Buying cryptocurrency is an easy process, but it’s important to ensure you keep some key things in mind before you purchase. If you’re new to cryptocurrencies and want to buy a cryptocurrency for the first time, this guide will give you a general overview of how these digital assets work, as well as what your best strategies for buying them are.
A cryptocurrency is a form of digital currency that runs on a distributed ledger system (blockchain) instead of the traditional banking system. A blockchain is a decentralized ledger that collects the transaction history for each unit of cryptocurrency—this enables peer-to-peer transactions without the need for a central authority or third-party intermediary. Cryptocurrencies also use cryptography to control transactions and verify them as legitimate.
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Understand the Risks of Cryptocurrency
There are important things you should keep in mind before deciding to purchase cryptocurrency.
First, it’s important to understand that cryptocurrencies aren’t backed by any government or central authority. It means that they have no intrinsic value and are entirely based on supply and demand. Cryptocurrencies also come with their own fair share of risks, including:
- The risk of hacking
- The risk of loss of your wallet information
- The risk of online fraud
- The risk of identity theft
- The volatility of prices can lead to the loss of all your money invested in it
Don’t Invest More Than You Can Afford to Lose
Before sinking your life savings into Bitcoin, you should determine how much you can comfortably afford to lose. There’s nothing wrong with being greedy, but only insofar as you don’t let it detract from your overall financial well-being, especially if the market takes a downturn. We’ll cover this risk in more detail later on, but first, we need to understand what amount is truly appropriate for investing.
To calculate how much of your money you should be investing, ask yourself: “How much will I miss if this investment goes bust?” If the answer is “not a lot,” then you’re good to go. If the answer is something like “a lot/my entire life savings/I may have to move back in with my parents/all of these things,” then it may not be time for crypto investment. You can try again when you have saved up enough money that losing some of it would not rock your world too badly or cost loved ones their rent money.
Consider the Tax Implications
Before you buy any cryptocurrency, it’s important to make sure you understand what your tax obligations will be in your home jurisdiction. Many countries have little guidance on how to treat cryptocurrency, but some have solid rules. For example, the IRS in the United States considers cryptocurrencies as property rather than currency. Therefore, trading them is taxable at short-term rates if you have held them for one year or less and at long-term rates if you have held them for more than a year.
If you are trying to decide whether to buy crypto with a credit card, it’s also important to check where that cryptocurrency is based and which regulators have oversight of it. In addition to local regulations that might apply, there are also global standards like Know Your Customer (KYC) regulations that may cover your purchase. If a company has done its due diligence with KYC processes, it can help make sure that the purchase of its coin complies with applicable laws and regulations worldwide.
If you are planning on holding cryptocurrency for an extended period of time, then consider how this asset is accountable in the coming tax season. There may be benefits available when holding assets like real estate or stocks for such a long time period, so consult with a tax professional before investing in cryptocurrency just because of potential gains in the future.
Learn About Different Types of Cryptocurrencies
If you are looking to purchase or convert cryptocurrency, it is always a good idea for investors to research and thoroughly investigate the asset before buying. There are thousands of cryptocurrencies out there, with new ones emerging every day. So, it becomes vital to know how each asset differs in terms of its uses and benefits.
Some of the more well-known cryptocurrencies include Bitcoin (BTC), Litecoin (LTC), Ethereum (ETH), Zcash(ZEC), Dash (DASH), Monero (XMR), Ripple (XRP), Bitcoin Cash(ABH), Bitcoin Gold(BTG), EOS, Cardano.
Check for Regulations in Your Country
Check for regulations in your country. Some countries have restrictions on crypto, so be sure to check that you are not breaking any laws before buying. Here are some examples:
- In Russia, you can’t buy foreign-based cryptocurrencies (the ones post U.S.).
- In Turkey, the purchase of cryptocurrency is prohibited by law.
- In China, cryptocurrency exchanges and ICOs are banned. However, there are still plenty of ways to acquire cryptocurrencies in China.
Identify Legitimate Exchanges
If you are buying Bitcoin or any other cryptocurrency, you’ll need to find a reputable cryptocurrency exchange. Here are some things to keep in mind when choosing one:
Is the exchange regulated? A reputable exchange should be regulated in at least one country, and preferably several. If an exchange is not regulated, it is more vulnerable to bad actors and high-risk behavior. Furthermore, if the company holding your crypto assets goes out of business or folds for any reason, you may also lose your money; regulation helps protect against this.
How long has the exchange been in business? Exchanges that have been around for many years are less risky than newer ones because they have had more time to prove themselves as trustworthy entities.
Does the exchange offer insurance? It is helpful if the company loses its virtual currency holdings due to theft or hacking attacks. Some exchanges will ensure their customers’ holdings against these risks by maintaining their crypto funds in “cold storage,” meaning that they store private keys offline rather than online, where they could be hacked.
Be Aware of Scammers and Hackers
- Use a strong password and 2-factor authentication.
- Dictionary words or personally identifying information (birthdays, family names, etc.) won’t cut it for cryptocurrency. Your account is the gateway to your money. And if you’re new to investing, you might not know much about creating strong passwords and keeping them safe. If that is the case, go ahead and get some help! It is important, so don’t be shy about asking someone who knows more than you.
- Do not share your password with anyone.
- Your bank probably has safeguards in place that will protect you against unauthorized purchases on your credit card if someone steals it. With crypto wallets, the story is a little different, and this is why security needs to be at the forefront of everything you do with cryptocurrencies! The best way to keep your crypto safe? Do not tell anyone what it is or give them access to your private keys or recovery seed phrases (more on those later). If someone gets into your wallet, they can empty out all of its contents in minutes without leaving any traces behind except for an IP address (which can be changed easily enough by using proxy servers).
Additionally: never click links in emails that promise riches beyond imagination! They’re almost certainly scams designed by malicious actors looking for easy prey among those who don’t know better yet. But even if they aren’t scams themselves, clicking their links could lead directly into danger zones where hackers lurk just waiting for people like us who aren’t aware of what they’re getting themselves into. It usually happens when making transactions online with cryptocurrency accounts/wallets.
Make Sure You are Safe When Dealing with Cryptocurrency
Above all, make sure you are safe when using cryptocurrency. Do your homework before you deal with cash, and understand that there are risks involved in buying and selling any currency. That is why, it is also crucial to understand the differences between legitimate exchanges, which act much like traditional stock exchanges, and their illegitimate counterparts.