February 3rd, 2022

Questions Unanswered About Crypto

Cryptocurrency is no longer just a buzzword in the financial arena.

Cryptocurrency is no longer just a buzzword in the financial arena, but rather a functional reality in the last five years. However, there are still a lot of unanswered questions in people’s minds about crypto and its value. What about the purpose of these digital assets? What about the tax regime that works in the case of crypto? There are so many questions, but the answers are hard to find. And in most cases, the lack of answers is what stops you from going ahead and investing in cryptocurrencies. So, here’s solving your dilemma by addressing your unanswered questions about cryptocurrencies. Read on to know more! 


What Exactly Is the Purpose of Cryptocurrency?


The actual intention behind the first cryptocurrency, Bitcoin, was to make electronic cash system that people can use in their daily transactions. Technically, you can sell and buy things using it. However, the price of Bitcoin tends to fluctuate consistently. Thus, it makes people skeptical of spending it in place of cash. You can spend $50 of Bitcoin on anything today and that can become $20 tomorrow or $60 on the day after that. Also, it is not widely accepted as payment. Thus, your purchasing power is still limited. 

Though it is not a great option for exchange, both Bitcoin and Ethereum have pointed out that they are potentially valuable (even if speculative) as an investment asset. Also, people buy cryptocurrencies to cash out for profits after its value increases – a lot like the conventional investments. For instance, Bitcoin has already grown over time. Back in late 2013, one Bitcoin was priced at around $200. Then, it rose to come around $30,000 within eight years, with loads of ups and downs in between.  


Can Cryptocurrencies Be Taxed?


Cryptocurrencies can be taxed. The taxation on cryptocurrencies changes from one country to another. Generally, the more active that a crypto trader is, the more tax implications are present in it. Also, taxable cryptocurrency events tend to include things like selling the crypto back in dollars, trading a crypto for another, and using crypto income to make purchases. For the purpose of taxes, in most cases, cryptocurrencies are treated like all other personal assets as gold or stocks. When you exchange or sell the investment, the capital gains of the transaction are taxable. The transactional history’s complexity will determine how much you need to do in order to prepare for the tax season when you’ve crypto.  

Though there are several new companies that come with the promise to organize the crypto for tax filing, the responsibility of keeping track of your crypto transactions and reporting them to the IRS is ultimately your duty. Thus, if you are making crypto moves frequently, you will need to be in sync with this. 


Who Is the Controller of Cryptocurrencies?


The creators of cryptocurrency can set a couple of parameters when they make new crypts, such as how much crypto will be there or regulations around selling and buying. Typically, these aspects are unchangeable. However, as cryptocurrency is decentralized, the control over everyday operations is distributed among multiple users. All changes need the approval for a majority of users called the nodes. 

As cryptocurrency is still new and truly different from conventional forms of finance, the world is still figuring out the regulations. There is hardly any legislation regarding the trade and ownership of digital currencies, though many countries have expressed their interest in terms of establishing crypto regulation. 


How Much of the Portfolio Should Go Into Crypto Investment?


If you can tolerate all the risk that accompanies crypto investments, it can be a great portfolio diversifier for you. However, the cryptocurrency market is still unpredictable. So, you will just want to invest a smaller part of the portfolio – after the other financial priorities are set in order. Thus, think about investing in conventional retirement accounts, paying high-interest debts, and saving for an emergency. 

Based on your financial condition, investing about one to five percent of the portfolio in crypto is a good idea. Crypto has a high volatility level. So, you will not want to risk more than you can lose. Therefore, the amount you invest in it depends on how much you are okay with losing. 


Should My Portfolio Lean More Towards Crypto or Conventional Funds?


Given the fact that crypto is still speculative, investing completely in it and nothing on conventional funds isn’t a good idea. Before putting all your money in cryptocurrencies, you need to ensure that you have a retirement fund in place. So, plan your retirement by putting your money in the low-cost portfolio investments that come with a long-term record of wealth building. 

If your portfolio is already healthy enough, you can think of diversifying with cryptocurrency, while keeping the traditional funds. Ultimately, it comes down to the specific financial aims and the amount of risk that you are comfortable with. When you carry out the investment, keep the following best practices in mind: 

  • Keep a low percentage of the portfolio in cryptocurrencies – a limited amount at 5 percent 
  • Avoid short-term fluctuations and invest for your long-term growth 
  • Be ready to take the risk to lose some of the money you put in 


Does Bitcoin Have a Future?


Considering crypto is still at a stage of infancy, several questions are still unanswered about its future. Bitcoin has been around for about a decade or so – amidst consistently evolving tech advances and rules. The value of both Bitcoin and Ethereum has constantly increased over the years (with some dips along the journey). However, making concrete forecasts is difficult because there isn’t as much historical record as you would find in the stock market. An increasing number of financial institutions are beginning to hold crypto. In fact, many larger corporations are also adding crypto to the balance sheets. The federal rules have also started considering crypto and offer formal guidance in that regard. Even a CBDC (Central Bank Digital Currency) is being considered. Going beyond that, most experts have been outlining the innovation potential backed by blockchain tech that can change lives in future. 

However, there is a long list of high risks that are associated with cryptocurrencies that can potentially limit its value. Right from the concerns regarding cybercrime to the high market volatility, susceptibility to celebrity influence, and environmental effect of crypto mining – there is no lack of reasons to stay cautious regarding the future of cryptocurrency. But do not let that give you the idea that crypto has no future. A lot of tech innovations are yet to come to give crypto a brighter future. 


The Endnote 


Hopefully, most of your unanswered questions about crypto have now been answered. So, go ahead and talk to a crypto broker or a crypto expert to start making your investments. It is a risky proposition, but remember that the rewards are high enough to make it all worth it.