Investing in Cryptocurrency is a good idea, but it also comes with a lot of risks. For instance, it may be susceptible to hacking, volatility, and tax treatment.
Volatility
If you’re thinking about investing in cryptocurrencies, you should understand the nature of volatility. It is a crucial factor for the market’s growth, but it can also be a major cause of risk.
Cryptocurrencies are a new asset class. Unlike traditional assets such as stocks, they are digital, decentralized, and highly volatile. This creates a whole new set of challenges. In addition to trading technical skills and having an analytical mindset, you need to be able to recognize when the price is changing.
As the crypto industry matures, we’ll learn more about its uses. While most of the cryptos are still in the early stages of price discovery, demand will likely grow, boosting prices and decreasing volatility.
Traders need to know how to navigate price movements and keep an eye on regulatory and security concerns. There is a lack of reliable institutional investors in the crypto markets, which can be a downside. However, the lack of centralized control could also be a blessing.
Susceptibility to hacking
Investing in cryptocurrencies can be risky. There are several factors you must consider before committing to a purchase. For example, it’s not uncommon for hackers to target exchanges. These institutions hold large amounts of virtual currency and are easy targets for thieves.
Exchanges are vulnerable because they often do not have full time cybersecurity personnel. In addition, the majority of digital currencies are stored in “cold wallets” which are not connected to the internet. The crypto market is also largely unregulated, meaning it is vulnerable to scams and hacks.
A good way to protect yourself from a hack is to choose the right crypto wallet for your needs. This means keeping your private keys private and using a strong password. It is also a good idea to use two-factor authentication when logging into your account.
Another option is to use a secure, encrypted Internet connection. Using a VPN is a good way to protect yourself from hackers. Lastly, you should be wary of phishing emails.
Costs of human error
The cost of human error is a real hazard. One such instance occurred in 2021 when BlockFi erred on the coin toss by sending its subscribers 700 BTC instead of the advertised 700 BTC. In the spirit of good governance, the company compensated its unfortunate victims with a nice tidy bonus. While no one wants to be a part of such an unfortunate event, the company was certainly prudent and came up with an appropriate response mechanism. Besides, it’s not like the company would have to make these mistakes on a regular basis. Moreover, its reputation was already well deserved.
While it is not an unheard of thing, the cost of errors can eat up a chunk of the profits and pocketbook, not to mention the reputation of the company. To mitigate these risks, companies should proactively devise a foolproof plan of action. Such plans should include a thorough audit of the most important files and documents, regular reiteration of the best practices, and a comprehensive compliance program.
Tax treatment
If you are considering investing in a cryptocurrency, you need to know how the tax treatment of a crypto investment will affect you. Depending on your situation, you could have a capital gain or loss. The tax rates can range from 0% to 20%. Depending on how long you have held your assets, you can qualify for a lower rate.
You should keep records of all of your transactions. This will allow you to claim your losses when selling your assets. Even though you won’t pay a Capital Gains Tax, you may owe sales and use taxes based on the exchange of goods and services using the virtual currency.
To calculate your Crypto gains, you will need to subtract the cost basis from the fair market value at the time you sell your asset. This will determine how much you will owe in taxes.
The amount you will owe depends on the time you have owned your crypto and how much you earn. If you have been holding your crypto for more than a year, you’ll qualify for the preferential long-term capital gains tax rate. However, if you have been holding it less than a year, you’ll be subject to the short-term capital gains tax rate.
