Over the last couple of years, cryptocurrencies have become more well known due to the significant increases and swings in the price of popular coins like Bitcoin and Ethereum. Despite reaching an all-time high price last year, only about 16% of Americans have reported investing or trading cryptocurrency.
What Are Cryptocurrencies?
Cryptocurrencies are digital assets secured on a blockchain, which is a type of ledger that records transactions using concepts of cryptography and game theory. Some of these concepts include:
- Private and public-key pairing
- Hashing functions
- Elliptical curve encryption
The first cryptocurrency was Bitcoin, a creation of the anonymous Satoshi Nakamoto that started in 2008. However, in the nearly 14 years since Bitcoin’s inception, many other cryptocurrencies now exist, each with its unique value propositions and communities.
How Do You Buy Bitcoin and Other Cryptocurrencies?
If not covered by a company plan but the spouse is, the phase-out range for 2021 is $198,000 - $208,000 and for 2022 is $204,000 - $214,000. If filing married-separate, the phase-out range is $0 - $10,000.
What Makes Cryptocurrencies Valuable?
The value propositions of cryptocurrency may vary from coin to coin, which is why it’s important to thoroughly research the fundamentals of a crypto project before investing. However, some of the general attributes of crypto that may be of value include:
- Decentralization
- Transaction Privacy
- Store of value (i.e., digital gold)
- Scarcity
- Utility through DeFi, NFTs, and other use cases in the metaverse.
Where Do You Keep or Store Your Cryptocurrencies?
Once bought, some users keep their cryptocurrency in the account on the exchange they used to purchase them. However, others may prefer to hold their crypto on any number of crypto wallets.
Cryptocurrency wallets are generally distinguished as a hot or cold wallet. Hot wallets refer to software programs stored online through a computer or phone. In contrast, a cold wallet is held in a USB-connected device capable of offline storage.
What Are the Risks of Owning Cryptocurrency?
The risks of cryptocurrency are threefold. The first is the potential for losing crypto by forgetting a spending password or wallet seed-phrase. Risk also exists through the potential for bad actors to hack and steal cryptocurrency either through manipulation of software or by obtaining an individual’s crypto wallet passwords.
Other Ways to Invest in Cryptocurrency
For people not yet ready to purchase their own cryptocurrency, other options still exist for investors to have some exposure to the cryptocurrency industry in their portfolio. These include:
- Investing in companies in the cryptocurrency space
- Indirectly obtaining crypto exposure through investment in companies that hold cryptocurrencies on their balance sheets
- Investing in an exchange-traded fund (ETF) that holds different cryptocurrencies and related contract assets.
What Is a Reasonable Amount of Crypto for Your Portfolio?
No single correct approach exists when it comes to determining the amount of cryptocurrency an investor should have in their portfolio. Rather, the chosen amount will always depend on factors specific to the investor and their financial goals.
Relevant to the discussion might be an investor’s net worth, current income and expenses, retirement savings, and overall risk tolerance. Generally, some experts may recommend allocating only a tiny percentage (e.g., 2-5%) of an investor’s overall portfolio, if any, to cryptocurrencies.
Is Crypto Right for an Investor’s Portfolio?
The cryptocurrency market is still a young industry, and its technologies and investment opportunities are continually evolving and changing. As a result, cryptocurrency investments can be somewhat speculative and subject to short-term volatility.
As always, investors should perform their own due diligence before buying a particular cryptocurrency and only invest amounts they won’t be afraid to lose.
Sources
3. https://www.investopedia.com/decentralized-finance-defi-5113835
4. https://www.forbes.com/advisor/investing/nft-non-fungible-token/
5. https://time.com/nextadvisor/investing/cryptocurrency/hot-wallet-vs-cold-wallet/
6. https://money.usnews.com/investing/cryptocurrency/slideshows/best-cryptocurrency-etfs-to-buy?slide=6
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