Cryptocurrencies have been around for over a decade, although investors are still rushing to own them. As investors gather in the crypto market with hopes of generating huge profits, some beginners are jumping into the opportunity without fully knowing about the asset they bought.
With millions of people now invested in cryptocurrencies, a few in the community still have little to no real-world crypto information.
If you’re a first-time investor or considering holding cryptocurrency assets, here are some crucial details about investing in cryptocurrencies.
Loss of Capital Can Be Instant
You may have read or heard some stories about overnight crypto millionaires. However, succeeding or making money in the cryptocurrency space is easier said than done. In reality, many crypto investors have been left with losses trading cryptocurrencies.
Take Bitcoin as an example. Bitcoin has become the world’s top cryptocurrency by market cap, and for the past ten years or so, it has experienced at least eight huge crashes or corrections.
Back in June 2011, Bitcoin’s value rose significantly from $2 to over $32. However, the cryptocurrency dropped as much as 99% in the span of one day to trade at $0.01 after major Bitcoin exchange Mt. Gox revealed that hackers accessed hundreds of accounts and stole millions of dollars’ worth of the crypto.
Fast forward to August 2012, when a Ponzi scheme involving Bitcoin occurred, resulting in about 700,000 of it being stolen and its value declining 56%.
Bitcoin crashed for the third time in April of the following year, sliding 83% due to a rapid surge and mismanagement. The cryptocurrency slipped again in December 2013, shedding 50% of its value overnight as China banned Bitcoin.
Between 2017 and 2018, Bitcoin had already lost over 80%. Then, as the pandemic started in March 2020, it shed 50%, followed by an additional 53% in May 2021. Finally, the biggest crypto’s value fell about 50% between November of the same year and May 2022.
Bitcoin recuperated in between those declines, although the crashes show that the no. 1 cryptocurrency had moments of severe instabilities over time.
Becoming a Miner is Tough These Days
Becoming a crypto miner has grown more challenging in recent years. Before, you could mine cryptocurrency through your own computer and gain the opportunity to obtain free cryptos.
As confirming cryptocurrency transactions require more and more computational power over time, mining has become somewhat an exclusive activity of professional mining organizations. A simple home computer may not be enough to do the job anymore.
Today, crypto mining is a pretty expensive endeavor as the hardware required to keep up with those companies comes at a high price. Furthermore, you may not have good odds of generating an excellent return on investment.
You Can Get Locked Out of Your Own Crypto Wallet
Investors should have a cryptocurrency wallet to store their crypto assets safely. In storing cryptocurrencies, you can either use a ‘hot’ or ‘cold’ wallet.
A hot wallet is always connected to the internet and offered by cryptocurrency exchanges and wallet providers. Conversely, a cold wallet is usually not connected to the internet and takes the form of physical devices such as hard drives, flash drives, and solid-state drives.
Hot wallets carry the risk of getting hacked since they are regularly online. So if you’re using a hot wallet and a hacker gains access to your private keys, they could take everything you have in your account.
On the other hand, cold wallets are not at risk of online attacks as they keep crypto assets completely offline, making them a safer storage option than hot wallets. Several companies offer investors cold wallets with the corresponding public and private keys.
The lesson here is to print off your wallet’s keys and store them somewhere safe because if you lose them, you lose access to your cryptocurrency investments. Note that being locked out of your wallet can be temporary, but it could also be permanent.
Cryptocurrency is Not Eco-Friendly
As stated earlier, the computational power required to mine cryptocurrencies has grown throughout the years. As a result, the people participating in crypto investing are using some serious computer hardware and consuming a substantial amount of electricity to mine cryptocurrencies.
Bitcoin’s energy requirements have increased to a level that it consumes a total of 150 terawatt-hours (TWh) of electricity annually. That is more than the amount used by Argentina.
Still, not all cryptos need a great deal of energy. The reason behind Bitcoin’s huge energy consumption is the proof-of-work (PoW) mining mechanism its blockchain uses to solve complex mathematical problems and verify transactions.
Having powerful equipment can let you solve more problems per second and provide you with a better chance of confirming transactions correctly, which will grant you Bitcoins. However, the more powerful your equipment, the more energy you’re likely to consume.
The verification process will require more energy as miners compete for crypto rewards. That said, some cryptocurrencies use different technology to validate transactions and reduce energy consumption.
For example, Ethereum is transitioning from a PoW system to a proof-of-stake (PoS) model, which will have miners stake their holdings to confirm a block on its blockchain and receive rewards.
Staking investments help investors become a validator and earn rewards, providing them with more cryptocurrency assets to stake. This method also supports investors with more cash and cash equivalents.
Crypto Investments are Taxed
Investing in cryptocurrencies will require you to pay taxes. Instead of currency, the Internal Revenue Service (IRS) recognizes crypto holdings as properties and investments, meaning they are taxed the same way as capital gains and losses.
Therefore, for any gains or losses from selling or disposing of cryptocurrencies, you will need to pay taxes on the amount of the profit or loss. The tax rates are usually the same as the capital gains or losses for stocks.
In addition, if you have been holding your crypto for over a year, you will need to pay a long-term capital gains tax. As regards the rates, that will depend on your income.