Cryptocurrencies like Bitcoin and digital assets like NFTs are new ways to invest. Learn how cryptocurrencies work and what you need to invest in them.
Once you’ve decided to buy cryptocurrency, you need an account with an exchange, such as Coinbase, that supports that token. The next step is to verify your account and connect it to a payment method like cash, Paypal or even credit cards. You’ll need a crypto wallet, a storage for your keys or crypto passwords, compatible with the token you’re buying. Once you have all those, just place an order.
There are many ways to invest in Bitcoin (BTC). You could buy the cryptocurrency on an exchange. You could consider bitcoin mining to earn BTC as a reward. While no Bitcoin ETFs exist you could consider investing indirectly through ETF-like funds such as the Grayscale Bitcoin Trust and the Bitwise 10 Crypto Index Fund. These may require investment minimums as high as $25,000.
Bitcoin (BTC) is powered by blockchain technology, which is a ledger that records every transaction. To transact BTC, you need a wallet that has an address. You can send, receive or buy BTC using this address. Every time a Bitcoin transaction occurs, the transaction is verified by miners and recorded. This prevents fraud and double use of the same BTCs.
Every bitcoin (BTC) transaction is broadcast on the network and is required to be verified. Computers around the world compete to verify BTC transactions by solving, in the simplest terms, complex mathematical problems. This process is called mining. Miners first to verify a group of transactions are rewarded with BTC. But bitcoin mining requires specialized equipment and consumes a lot of energy.
Just like stocks Bitcoin’s price fluctuates on exchanges based on supply and demand. BTC price is highly volatile and is partly also driven by a limited supply of 21 million BTC. However, there is some debate if BTC, despite high prices, has value. Skeptics believe it doesn’t as it does not meet value requirements that other currencies or assets do, while BTC supporters disagree.
For tax purposes, the IRS has ruled that Bitcoin and other virtual currencies be treated as property not currency. That means, not only will you be liable to pay capital gains tax on any profit from the sale of cryptocurrency, but also if you use your crypto to buy goods and services. You will also need to report it as income if you receive crypto in exchange for goods or services. If you meet the threshold, you may also face a 3.8% net investment income tax
As of August 2022, there are more than 20,000 cryptocurrencies. Bitcoin is the oldest cryptocurrency and has the highest market cap. While the market cap may give you some idea of the reputation of the crypto, it may see big swings with price volatility. It also tells you nothing of the underlying technology or governance. Start by reading the crypto’s whitepaper to understand how it works better and watch out for executive or regulatory actions.
Adoption of cryptocurrency as a medium exchange is picking up. A number of retailers such as Overstock and Newegg accept Bitcoin as payment, and so do many stores on Etsy. You could also use payment networks such as PayPal, Flexa. PayPal converts your crypto to U.S. dollars so it may be used at merchants who don’t otherwise accept crypto. Shopping with crypto may not be that hard but remember spending cryptocurrency can trigger a tax liability.
An initial coin offering (ICO) is a term for the initial release of a new digital asset. Like an IPO in the stock market, an ICO is the first time new buyers can tap into a currency.
Blockchain, the underpinning technology that maintains the transaction ledger for bitcoin, has revolutionized the way information can be shared on the internet because the data can't be altered or deleted.
An altcoin is a cryptocurrency, or virtual currency, alternative to Bitcoin. Each altcoin operates according to its own rules.
A stablecoin is a cryptocurrency with a fixed value. Major stablecoins peg their values to major world currencies like dollars, euros, pounds, and other fiat currencies.
Non-fungible tokens or NFTs are unique digital assets that are based on blockchain technology. Anything can become an NFT—a piece of art, sports memorabilia, or even a tweet. Unlike cryptocurrencies that also use the blockchain network for ownership verification, one NFT cannot be directly exchanged with another NFT.
HODL is a term used in the cryptocurrency world to describe a buy-and-hold investing strategy. While some claim that HODL is an acronym for “hold on for dear life,” it’s actually a misspelling of the word “hold.”
A cryptocurrency crowdsale is a method of funding a project through the sale of digital tokens that give their buyer the right to participate in an idea being funded by the sale.
Proof of stake is a consensus mechanism that gives those who own a certain amount of a cryptocurrency the power to validate transactions and create new blocks for that cryptocurrency network. Compared to other consensus protocols, proof of stake is faster, offers lower transaction costs, and requires less computational power.
Gas is the fee paid for sending transactions on the Ethereum network. Whether you’re sending ether tokens, transferring any other ERC-20 compatible cryptocurrency, or running a smart contract on the network, you should plan on paying a modest fee for the transaction.
Bitcoin forks are splits that happen in the transaction chain based on different user opinions about transaction history. These splits create new versions of Bitcoin currency and are a natural result of the structure of the blockchain system, which operates without a central authority.
Ripple is a major cryptocurrency that trades under the cryptocurrency ticker symbol XRP. The currency and technology are designed and managed by Ripple Labs to facilitate fast, trusted payments globally.
Tether is a stablecoin, which is a type of cryptocurrency designed to follow the value of a specific fiat currency. Every Tether coin should always be worth exactly one unit of the fiat currency.
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