Cryptocurrency has been on the rise in recent months. Several cryptocurrencies have broken records as the drive to get in and invest in crypto has skyrocketed. So, why should you invest? Is it too late? What if it crashes? These are all important and valid questions to consider.
This article will attempt to dispel some common myths and misconceptions about cryptocurrency and explain why 2021 is your year to start investing.
Why You Should Start Investing in Cryptocurrency This Year
Let’s start by explaining why you should start investing in cryptocurrency in 2021.
The Value of Cryptocurrency Is Going Up
Recently, the price of cryptocurrencies has dramatically shot up. In the past couple of months, cryptocurrencies like Bitcoin have broken records, reaching as high as $40,000 in value in recent weeks.
For example, if you bought 100 bitcoins at their initial value of $0.008 in 2009 and decided to sell them 12 years later, you could have sold them for $40,000 each. In the end, you could have made a whopping $4,000,000! And to think you would have only paid a total of 80 cents at that time. Compared to 2009, when Bitcoin made its first appearance, this cryptocurrency has seen massive growth in value.
Bitcoin is not the only cryptocurrency that has done well. Other popular cryptocurrencies, such as Ethereum, Litecoin, and Bitcoin Cash, have gone up in value.
Cryptocurrency Has Gained Recent Recognition and Popularity
You might worry about the stability of cryptocurrency and whether it will last. However, consider that many reputable and established companies have recognized cryptocurrency’s potential by accepting payments in crypto and allowing people to buy and sell crypto on their platforms. For example, PayPal recently implemented crypto-trading onto its platform in November of 2020, allowing individuals to buy and sell crypto.
The more crypto becomes accepted as currency by big companies, the greater the odds it will be around for a long time.
There’s a Limited Supply for Certain Cryptocurrencies
Unlike fiat currencies, where you can print as much of it as you want, particular cryptocurrencies have a limited supply available. Bitcoin, for example, has a limit of 21 million bitcoins. Once gone, there will likely be no more produced. Many consider Bitcoin digital gold because, like real gold, only a finite supply is available.
Is It Too Late to Invest?
No. There is still time to invest. Keep in mind, though, that the longer you wait, the chances are the value of cryptocurrency will continue to increase, and you may lose out on some potential profits. That means a cryptocurrency could be more expensive to buy in the future than if you had bought it today or a year ago. You can still make money if you invest now, but the idea is the sooner you do, the more you will profit in the future.
Another thing to remember is that the value of cryptocurrency is highly volatile. The price could go up or down on any given day. Trend-wise, the value of many cryptocurrencies has been steadily increasing over the years.
If you’re concerned about investing large chunks of money into a speculative asset, or if you want to avoid buying it for a high price, you can do what’s known as dollar-cost averaging. Rather than purchasing an asset all at once, you divide the money you want to spend and invest it over time. You can do this weekly or monthly.
Using this technique, you increase your chances of investing at the right times when the market dips down and up. Over time, your investment will grow. This strategy will also prevent you from spending your money out of fear of missing out (FOMO).
What if It Crashes?
Similar to the stock market, cryptocurrencies are not immune to crashes. It has happened multiple times and will likely continue to happen in the future.
Whenever the stock market has crashed, it managed to recover and continues to grow. The same is true for cryptocurrencies. Even if a cryptocurrency experiences a dip, there’s a high chance it will recover.
Take Bitcoin as our prime example. Bitcoin has experienced over 13 crashes since its inception, one of which caused it to lose its value by almost 87 percent (“Three Reasons Not to Worry About a Bitcoin Crash”). In each case, however, Bitcoin recovered.
While crashes may sound like a bad thing, there can be some good that comes out of it. If you’re an investor looking to make a profit, you can take advantage of lower prices and sell when the value has gone back up.
Now let’s dive into some common misconceptions about crypto.
[H3] Cryptocurrency Is Used Only for Illegal Activities
Alt: Silhouette of a hooded man on a laptop
False. Cryptocurrencies solve many problems fiat currencies face. Several exchanges and institutions that buy and sell cryptocurrencies have implemented verification practices to stop illegal activities such as money laundering.
While it’s true that some individuals use cryptocurrencies for illegal or criminal activities, many use them for day-to-day purposes like shopping for groceries or investing. Besides, criminals are just as likely to use fiat currencies for illegal purposes as they are to use any cryptocurrency.
[H3] Cryptocurrencies Have No Value
Alt: Bitcoin on a one-hundred-dollar bill
Again, not entirely true. Even though cryptocurrencies are not a physical object like fiat or gold, they do offer value. For example, cryptocurrencies rely on blockchain technology, which stores digital data. This technology can transfer information from one person to another without requiring a middleman.
Think of a bank as a middleman. When someone needs to transfer money to another, they first have to speak to the bank. The bank decides if they’ll make the transfer happen or not, and the sender has to trust that the bank will handle their money accordingly. Transfers like these can take days and sometimes require hefty fees if you’re sending a wire transfer internationally.
Blockchain technology removes the middleman in this case and leaves it up to the individual to decide when and if they want to transfer money to another person. Transfer times are also significantly reduced to just minutes or hours compared to bank transfers. Likewise, transaction fees are much lower. There are many advantages of blockchain technology that make it worthwhile for people to invest their money into cryptocurrency.
Cryptocurrencies like Bitcoin also have value due to their scarcity or their limited supply. Like gold, there’s only so much that will be available before it’s gone. While not considered an advantage, it does cause demand.
[H3] You Don’t Have to Pay Taxes on Cryptocurrencies
Alt: Coffee mug next to tax withholding document
Also false. If you made a profit off of investing in a cryptocurrency or two, the Internal Revenue of Service (IRS) requires you to report it as part of your income tax report.
You should also know that filing your crypto taxes is not the same as filing your regular fiat taxes. You will need to keep track of how much you invested in a cryptocurrency and when. Additionally, you need to record your gains and losses and file those as part of your tax report. On top of that (stay with us), you have to convert the values of your crypto assets into fiat.
While you can do this by hand, it’s much harder to do the conversions and calculations, and it’s time-consuming. Plus, it’s easy to make a mistake. If done improperly, the IRS may audit and penalize you with fines. That’s where crypto tax software, like TaxBit, can save you some grief.
Crypto tax software essentially does the hard work for you by calculating and compiling your crypto taxes in no time. You can link up different exchanges that you use as well, and it will put together the appropriate tax forms you need. From there, you can download your tax forms and upload them to your choice of tax software, like TurboTax or TaxAct, or mail them yourself.
We’ve covered a lot on why you should make 2021 the year you start investing in cryptocurrency. Yes, cryptocurrency is volatile, and some cryptocurrencies won’t last. The point is that many are growing and gaining recognition as a stable digital currency.
Of course, it’s still important to do your research to determine which cryptocurrencies are right for you and to sift out the bad from the good. Stay informed and avoid investing out of fear that you might miss out. You can, if you want, start investing small amounts over time if you’re worried about losing a lot. It’s always a good practice to not spend more than you can afford to lose.
Happy New Year!