Crypto Overview

By Jessica Dosseh

Cryptocurrency is a digital currency that is secured by cryptography and represents a new decentralized paradigm for money where third-party intermediaries are not necessary to enforce trust or police transactions between two parties. As a relatively new asset class, crypto offers a unique return profile.

There are three primary ways of obtaining cryptocurrencies:

  • Buy them on an exchange.

  • Receive them as payment (earned income).

  • Mine them yourself.

Intro to Crypto Investing

What is cryptocurrency?

Cryptocurrency is a digital currency secured by cryptography, usually on a decentralized network based on blockchain technology. Blockchain refers to a distributed ledger enforced by a connected network of computers. Cryptocurrencies are the first alternative to the traditional banking system and have powerful advantages over previous payment methods and traditional asset classes. They enable secure online transactions without third-party intermediaries and can be mined or purchased from cryptocurrency exchanges. This asset can take many forms, including but not limited to Bitcoin, Ethereum, Altcoins, NFTs, etc. Bitcoin, launched in 2008, was the first cryptocurrency and remains the biggest, most influential, and best-known.

As a relatively new asset class, crypto offers a unique return profile, usually with a high-risk, high-return potential. Crypto may be more widely accessible but has a less-proven track record. With this in mind, volatility and liquidity are important to consider when you consider including cryptocurrencies in your investment portfolio.

What is crypto's value as an asset class?

As a relatively new technology, cryptocurrency can be highly speculative, so it is important to understand the risks involved before investing. Nevertheless, cryptocurrency markets have skyrocketed in value over the past decade, at one point reaching almost $2 trillion. As of July 2022, there are over 20,000 cryptocurrencies in circulation. Much of the interest in this asset is the ability to trade it for profit. Cryptocurrency also represents a new decentralized paradigm for money where third-party intermediaries (such as banks and monetary institutions) are not necessary to enforce trust and police transactions between two parties. The idea is to make transferring funds between two entities easier. Each transaction is secured by the use of public keys and private keys and runs on either proof of work or proof of stake system.

There are three primary ways of obtaining bitcoin and other cryptocurrencies:

  • Buy them on an exchange (such as Coinbase, Kraken, FTX, Binance, etc.).

  • Receive them as payment (earned income).

  • Mine them yourself.

Cryptocurrencies are generated through mining–Mining is the process by which networks of specialized computers generate and release new coins and verify new transactions. It involves vast, decentralized networks of computers around the world that verify and secure blockchain. If you are just starting out, mining isn't impossible; however, amateur mining is unlikely to be profitable unless you have a specialized setup.

Getting started with cryptocurrency.

If you have decided that you'd like to invest in crypto, there are a couple of guidelines that can help mitigate risk.

Create a long-term strategy.

Like any other asset, having a long-term strategy is the best way to build your crypto portfolio.

Avoid trying to time the market.

Using leverage and shorting doesn't necessarily work well with a crypto portfolio because it's still relatively speculative and volatile. Any small change in the market can cause it to rise or crash. Nevertheless, your investment strategy will depend on your risk tolerance.

Dollar-cost averaging into Bitcoin (BTC), Ethereum (ETH), and other Altcoins.

If you have no idea what you are doing, the best way is to start small. Set aside a small amount to contribute to your crypto portfolio as you continue to learn about this asset class.

Choose currencies that run on proof of stake.

As you build out your portfolio, consider choosing currencies that offer staking. Staking is a way of earning rewards for holding certain cryptocurrencies. You can "stake" some of your holdings and earn a percentage-rate reward over time. Current options include Ethereum, Cosmos, Tezos, Solana, Cardano, etc. Many long-term crypto holders consider staking as a way of making their assets work for them. Before staking, it is important to understand that staking often requires a lockup or "vesting" period, where your crypto can't be transferred for a certain period of time which will affect the liquidity of your asset. Before staking, it is important to research the specific staking requirements and rules for each project you are looking to get involved with.

Add crypto exposure to your IRA.

One of the most popular vehicles for saving for retirement is the IRA. Whether you choose the traditional or Roth IRAs, either one can help provide a tax-advantaged way to build and save for retirement. According to Investopedia, nearly one in four millennials now use crypto to help fund their retirement goals.

If you're searching for ways to add crypto exposure to your IRA, consider looking into Grayscale funds. They include a variety of popular and emerging cryptocurrencies. These funds can be searched for in brokerage accounts such as Schwab and Fidelity or through Robo-advisors like Wealthfront and added to your IRA mix.

Here are some other ETF examples to get you started:

  • ProShares Bitcoin Strategy ETF (BITO)

  • Grayscale Bitcoin Trust (GBTC)

  • Global X Blockchain ETF (BKCH)

  • Global X Blockchain & Bitcoin Strategy ETF (BITS)

  • Purpose Bitcoin ETF (BTCC.U)

  • CI Galaxy Ethereum ETF (ETHX.U)

  • Purpose Bitcoin Yield ETF (BTCY.U)

Crypto taxes.

Filing taxes for crypto transactions can quickly get complicated. Crypto has its own unique tax requirements and regulations. U.S. taxpayers are required to report crypto sales, conversions, payments, and income to the IRS and state tax authorities where applicable, and each of these transactions has different tax implications. Always keep a detailed record of your crypto transactions and contact a tax professional to help you navigate the complexities of crypto taxes.

If you receive cryptocurrency as wages or mine for crypto, it is treated as ordinary income and subject to taxes.

BTC/ETH is treated as property, which means that every time you spend, trade, or exchange cryptocurrency, the transaction creates a taxable event. Capital gains tax (0%, 15%, or 20%) or ordinary income tax (10% - 37%) applies to any gains, and capital losses can be deducted against capital gains in a net loss position up to $3,000.

Taking the time to learn and speak to a tax advisor is essential because crypto may have detrimental tax implications if not handled properly.