Cryptocurrency Investing: What You Need to Know Before You Start

Cryptocurrency investing has become a hot topic in recent years, drawing both seasoned investors and curious beginners into the digital currency market. While the potential for significant returns is enticing, it’s essential to understand the landscape before diving in. This guide will walk you through the fundamentals of cryptocurrency investing, the risks involved.

What Is Cryptocurrency?

Cryptocurrency is a digital or virtual form of currency that uses cryptography for security. Unlike traditional currencies issued by governments, cryptocurrencies operate on decentralized networks based on blockchain technology.

Some popular cryptocurrencies include:

• Bitcoin (BTC): The first and most widely recognized cryptocurrency, often referred to as digital gold.

• Ethereum (ETH): Known for its smart contract capabilities, making it a platform for decentralized applications (dApps).

• Binance Coin (BNB): Used primarily on the Binance exchange for trading and transactions.

• Cardano (ADA): Focused on sustainability and scalability within blockchain technology.

• Dogecoin (DOGE): Originally created as a meme coin but has gained popularity for speculative investing.

Why Invest in Cryptocurrency?

1. High Growth Potential: Cryptocurrencies like Bitcoin have shown massive price increases over the years. For example, Bitcoin’s price was under $1 in 2010 and peaked at over $100,000 in 2025.

2. Portfolio Diversification: Cryptocurrencies offer an alternative asset class to diversify your portfolio, reducing risk by spreading investments across various assets.

3. Decentralization: Cryptocurrencies operate independently of central banks, making them appealing to those wary of traditional financial systems.

4. Innovation: Emerging technologies like DeFi (Decentralized Finance) and NFTs (Non-Fungible Tokens) are powered by blockchain, creating new investment opportunities.

Things to Know Before You Invest

1. Understand the Market

Cryptocurrency markets are highly volatile. Prices can rise or fall by significant percentages within hours or even minutes. For instance, Ethereum’s price dropped from $4,000 to $2,400 within six months in 2024. Be prepared for fluctuations and only invest what you can afford to lose.

2. Research the Cryptocurrency

Not all cryptocurrencies are created equal. Before investing, research the use case, team, roadmap, and market position of the coin. Here’s how to research a coin effectively using Solana (SOL) as an example:

• Official Website: Visit Solana’s website to understand its technology, mission, and use case.

• Whitepaper: Read the official whitepaper available on their website to grasp the technical aspects and vision.

• Market Data: Use platforms like CoinMarketCap or CoinGecko to analyze market trends, trading volume, and historical price data.

• Community: Join discussions on forums like Reddit and Twitter to gauge public sentiment.

• News Updates: Stay updated on the latest developments via CoinDesk or The Block.

3. Choose a Reliable Exchange

You’ll need to buy cryptocurrency through an exchange like Coinbase, Binance, or Kraken. Consider factors like security, fees, and ease of use when choosing an exchange.

4. Store Your Crypto Safely

Cryptocurrency is stored in wallets, which come in two types:

• Hot Wallets: Connected to the internet, making them convenient but more susceptible to hacks (e.g., exchange wallets).

• Cold Wallets: Offline storage like hardware wallets, offering higher security.

5. Understand Taxes on Cryptocurrency

Cryptocurrency investments have tax implications. In the U.S., cryptocurrencies are treated as property, meaning you may owe capital gains taxes when you sell or exchange them. Let’s look at a detailed example:

• Short-term gains: If you sell your crypto within a year, gains are taxed as ordinary income. For instance, if you bought Bitcoin for $10,000 and sold it six months later for $15,000, your $5,000 gain is added to your taxable income. If your tax bracket is 24%, you’ll owe $1,200 in taxes on this gain.

• Long-term gains: If you hold your crypto for over a year, gains are taxed at a lower capital gains rate of 0%, 15%, or 20%, depending on your income. Using the same example, if you sold the Bitcoin after 18 months for a $5,000 gain and your income puts you in the 15% capital gains tax bracket, you’d owe $750 in taxes.

• Losses: If you sell at a loss, you can use the loss to offset other gains or deduct up to $3,000 from your taxable income annually.

This is where Lesser Tax can help. Our financial experts specialize in tracking cryptocurrency transactions, calculating gains/losses, and ensuring you leverage all available deductions to minimize your tax liability.

Strategies for Investing in Cryptocurrency

1. Dollar-Cost Averaging (DCA)

Instead of investing a lump sum, spread your investment over regular intervals. For instance, invest $200 monthly in Bitcoin regardless of the price. This strategy reduces the impact of market volatility.

2. HODLing

HODLing (Hold On for Dear Life) involves buying and holding cryptocurrency long-term despite market fluctuations. Many early Bitcoin investors became millionaires by holding through bear markets.

3. Diversify Your Portfolio

Avoid putting all your funds into a single cryptocurrency. A diversified portfolio might include Bitcoin, Ethereum, and smaller altcoins like Solana or Polkadot.

4. Set Stop-Loss Orders

A stop-loss order automatically sells your cryptocurrency if its price drops to a certain level, protecting you from significant losses.

Risks to Consider

1. Market Volatility: Prices can swing dramatically.

2. Regulatory Uncertainty: Governments may introduce regulations that impact the market.

3. Security Risks: Hacks and scams are common in the crypto space.

4. Lack of Knowledge: Investing without understanding the market increases your risk of losses.

Additional Resources to Learn More

Staying informed is critical in cryptocurrency investing. Here are some reliable sources to learn more and stay updated:

• CoinDesk: News and analysis on cryptocurrencies, blockchain, and fintech.

• CoinMarketCap: Real-time cryptocurrency prices, market caps, and trends.

• Investopedia: Detailed guides and tutorials on cryptocurrency investing.

• Reddit Communities: Subreddits like r/CryptoCurrency and r/Bitcoin offer discussions and insights.

• YouTube Channels: Channels like "Andrei Jikh" and "Coin Bureau" provide in-depth explanations and updates.

• Official Whitepapers: Read whitepapers of cryptocurrencies like Bitcoin and Ethereum for a deeper understanding.

Final Thoughts

Cryptocurrency investing offers exciting opportunities, but it’s not without risks. By understanding the market, diversifying your portfolio, and leveraging professional services like Lesser Tax, you can navigate the world of cryptocurrency with confidence. Remember, only invest what you can afford to lose and always stay informed.