Getting started with cryptocurrency
As we learned in Part I, Cryptocurrency isn’t available at your neighborhood bank. If you want to get involved in cryptocurrency, though, there are a couple of options. First, you need to decide which cryptocurrency you want. Bitcoin is just one type, but it dominates more than half the market. Ether is another type that uses the Ethereum blockchain, which is most closely associated with NFTs. Other types include Litecoin, Cardano, Dogecoin, and more. Some cryptocurrencies, like Bitcoin, are available to purchase with U.S. dollars, but others require buyers to pay with Bitcoin or another type of cryptocurrency. Once you’ve decided which cryptocurrency you want, you’ll need to follow a few steps:
Open a broker or crypto exchange account and fill your wallet with a cryptocurrency trading firm. Once your account is open, you can transfer real money to buy cryptocurrencies like Bitcoin or Ether. One popular exchange is Coinbase, which allows users to both create a wallet and buy and sell cryptocurrency. Several online brokers like Robin Hoot, eToro, Sofi Active Investing, and Tradestation have started to offer cryptocurrencies.
Place an order. Once your wallet is set up, you can make a purchase by entering a cryptocurrency’s ticker symbol and how many coins you want to purchase. Many exchanges and brokers allow the purchase of fractional shares, so buyers can purchase fractional shares of cryptocurrency like Bitcoin or Ethereum that can be thousands of dollars per token.
Choose a storage method. Cryptocurrency is not backed by protection like the FDIC, and despite blockchain’s security, your investment is still at rick of hacking or theft. If your cryptocurrency is purchased through a broker, your storage choices may be limited. However, if you purchased through an exchange, you have a few options: hot wallet, cold wallet and leaving it on the exchange.
A “hot wallet” is a convenient way store your currency online. However, the online nature of it makes it more susceptible to hacking. A “cold wallet” is the most secure option for storage, since it is stored on a device like a hard drive or USB drive and not connected to the internet. You can also leave the currency in the wallet that is associated with the exchange where you purchased it.
An important word on security
Hot and cold wallets are secure ways to store your crypto, but if you lose access to either one, you can lose your investment. Whether it’s losing the keycode to a hot wallet, or the hard drive or USB breaks or otherwise fails on the cold wallet, you can be out the full amount in that wallet, so choose your storage carefully.
Buyer beware. The cryptocurrency landscape is still in its early stages, and there are a number of risks to investing in cryptocurrencies. Because the market is unregulated and has been plagued by volatility, there is the potential for large losses. In recent hacking and customer service scandals with platforms like Coinbase, individual investors have lost hundreds to hundreds of thousands of dollars. When that happens, there’s no recourse because blockchain transactions are irreversible once completed.
Cryptocurrency is also a boon for scammers. From October 2020 through April 2021, the Federal Trade Commission (FTC) fielded nearly 7,000 reports from consumers about scams. The median loss reported for these scams was $1,900. The FTC cautions people interested in cryptocurrencies to look for these signs of a scam: someone insisting on cryptocurrency for payment, a guarantee you’ll make money, or a promise of guaranteed returns and big payouts. Scammers also make big claims but don’t provide details about how the investment works or where your money is going.
The Currency of the Future?
Cryptocurrency isn’t just for buying and selling. With cryptocurrency becoming more readily exchanged and accepted, Several major companies are coming around to this new type of currency. Microsoft, Overstock, Whole Foods, Starbucks, and Home Depot are just a few of the companies who now accept Bitcoin as payment. As more and more businesses adopt crypto as a payment form, questions arise about how it will be used for commerce in the future and how and how it will interact with the Uniform Commercial Code, tax law, and estate planning. You can be sure your Strauss Troy attorneys will stay on top of this issue.