Cryptocurrency 101: How to Invest
March 30, 2021
In case you hadn’t heard, the price of Bitcoin has been on a tear. It began 2021 worth around $37,000 Canadian and, within two weeks, was over $50,000. By mid-March it crested at $76,000. Despite the slight decline that followed, there’s been talk of a spike to a whopping $300,000 by year’s end, with the potential for a massive crash soon after.
Such a rapid rise might well tempt you to consider investing in Bitcoin or any other of the many cryptocurrencies now available. In their short history, cryptocurrencies such as Bitcoin have withstood periods of serious volatility at times while ultimately producing some truly remarkable returns. According to one estimate, a $1,000 investment in Bitcoin in 2010 would be worth a cool $287 million in 2021.
Of course, nothing is ever a sure thing in the investment world, least of all Bitcoin. The world’s biggest cryptocurrency has been on a wild ride in recent years, and its fate in the decade ahead is unknown.
If you’re curious about the possibility of eye-popping returns and want to investigate making an investment in cryptocurrency, there are a few things worth knowing first.
You can buy just a piece of the pie
Don’t get turned off by the soaring value of a single Bitcoin and think investment in cryptocurrency is beyond your reach. You don’t need tens of thousands of dollars on hand to purchase a full-value unit in order to get involved in cryptocurrency investing. Many people invest smaller amounts to buy just a slice of a single unit, a small fraction of one coin.
It’s an unregulated environment...for now
Bitcoin and other cryptocurrencies don’t operate within the same framework of rules and financial regulations that govern most investments. Oversight of transactions is provided by the open-source blockchain ledger that’s shared and copied between hundreds of computers. Still, that doesn’t prohibit the possibility of market manipulation and insider trading, creating potential risks for individual investors. If cryptocurrencies continue to boom, or threaten traditional national currencies, governments may act to regulate this sphere and change the rules of the game for all involved.
Cryptocurrency can help balance your portfolio
Given its history of volatility, buying Bitcoin might not seem like the most sensible way to diversify an investment portfolio. However, one attractive aspect of cryptocurrency investment is the general lack of correlation between their price, and that of more traditional assets, say oil or gold. As such, investing in cryptocurrency can bring balance to a portfolio by acting as an asset that moves independently of other declines, or even in opposition to them.
You can buy and sell cryptocurrency through online brokers and even some ATMs
If you decide to invest in cryptocurrency, you can buy and sell it through online brokerages or exchanges in Canada, although they’ll charge you a fee for the service. The broker will also retain responsibility for the electronic key codes that secure the specific cryptocurrency and permit transactions.
In addition, there are now more than 4,000 Bitcoin ATMS in countries around the world. These kiosks allow individuals to purchase Bitcoin and send the cryptocurrency to a secure online ‘wallet’ for storage.
Beware of hackers!
Cryptocurrency investments, or more accurately, the digital passwords that identify individual holdings, can be stored in online accounts to facilitate easier trading, or in an offline piece of hardware for extra security.
If your codes are stored online, be sure to use all available protections to guard against theft by hackers. Multiple incidents have seen millions of dollars worth of cryptocurrency stolen from individuals who failed to properly safeguard the digital passcodes used to access cryptocurrency holdings.
Earn more by using cryptocurrency funds to make a tax-sheltered investment
Some online brokers offer Bitcoin-based mutual funds, rather than selling units of cryptocurrency itself. The advantage of such an investment choice is that these funds can be held inside a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA), providing a valuable tax shelter for your investment earnings. Given the potential for big returns, and the steep tax rate on capital gains, sheltering your cryptocurrency holdings inside a tax-free account could make a huge difference to your investment earnings.