The Basics of Cryptocurrency
In essence, crypto is a form of currency that can be used to pay for goods and services online. Entities like Bitcoin, Dogecoin and Ethereum issue their own currencies, usually referred to as “tokens” or “coins,” which can be traded for specific goods or services offered.
Investing in crypto is nearly identical to investing in a country’s native currency, such as the yen or the euro—the difference being that a country’s currency rises and falls based on the country’s successes, whereas, according to Investopedia, crypto rises and falls for various reasons, including “media coverage, speculation and availability.”
“Blockchain is a way to validate that transactions have occurred in an encrypted, anonymized fashion,” Holt says. “It’s a public ledger of sorts for transactions.”
Pros & Cons of Investing in Cryptocurrency
Investors are turning to crypto over traditional government-based money for a variety of reasons. Some point to crypto’s ability to reduce corruption—chances of abusing power increase when one entity holds all the power, and crypto’s blockchain technology distributes power among all members of its network. (Unlike a mutual fund where a single entity controls one ledger, blockchain uses a distributed ledger that helps to remove the risk of corruption or fraud.) Crypto also allows folks to cut out the middleman (banks) and take charge of their own funds.
But crypto isn’t without its risks—currencies lack regulation and are often volatile. In 2017, the price of Bitcoin and other major currencies skyrocketed above 1,000 percent before crashing back down. And more recently this year, Elon Musk’s mentions of Dogecoin have it both tumbling and soaring.
“That’s one of the biggest risks—the degree to which cryptocurrencies can be artificially inflated,” Holt says.
So, is cryptocurrency safe to invest in? Holt says yes, but with a caveat.
“If you’re very risk-averse, I would not recommend investing in crypto,” Holt continues. “It’s not something I would do as a casual investor generally. But for people who are not risk-averse—who would accept a higher degree of loss—this is a reasonable investment.”
In general, Holt recommends those interested in taking the plunge invest in cryptocurrencies that are well known. There are more than 9,000 different cryptocurrencies in existence as of April 2021, but more established cryptos like Bitcoin, Ethereum and Litecoin might be a good place to start. (Think of it like in- vesting in an established economy versus a developing economy.)
“There are so many variations,” Holt says. “Do your due diligence—don’t just pick [a new cryptocurrency] that was pumped up once on a podcast. Treat it like you would any other vendor. If you just buy $100 worth of some far-flung crypto, you may never get that money back. This is a space that can be pretty easy to scam people, so due diligence is tremendously important.”
When deciding which cryptocurrency to invest in, you’ll find countless articles with advice and tips from financial experts on sites like TIME, Forbes, Business Insider, CNBC, Investopedia, etc. Ideally, a financial advisor would be able to guide you on which cryptos to consider adding to your portfolio and how much, but many advisors don’t recognize crypto as an investable asset class like stocks or bonds. Companies like Edward Jones and Fidelity have cryptocurrency primers on their websites, but clearly state that their customers cannot buy or sell crypto through them.
Holt also suggests beginner investors start by buying crypto and sitting on it.
“I would be very careful about investing with the notion that you’re going to turn it around quickly and sell it off,” he says. “Look at it as a broader portfolio investment. Start slow and build your way to being comfortable with it.”
Holt adds that for environmentally conscious individuals, some cryptocurrencies have a lower carbon footprint than others. New crypto is created or “mined” by using computers to complete very difficult math equations. Solving a Bitcoin equation requires more computing power than currencies such as Dogecoin or Ethereum, which means it uses more electricity per coin mined.
Crypto may be hot right now, but with its volatility, will it stay that way? Is it the future of finance?
“It’s possible,” Holt says. “I think that hard currencies are always going to have a specific role. At the moment, it seems like crypto is just another type of commodity or stock. But the blockchain and accountability component makes it attractive. It could certainly happen over time, but would maybe require some generational changes before that could take root.”
How to Get Started Investing in Cryptocurrency
Holt says he would heartily encourage anyone who’s interested in investing to do a lot of reading upfront to understand how cryptocurrencies work.
“It’s important to understand the tax implications of buying and using cryptos,” he says. “There are taxes one will have to pay in order to liquidate or use Bitcoin in the U.S.—you will be taxed like capital gains.”
The best way to get started, in Holt’s opinion, is to use a site like Coinbase (coinbase.com) that provides very easy-to-understand tutorials.
“Coinbase is definitely the forerunner in this,” he says. “The site will also give you cryptocurrency while you’re going through their tutorials. So you get a little bit of cryptocurrency for the effort that you put into learning about it.”
Beyond learning about crypto, you can use also Coinbase to invest in more than 50 different cryptocurrencies, and the site has been lauded for its strong security measures. (Note: If you choose to use Coinbase as an exchange for investing in crypto, it does charge fees.)
For more information about investing in crypto, visit coinbase.com.
6 Crypto Investing Apps You Should Know
You’ve sailed through the Coinbase tutorials and now you’re ready to dive into other exchange options. For those looking for something beyond Coinbase’s offerings, here are some of the best apps and sites for investing in cryptocurrencies.
Robinhood is considered one of the best apps for beginners looking for options to buy a wide array of cryptocurrencies, as well as more traditional investments like stocks and options, all in one place. All crypto trading on the app is completely commission-free, and there are no fees or account minimums. A premium account with more features starts at $5 a month.
Gemini is popular with investors in part because of its attention to security and transparency. The app, which features a user-friendly interface, offers Federal Deposit Insurance Corporation (FDIC) protection on all deposits. And as an added benefit, new users get $10 when they open an account and deposit $100.
eToro offers investors a solid selection of cryptocurrencies to choose from (more than a dozen), as well as some features that set it apart from other apps—think social media-type commenting and following that allows you to observe and copy the trades and portfolios of other investors. The app also includes a practice account that you can try out before investing real funds. Unlike Robinhood, eToro does require a $50 account minimum and the app has a straightforward fee schedule that varies by cryptocurrency.
BlockFi is an exceptional app for earning monthly interest on your crypto investments (up to 7.5% annually). The app allows users to borrow against their holdings instead of selling their tokens/coins, or users can hold your crypto and let it earn interest. Currently BlockFi is offering a Bitcoin bonus when you deposit $100 or more, but there’s no minimum deposit or monthly fees.
Stockpile is perfect for parents wanting to teach their kids or teens about investing and the stock market. The app makes it easy to gift stock to a young user, and parents can also keep an eye on the account of a minor. Stockpile does charge a commission of $0.99 per trade, but it offers fractional share investing, which may make the fee worth it for some users. Stockpile also includes fun and educational mini lessons that teach kids about the ins and outs of investing. Does your teen want to know more about Bitcoin? Stockpile will guide them through the basics while giving new users a $5 credit to invest in crypto or other stocks.
More from Northern Michigan Financial Services
This article first appeared in the September 2021 issue of MyNorth Estate & Financial Services. View more financial-related articles, preview and purchase our digital issues or subscribe and get Traverse, Northern Michigan’s Magazine delivered to your door each month.