What You Should Know Before Buying Cryptocurrency
Cryptocurrency is digital currency that uses cryptographic algorithms to create and verify transactions on a blockchain. At it simplest form, a blockchain is a database storing data in "blocks" that are linked together. A blockchain is also decentralised, shared and updated across a network of computers. This mechanism is designed to ensure transparency and security of information on the blockchain.
The most famous cryptocurrency is Bitcoin, a cryptocurrency invented in 2009 by its mysterious, and still anonymous, creator Satoshi Nakamoto. Since then, over 10,000 cryptocurrencies are estimated to have been created. In recent times, the cryptocurrency market has hit new highs, and you may have experienced a tinge of FOMO, however, here are a few things to keep in mind before you get started (and no, this is not financial advice).
Do Your Own Research (DYOR)
The golden rule of investing is to understand what you're getting into. And unfortunately, the cryptocurrency market is awash with scammers and opportunists. To field your way through the noise, do your own reading on the cryptocurrency project you are considering investing in as well as blockchain technology more generally. Some ways are:
Read the white paper - most cryptocurrency projects will have a white paper that will describe the purpose of the project, the technology and a roadmap;
Research the team, including their background and experience especially if it's a new project (crypto projects have been known to use fake pictures, for example... Ryan Gosling as a graphic designer)
Check out the project's community using Telegram or Discord (however, be wary of people that will try to promote a cryptocurrency for ulterior purposes);
Use learning resources such as CoinMarketCap, CoinBase and Binance Academy.
Learn how to store your cryptocurrency safely
The popular phrase "not your keys, not your coins" refers to having control over a private key that identifies you as the owner of the cryptocurrency. If you choose to keep your cryptocurrency on an exchange or with a third party, you do not have control over the cryptocurrency. For example, if the exchange goes down or is hacked, your coins may be lost. It is generally recommended to transfer cryptocurrency to a wallet you control, especially if you have a large amount invested. This could be through a "cold wallet" such as a hardware wallet (physical devices which stores your keys offline) or a "hot wallet" which is connected to the internet. Having said that, using your own wallet means you do need to be more careful in how you store your keys. Regardless of where you choose to store your cryptocurrency, take wallet security seriously (here's a place to start).
Understand what taxes you'll need to pay
Depending on where you live, you may need to pay taxes on some transactions involving cryptocurrency. For example, in the USA and UK, capital gains tax may apply on profits you make from cryptocurrency. You can try using a tool like Koinly or CoinTracker to keep track of your portfolio and any taxes that may apply in your jurisdiction. The taxation rules around cryptocurrency can be complex, so be sure to check and get advice from a lawyer or accountant if needed.
Don't invest more than you are willing to lose
Once again, this tenet is true for any investment but there's no getting around that cryptocurrency is a particularly risky and speculative investment. While we may hear about those who make wild fortunes by making an opportune investment at the right time and place, we often don't hear about those who lose all the money invested or who sell at a great loss. Also, be careful of schemes that promise you returns that sound too good to be true - they are probably very high risk.
Cryptocurrency investing can have turbulent highs and lows, so take the time to understand the risks involved before deciding to invest.
Do you have any tips you'd like to share? Let us know in the comments!