Cryptocurrencies have taken the world by storm. You might be wondering how you can get involved in this relatively new phenomenon? It can seem confusing at first; what with lots of hype on the subject, investing your money, and new digital assets appearing every week it can be hard to keep up. If you can educate yourself on the topic, you’ll be able to invest in no time. This is why, here at Paycheck Guru, we have created this comprehensive guide to help you navigate the world of crypto and start growing your investments and net worth. If you are looking to get started with investing in crypto, here is everything you need to know.
What is cryptocurrency?
Cryptocurrencies, also known as crypto assets, are digital assets that have been created to represent a particular value or contractual right that can be electronically traded, transferred, stored or used to pay for things. Cryptocurrencies can be difficult to comprehend at first because they do not hold any intrinsic value. The value of cryptocurrency is determined by what a buyer is willing to pay, so it’s worth is built from the market’s supply and demand. This is what makes investing in cryptocurrency difficult, high risk and unpredictable. However, with the right knowledge, you can make some great returns. As you will gain from cryptocurrencies, you will need to incorporate this in any tax returns that you have to make. You can learn more about the tax owed on cryptocurrency when you use the Ontario salary tax calculator.
Cryptocurrency is stored in a digital wallet, also known as a blockchain wallet, which enables you to manage and trade accordingly. You will need to ensure you invest and store cryptocurrency in a secure wallet, that is encrypted with specialist code.
Benefits of Investing in Cryptocurrency
Cryptocurrencies not only enable you to build your wealth, but they also come with a whole host of features that you or your business can benefit from. Here are some of the top benefits you can reap:
- Transactions are easy to conduct and boast more freedom
- Increased security
- Small fees and shorter settlement times to transfer money compared to banks
- Potential for huge returns
- Increased privacy when handling transactions
- Industry growth and expansion
- Diverse portfolio
- It’s not difficult to send money across borders
- Higher chance of coin value increasing with a limited supply cap and are good hedges against typical inflation seen with central banks
- Markets are 24/7
How Cryptocurrencies Work
Cryptocurrency is not controlled or overseen by any regulatory body, which makes it different from your typical investments and purchasing activities. Cryptocurrencies operate on an open network, which is run by peer-to-peer transactions, as opposed to a bank. They use a technology called blockchain, which is known as “distributed ledger technology” which enables a public record of transactions that occur through a decentralized database, to ensure data is synchronized and shared globally and prevent cryptocurrencies from being double-spent.
Cryptocurrencies are legal, but different countries around the world have different rules about how they can be used. For example, Canada has rules in place that state cryptocurrency has to be treated like barter transactions, which means it can only be used in the form of an exchange. Any money that is made from cryptocurrencies will be treated as a business, and therefore, be subject to taxes in line with income and capital gains and losses. This is where you will need to consider using a Canada tax calculator to help you establish your profits.
Cryptocurrency and Tax in Canada
Tax is not paid on cryptocurrency if it is being held. The following activities will subject you to potential tax liabilities:
- Selling cryptocurrency
- Gifting cryptocurrency
- Converting cryptocurrency
- Buying services or items with cryptocurrency
- Trading or exchanging cryptocurrency
All cryptocurrency activity in Canada should be determined with a Canada tax calculator and reported to the Canada Revenue Agency (CRA) as they are subject to income tax rules. When you file a tax return, you must report all gains and losses from buying and selling cryptocurrencies. It will depend on the type of activities, and the extent of profit, to how your transactions are characterized.
According to case law, your cryptocurrency activity may be deemed as business income if it meets the following criteria:
- You manage your behavior and activities in a commercially viable way
- You have acquired capital assets and inventory
- You have created a business plan
- You have a high volume of trades
- You promote certain products or services
As a taxpayer, you are required to include in your income 100% of the net gain. They will then be able to review this data, along with your intentions, to determine the course of action.
Different types of crypto
There are thousands of types of cryptocurrency on the market that you can get involved with. The largest cryptocurrency currently on the market is called Bitcoin, which holds a market cap of approximately $837.98 billion at the time of writing. Ethereum is the second largest with a market cap of $370.28 billion, and Tether comes in third at $78.51 billion. The market cap (capitalization) refers to the market value of the shares of stock of a company. This tells you what investors are willing to pay for its stock, and reflects the perception of its future prospects, which can be key in making good investments choices for yourself. It is more conservative to invest in a high market cap because they pose less risk.
This does not mean you shouldn’t invest in a low market cap, it just means there is more risk. It could be an investment you lose your money in, or an investment in a business that is in its early stages of development and has aggressive growth over time, providing you with even more gain.
Investing in crypto is all about taking calculated risks, as you can see it can be an extremely volatile market. Each cryptocurrency has been designed to serve a purpose and provide a new function or feature, but are typically founded on the same principle as Bitcoin. This means they are not regulated, they use blockchain and peer-to-peer review, are encrypted and stored in digital wallets.
There are currently both coins, and tokens on the market. Coins, such as Bitcoin, are intended to be used as a form of currency, and are built on their own blockchain. All coins that are not Bitcoin, are generally referred to as altcoins (deriving from the term “alternative to Bitcoin”). Tokens serve a slightly different function. Although built on existing blockchain, they represent a unit of value, for example, money, electricity, points, and much more. They are considered programmable assets that are used to create and execute contracts, for example, Basic Attention Tokens (BAT). They are typically created and distributed through an Initial Coin Offering (ICO) and are similar to stock offerings.
Some cryptocurrencies have a limit, just like money, to help prop up their value and create demand. For example, Bitcoin has decided there can only be 21 million Bitcoins created.
The top 10 most common types of cryptocurrency on the market to date are:
- Cardano (ADA)
- Binance Coin (BNB)
- Polkadot (DOT)
- USD (USDC)
How to invest in cryptocurrency
Investing in cryptocurrency is going to take a lot of time, patience and consistency. You should first do your research into the specific coins or tokens that you want to invest in, and understand their value. You should also have a plan to direct your focus and your investments, for example, are you looking to create an additional income stream and build your wealth, or a diverse portfolio to focus on a retirement fund. This will help to drive your investments accordingly. However, at first, you may choose to make smaller investments as you dip your toes in and learn more about the market. You will also need to remain consistent, and patient. As you have learned, the market can be extremely volatile. You may well make a large investment, and suddenly see it drop. You may choose to take your money out, or you might choose to give it time and let the market rise again. It will all depend on what you have invested in, and your current knowledge in the market. The key is to not let fear or panic drive your decisions.
High risk vs. low risk
You can choose to invest money into a more high-risk cryptocurrency, which means the rewards can be much higher, but the chances of you gaining are going to be significantly different than taking a smaller risk, and the safest option. This will depend on how much money you have, your goals, the time you have to wait, and how willing you are to take risks.
How to get your hands on cryptocurrency
It can be difficult to know where or how to get started with cryptocurrency. The first way that cryptocurrency was obtained (now often referred to as the “old-fashioned way”) was to purchase it on an exchange site, such as Coinbase. You are also able to trade cryptocurrencies on an exchange.
There is another method of obtaining called mining, which is where you earn your cryptocurrency through a variety of methods, as opposed to paying directly for it. Miners do have to spend a lot of time mining cryptocurrency and using high-tech processes (which mean powerful hardware and high electricity usage). Due to the extent of time, skill and equipment needed to mine cryptocurrencies, it can be an expensive route to take.
Once you start investing in cryptocurrencies, it is vital that you properly report and pay the right amount of tax on your gains. You can use the Ontario salary tax calculator to help you calculate the correct amount. Incorporating time for your taxes will help you avoid any fines or penalties.
Safety and security while making investments
Cyber attacks are becoming more sophisticated by the day. As cryptocurrencies are operated online, you must take steps to safeguard yourself, and your investments. Due to the high market value of cryptocurrencies, not only does it attract investors, but also cybercriminals. The cryptocurrency exchanges have reported several hacks and heists over the years. In 2019, cryptocurrency crimes amounted to more than $4.3 billion across the world, according to the Cryptocurrency Anti-Money Laundering (AML) report.
Your digital wallet is an important technology. It attaches a private key against your cryptocurrency, which enables you to trade online. This is essentially your crypto identity, so if it is compromised, you risk your investments being stolen, and/or fraudulent transactions under your identity.
Here are some of the best ways that you can keep your cryptocurrencies secure:
- Use a cold wallet (a hardware wallet that stores your information offline)
- Only access or manage your investments while using a secure internet connection (use a VPN on your home network, and avoid public networks)
- Change your passwords regularly and keep them strong
- Secure all of your personal devices and ensure they have the latest virus and malware prevention software
- Diversify your wallets and your investments
- Be cautious of phishing scams
With the market constantly evolving, it is up to you to ensure you are keeping your investments safe. Make sure you don’t let your time and money go to waste and ensure you have protected your digital assets accordingly. Take any necessary precautions, especially when there is a lot of money or a business involved.
There are thousands of different cryptocurrencies on the market that you can learn more about and invest in. They are not like other currencies you find around the world, that are governed by a central authority and are a tangible currency. Instead, they incorporate a range of different types of coins and tokens, which have been created and designed to serve an individual purpose.