Cryptocurrency Investing Guide
What are cryptocurrencies and how do they work?
Cryptocurrencies are a new form of asset, virtual in nature and issued by no central entity but an algorithm-based protocol. They are based upon Blockchain technology and are operated by an open, decentralized validator set that establishes a global consensus on what is called a distributed ledger. Compared to traditional electronic money, which is only account-based and resides in a central authority’s balance sheet, a cryptocurrency is a coin-based money that represents true equity and is no one else’ debt or liability.
With Bitcoin, the first cryptocurrency was launched in 2009.Today, there are numerous different cryptocurrencies that have either been forked off of Bitcoin or have been created from scratch. They not only differ when it comes to technical details like supply metrics but also show different degrees of inherent programmability and are built on what is called a different consensus mechanism. The most famous of these is Proof-of-Work, Bitcoin’s way to achieve global consensus within its network through a process called mining. An alternative is Proof-of-Stake allows for staking a blockchain’s native asset. This younger consensus mechanism is soon to be implemented in Ethereum, or rather Ethereum 2.0.
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Why do cryptos have value?
Ultimately, a cryptocurrency’s value is derived from supply and demand. On the demand side, some cryptocurrencies like Bitcoin have a fixed supply. In the case of Bitcoin this hard cap is set to 21 million coins, meaning that no more than 21 million Bitcoin units will ever exist. Capping a cryptocurrency’s supply creates a form of artificial scarcity that can lend credibility to a cryptocurrency’s value.
On the demand side, a cryptocurrency’s value is a function of its usage. A cryptocurrency can either be used as a store of value, a means of payment or both. So, if people consider a cryptocurrency an eligible way of achieving a certain goal – be it storing value or transacting value – these people will create a natural demand for the cryptocurrency, making it potentially valuable.
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Best Cryptocurrencies to buy
As of 25th of August 2021, there are 11,391 cryptocurrencies listed on Coinmarketcap. The most famous are Bitcoin, Ethereum, Cardano and Dogecoin. Not all of 11,000+ cryptos should be considered currencies though as many pursue use cases that have nothing to do with a currency. As such, it might be better to speak of crypto assets when referring to the vast amount of crypto projects.
While most of these crypto assets as well as cryptocurrencies are legit, there are also many scams. Some of these got busted like Bitconnect, while other scams might still exist in the wild. In order to prevent falling prey to such a scam, proper research is needed. But research is not only needed to cut out the scams. Due diligence is just as much needed when looking at legit projects. They have different technological parameters and demand different trade-offs. When it comes to cryptocurrencies some of the important metrics to look at are: technical metrics like circulating and total supply, tokenomics, transactional volume, scope of decentralization, the team behind a project or potential network effects.
As a matter of fact, no one can ever tell you which cryptocurrency you should buy. The number one rule before buying any cryptocurrency is always to do proper research. Do Your Own Research (DYOR) should be followed by every serious investor.
Profiling the most famous Projects
Bitcoin: Bitcoin is the pioneer, the torch bearer & most famous of them all. It’s essentially a decentralized internet protocol giving rise to a peer-to-peer monetary network that includes its own asset. This asset can be bought through various ways, can be used in a peer-to-peer manner and can also be mined in a process called mining. While naysayers call Bitcoin a bubble, others consider it a monetary revolution.
Read the Guide: What exactly is Bitcoin?
Watch the Video: Why Bitcoin Will Green The Planet
Ethereum: Ethereum is a decentralized network, an open-source blockchain with expressive smart contract functionality. Through cryptocurrency mining, Ethereum’s native currency ether (ETH) can be acquired. Another way to get ether is by buying it through one of the different options like exchanges or Coin ATMs. Just as bitcoin, ether can be used in peer-to-peer way and can also be stored on many different wallets. As Ethereum is the second largest cryptocurrency network by market cap, it is of considerable size and sometimes seen as a competitor to Bitcoin. Others deny any competition as the two need to be considered the apex predators of two distinctive fields. Ethereum is set to change from Proof-of-Work to Proof-of-Stake in late 2021 (2022 update here), thereby Eth more attractive from a staking point of view.
Read the guide: Bitcoin vs. Ethereum, the lion vs. the shark
Read the guide: What is Cryptocurrency Staking?
Watch the video: Ethereum’s Transition To Proof of Stake
Polkadot: Polkadot is a next-generation protocol that aims to connect blockchains into a single unified network. Designed as part of a broader vision for a decentralized internet that returns control to individuals and users, its goal is to enable specialized blockchains to communicate with each other by attaching themselves to the Polkadot network.
Chainlink: Chainlink is a decentralized oracle network, which provides real-world data to smart contracts. As such it provides one of the most important functions to the crypto world: connecting blockchains with the outside world. Chainlink has become one of the most commonly used and trusted projects for oracle services within the crypto space.
Cardano: Cardano is a proof-of-stake blockchain and as a platform geared to run smart contracts. Cardano was started by Charles Hoskinson, a former Ethereum co-founder and thus is considered to be one of Ethereum’s greatest competitors.
XRP: XRP is one of the most controversially debated projects within the cryptocurrency world. While some consider it to be a highly centralized endeavor because of its premine that should never be likened to an open and permissionless blockchain like Bitcoin and Ethereum, others are of the opinion that XRP is the only project that will ever be able to get meaningful adoption within the traditional world of finance. The famous company that is fostering XRP’s development is Ripple. Despite the controversies, XRP still managed to attract an army of investors to buy and strongly support the cryptocurrency.
Dogecoin: Dogecoin, the ultimate meme coin was actually created as a joke back in 2013 by two Australian software engineers. While the cryptocurrency is not meant to have value or function beyond being a meme coin, it has gained quite some traction recently after world famous entrepreneur Elon Musk started tweeting about it. That sparked a rally and many people bought into the cryptocurrency. The coin super-power is its community and as a result it has network value (Metcalfe’s law).
Litecoin: Litecoin is one of Bitcoin’s earliest forks, meaning that Litecoin is basically a copy of Bitcoin’s programming code with a few tweaks. This fork happened already in 2011 and was created by Charlie Lee. Ever since Litecoin started, some consider it as a sort of test bed for Bitcoin, while some believe it to be Bitcoin’s little brother just as silver is considered to be gold’s little brother. Because of this relation to Bitcoin, Litecoin still has quite an investor community that has bought into Litecoin.
How to buy & Sell Cryptocurrencies
The most convenient way to trade cryptocurrencies is through the big crypto exchanges. As Coinmarketcap shows, there are currently over 300 cryptocurrency exchanges. As a retail investor one is advised to only use the most famous and liquid ones as they offer the best rates for smaller investors.
The top crypto exchanges are: Binance, Coinbase, Kraken, FTX, Bitfinex, Huobi Global, KuCoin, Bistamp, Gemini or Okcoin. Buying at these exchanges requires an account. In order to enjoy full functionality and no trading limits, a proper identification should be completed. With every single exchange, there are a few basic steps that can be followed to set up an exchange account:
- Sign up for an account
- Provide ID
- Set up two factor authentication
- Transfer money from bank (usually takes 24 hours)
- Use that money to buy bitcoin or any other cryptocurrency that is supported on the respective exchange
- For safety, store on an hardware device
Apart from the straightforward possibility to buy cryptocurrencies at exchanges, there is also the option to use traditional fintech brokers like Robinhood, eToro or Revolut. These services have been ramping up their crypto offering, listing more and more cryptocurrencies to buy. While Robinhood reported that a significant amount of their revenue is due to cryptocurrency trading, the company does not allow for coin withdrawals, meaning that you cannot take self-custody of the cryptocurrencies bought on Robinhood. The same currently goes for Revolut, although they have announced that they are working on making cryptocurrency withdrawals possible, gradually rolling it out over time.
In addition to exchanges and brokers, some cryptocurrencies – mainly the big ones measured by market cap – can be bought using what is called a Crypto ATM. As of August 30th, almost 26,000 Crypto ATMs exist worldwide. Similar to a conventional ATM from traditional banks, Crypto ATMs make it possible to buy and sell cryptocurrencies using fiat money. Some of these ATMs even allow for anonymous buying up to a certain amount. Compared to exchanges and brokers, the fees are higher though.
A fourth option worth mentioning is Bisq. This is a Bitcoin-only exchange, which is particularly popular among Bitcoiners as it is a decentralized exchange allowing for the purchase and selling of Bitcoin via many different fiat money options. Although liquidity is low and fees are rather high, this exchange has been gaining some traction lately. Even Twitter CEO and Bitcoin enthusiast Jack Dorsey has announced that he is committed to building a proper decentralized onboarding exchange for Bitcoin. Some speculated that he might be considering Bisq when doing so.
How to invest without buying a coin
Whilst it is a relatively simple process for an individual to buy cryptocurrencies, the same is not always true for companies who wish to expose their balance sheet to the rapid rise of this new industry. Considering that an estimated 2.5% of the global population own Bitcoin in 2021, and a projected 8% will own it by 2025, the value is expected to grow in tandem.
Furtunately, there are numerous ways to get exposure beyond buying the tokens or coins. So let’s dig into a few of them here.
While investing in cryptocurrencies is getting easier and easier, it is still not for everyone. Some people don’t want to invest into cryptocurrencies themselves but rather participate in the growth of the entire industry by investing into cryptocurrency companies like exchanges, lending firms or wallet companies.
The most popular crypto company to offer shares is arguably Coinbase. The US cryptocurrency exchange has gone public in mid-April with its stock – going by the moniker COIN now listed on Nasdaq for conventional investors to buy. Following the Coinbase IPO, some other notable crypto firms have revealed plans for going public. Coinbase’s rival Kraken could do an IPO by the end of 2022. At the same time, famous crypto lending company BlockFi has also indicated in Summer 2021 that they are thinking about going public in the next 12 to 18 months.
A special case is wallet provider Exodus. They closed its Reg A+ public offering on May 5, 2021. The company issued 2,733,229 shares of its Class A common stock and raised approximately $75 million in gross proceeds. While Exodus offered a common stock, they have also used a public blockchain (Algorand) to offer a security token (tZERO) to represent its stock on-chain. The sale of Exodus’s stock was only conducted through their own wallet – institutional as well as eligible retail investors participated in it.
Another popular option to gain exposure to cryptocurrency is through mining. Still, many cryptocurrency – most notably Bitcoin – allow for mining because of their consensus mechanism Proof-of-Work. Becoming a miner means investing into crypto mining rigs and is particularly profitable when there exists access to cheap energy resources.
But obviously, one does not have to do the mining himself. As the mining business is quite capital intensive, many mining companies have raised money through going public. This is why for investors, there are several options to invest in the stocks of mining companies. These are:
- Bit Digital (NASDAQ:BTBT)
- Hut 8 Mining Corp (NASDAQ:HUT)
- Bitfarms (NASDAQ:BITF.V)
- Marathon Digital Holdings (NASDAQ:MARA)
- Canaan (NASDAQ:CAN)
- Ebang International Holdings (NASDAQ:EBON)
The last two companies are based in China and produce the chips and processors needed to do efficient crypto mining. As the company blockstream has shown in August 2021, for some investors that are able to get access, private equity deals might also be a good way to gain crypto exposure.
Companies With Crypto On Balance Sheet
In the recent months, several publicly traded companies have bought Bitcoin (or other cryptocurrencies) to hold on their balance sheet. The most famous institution starting this has been Microstrategy. The company currently holds over 100k Bitcoin. Following Microstrategy was Tesla and Square that also bought into Bitcoin. The crypto exchange Coinbase announced that it has bought cryptocurrency to hold on its balance sheet as well. It further announced that it would keep on allocating 10% of its quarterly profits into a crypto assets portfolio.
A complete list of public as well as private companies with Bitcoin on their balance sheet can be found here. As these companies hold some of their assets in crypto, their share prices ought to reflect this, which is why some investors buy the company’s stocks as a way to gain exposure to cryptocurrencies. Because of its warchest in Bitcoin, especially Microstrategy’s stock seems to be tied to Bitcoin’s success or failure.
Companies Involved In Crypto
More and more companies are getting involved in crypto, which is why their success will be increasingly dependent on the growth of crypto in general. Companies like Square, Paypal or Robinhood are offering the buying and selling of cryptoassets. PayPal additionally makes it possible to spend your crypto at vendors around the world. In this regard, credit and debit card companies like Visa and Mastercard are pushing for crypto adoption by facilitating crypto reward payments through their respective cards. As most of these companies can be bought through public exchanges, they offer a way to participate in the potential future growth of crypto.
Crypto Investment Products
A welcomed cryptocurrencies investment option are traditional investment trusts. The most popular actor in the market is Grayscale. The company runs several open-ended private trusts. Each of them issues shares to track different cryptocurrencies. In the past, these Grayscale Trust shares have been a popular way to gain exposure to cryptocurrencies and they sometimes trade at a premium, which makes them even more interesting.
An upcoming competitor to Grayscale is Osprey Funds. They are filing to register their Bitcoin Trust as a Securities and Exchange Commission (SEC) reporting company, which would put them on a par with Grayscale’s funds. Particularly when it comes to fees, the Osprey Funds boast to be much cheaper.
While Grayscale seems to be gearing up to finally become an ETF issuer, some ETFs on cryptocurrencies are already live. The most famous one’s are three different Bitcoin ETFs in Canada. They are all trading on the Toronto Stock Exchange. Besides these Bitcoin ETFs, there are also ETP that allow for crypto exposure. With WisdomTree, a traditional ETF provider has ventured into crypto by launching a Bitcoin ETP. At the same time, there’s an upcoming ETP issuer from Switzerland called 21Shares that has several crypto ETPs that are listed on the Swiss Stock exchange. Also in Switzerland, an actively managed ETP tracking the Top 15 cryptocurrencies is issued by a company called Ficas and also listed at the Swiss Stock exchange.
Let's talk about Tax
When it comes to paying taxes on cryptocurrencies, regulations differ from country to country. In the US, the IRS has identified crypto as property and not currency. This means: Tax rules that are generally applied to property transactions, like selling a car, a piece of art or any other collectible, do also apply to cryptocurrencies. As a crypto investor, capital gains taxes need to be paid once profits are realized. But not only selling crypto for cash is triggering capital gains taxes. When crypto is sold to pay for services or to buy food or any other items, the tax must be paid as well. Even switching from one crypto into another for profit, receiving a profitable airdrop, mining for rewards or obtaining any other crypto reward is taxable.
In the US, taxes on cryptocurrencies can be minimized if cryptocurrencies are used to donate to a qualified tax-exempt charity or non-profit. Also, if cryptocurrencies are never sold, no gain is ever realized, which means there is no realized gain to tax. This is why some people argue that crypto should not be sold but lent as collateral in order to get a dollar credit that can then be spent instead. While any income that is generated as a result of this lending activity is taxable, the cryptocurrencies used as collateral are not sold, which is why there are also no taxes that are coming due on these cryptocurrencies.
There are also countries, where no capital gains tax needs to be paid on cryptocurrency holdings. These countries are Portugal, Singapore, Malta, Belarus, Malaysia or Switzerland. In Switzerland, there’s only a wealth tax on cryptocurrencies. Also, and this is similar to other countries like Malta, if cryptocurrencies are day-traded for significant amounts of money, these profits need to be taxed as income. A special case is Germany. If a private cryptocurrencies sale does not exceed EUR 600, the sale is not taxable. Everything above is taxed as income except if the cryptocurrencies that were sold had been held for more than 12 months prior to the sale. This article has some more things to say on cryptocurrencies and how they are taxed differently around the world.
The crypto markets are definitely here to stay. Originally started with the launch of Bitcoin in 2009, they have grown into an entire investment universe covering all sorts of markets and industries, while also creating new markets and industries along the way. Anyone willing to take part in the further development of crypto can do so by buying through an exchange, a broker or a Crypto ATM. Participating by gaining exposure to companies working in the crypto world or firms that are applying cryptocurrencies in their daily business is a practicable option too.