more than you’re willing to lose. As personal finance icon Suze Orman puts it, the amount you invest in crypto “depends on how much money you are willing to lose.”
Should I invest in crypto or more traditional funds?
Considering how speculative crypto is, we would never recommend investing in it over traditional investment funds. Before you put any money in crypto, you should make sure you’ve set up a retirement fund, like a 401(k) or Roth IRA. Plan for your retirement by investing in an ETF or index fund — low-cost portfolio investments with proven long-term records of building wealth.
If you already have a healthy portfolio, you may look to diversify with crypto in addition to more traditional funds. It all comes down to your specific financial goals and how much risk you feel comfortable taking. If you do invest, here are some best practices experts recommend:
- Keep the percentage of your portfolio in crypto low — no more than 5%
- Be prepared to lose the money you invest
- Invest for long-term growth, and avoid short-term fluctuations
Which cryptocurrency should I invest in?
In general, experts recommend beginner crypto investors stick with Bitcoin or Ethereum, the two largest by market cap and trade volume. They’re still highly speculative and volatile, but are a little less risky than the thousands of other coins available.
Non-Bitcoin cryptocurrencies (known as altcoins) are often designed for unique purposes, like being more energy efficient (and thus eco-friendly) than Bitcoin or as a potentially better means for transactions. But most of them have an even smaller chance of growing in value, and altcoins can put your investment at even more risk than with the comparatively more stable Bitcoin and Ethereum.
You can always take the gamble and consider an altcoin if you see promise in it. Just proceed with a healthy dose of skepticism — investing in cryptocurrency is already extremely speculative, and becomes even more so when you choose an altcoin with little to no history. For most retirement-minded investors, experts emphasize Bitcoin or Ethereum are better options.
Can I be hacked? How do I protect myself?
Yes, the exchange you use to buy your crypto and the wallet you use to store it can be hacked. If you choose to hold your crypto in an exchange or on a software-based hot wallet, make sure you choose a platform that has robust security measures in place. The most secure protection from hackers is cold storage — because it’s completely offline, there’s zero chance for hacking. But that extra security isn’t without cost either: If you lose your USB-like cold wallet or the encrypted keys to get into it, you likely lose any crypto held on it, too.
Hacking is one risk, but as crypto’s value has grown, cryptocurrency crime has too. If you invest, be on the lookout for fraud. Recognizing common scams can help you protect yourself and your money. Here are a few crypto scams to watch for:
- Someone who will only accept payment for goods or services in cryptocurrency
- Unsolicited offers to help you make money or increase your holdings
- Initial coin offerings for fake cryptocurrencies
- Crypto pump and dump schemes
The Future of Cryptocurrency
What is the future of Bitcoin?
Given cryptocurrency is still in its relative infancy, many questions regarding its future remain unanswered. Bitcoin has only existed for a little over a decade — amid constantly evolving technological advances and regulations. The value of both Ethereum and Bitcoin has steadily risen over the years (with plenty of dips along the way), but with so little historical record compared to the stock market, it’s difficult to make any concrete forecasts.
More financial institutions are starting to hold crypto, and some large corporations are adding crypto to their balance sheets. Federal regulators have also taken an interest in more formal guidance and even the creation of a central bank digital currency (CBDC). Beyond that, many experts see the potential for innovation backed by blockchain technology that could transform our lives in the future.
But there is also a long list of risks associated with crypto that could limit its potential value. From the concerns of cybercrime to high market volatility susceptible to celebrity influence and the environmental impact of crypto mining — there’s no shortage of reasons to remain cautious as we look to the future of crypto.
Is there any potential for the widespread use of cryptocurrency as a currency?
As of right now, there are few instances in which using cryptocurrency to buy things would make sense. Of the platforms that do accept crypto payment today, many only accept Bitcoin, which is especially ill-suited for payments, given its extreme price fluctuations.
There is a chance that payment with digital assets could become more common in the future, especially as digital currencies like stablecoins — which are pegged to existing currencies and less volatile — become more popular and take on potential government regulation.
The U.S. government is also considering a central bank digital currency (CBDC). It would operate using blockchain technology like other cryptocurrencies, making it faster and more secure than today’s digital transactions. Unlike crypto, a CBDC would be centralized and backed by the Federal Reserve — making it much more useful for purchases.