What is cryptocurrency?
Cryptocurrency is a flexible digital asset created using blockchain technology. Crypto acts as a decentralized currency free from regulation by any central bank, authority or government and has become a popular investment option.
One of the biggest differences with fiat, or established currencies, is that crypto is based around a peer-to-peer network underpinned by cryptography which helps ensure complete security and makes fraud near impossible.
Like most new and emerging tech, cryptocurrency has evolved at pace and scale since the launch of the original cryptocurrency, Bitcoin, in 2008. As the market has grown, investment companies, fund managers and even governments like Venezuela have begun exploring opportunities around both blockchain technology and cryptocurrencies themselves.
The first crypto that started it all was Bitcoin – the brainchild of Satoshi Nakamoto, a mysterious figure who still retains his anonymity. In a whitepaper Nakamoto outlined a vision for a web-based, peer-controlled digital currency; a “new type of money” that acts as ‘an electronic payment system based on cryptographic proof instead of trust.’
The premise was that full transparency inherent in Bitcoin’s crypto ledger would enable greater trust and control with every single transaction on the network having to be approved, verified and recorded on the blockchain.
Over the course of the past decade, we’ve seen several other cryptocurrencies emerge including the likes of Ethereum, Tether, BNB, Solana, Polkadot and Cardano. As the technology and its adoption has grown around the world, so use cases and functionality has become more advanced and flexible. One of the most interesting aspects of cryptocurrencies and crypto investing is this deep swell of potential around what may be possible in the future.
Why invest in cryptocurrency
Like any asset, cryptocurrencies can be traded, bought, sold and speculated on. Investors can buy and sell the cryptocurrencies themselves using a digital wallet which enables them to own the digital assets
Crypto trading has also become popular with investors trading on cryptocurrency volatility in a similar way to FX traders – using a trading platform to speculate on market movement. Whichever way investors choose to get into the market, there is a huge amount of choice on offer with hundreds of cryptocurrencies to choose from.
Even within this selection there are different types of crypto on which to speculate: NFTs (Non-Fungible Tokens) are unique digital artworks, while De-Fi (Decentralized Finance) offers investors new opportunities to reimagine the way the world pays for goods, services and products. This flexibility and choice is one of the key drivers behind crypto market adoption and the growing number of investors getting into the market.
Like with any asset there are two key approaches when trading cryptocurrencies – investors can look to be aggressive and hold short-term positions to capitalize on market volatility, or they can invest in cryptos that they feel offer long term potential and hold their asset or position for longer periods in the hope for a steady, reliable return on their investment.
It is important to remember that the value of any investment can rise and fall in relation to market conditions – and crypto investment is no different. Generally the cryptocurrency market has been more volatile than established markets like Shares or FX and this is partly due to the novelty of the assets and the uncertainty as to long term use cases. Governments may in the future decide to more heavily tax crypto investments and other factors, like inflation, macro influences, central bank decisions and geopolitical events can impact cryptocurrency prices.
Crypto investors need to understand the assets they choose to trade or invest in, and many traders use crypto as a hedge against volatility in other sectors or markets. This has become an increasingly attractive option for traders and investors as it provides greater portfolio diversity and an opportunity to offset losses incurred across other asset classes.
Over the past two years of the global pandemic, many investors have flocked to Bitcoin and related cryptocurrencies to take advantage of the market’s long bull run. Understanding the factors behind the market’s success is key to devising and maintaining a long-term strategic position. Investors should keep a close eye on the market as well as correlated assets to identify both risk and opportunity.
Will I have to pay any taxes when investing in cryptocurrency?
Cryptocurrency trading is subject to tax in several countries and the issue is an ongoing one. Some countries want to increase taxes on profits while others are removing barriers to trading to open up investment and encourage market participation. The majority of countries will have some form of tax on earnings, usually Capital Gains or Income Tax.
This is because crypto has increasingly filtered into the real world and can be used in many cases just like a fiat currency – to buy and sell products, goods and services. Increasingly big businesses have also begun to accept crypto like Bitcoin as payment while boosting the investment balance sheet with crypto assets. Below is a short guide to the tax regulations on Cryptocurrencies in major markets around the world.
The United Kingdom
Cryptocurrency in the United Kingdom is subject to Capital Gains Tax which means that investors are taxed on profits when selling coins or digital assets for a profit or using crypto as a currency to pay for services or goods. There are two ties CGT – the higher rate for high-net-worth individuals is 20% while taxpayers in a lower tax bracket pay 10%. Returns up to £12,000 fall within a tax-free threshold.
The United States
In the United States the IRS has classified crypto as property which is subject to existing tax regulations. The IRS has determined that crypto has a representation of market value and will be taxed at the relevant rate based on volume or quantity. The IRS taxes crypto gains in a range from between 0% and 20%, depending on income level.
In Australia, cryptocurrency is subject to Capital Gains Tax and investors must include a capital gain or loss in tax returns based on the volume of cryptocurrency exchanges, traded, bought or sold within the tax year.
Options for investing in crypto
When it comes to options for trading crypto, investors have two primary choices. They can:
- Trade on price movement using a broker or trading platform
- Buy or sell actual cryptocurrency using a digital wallet or crypto platform
Trading cryptocurrency using a broker or trading platform is the most flexible way to invest in crypto. It enables traders to speculate on market movement and volatility without the need for owning the underlying asset. Traders can choose to take a Buy position – where they feel the price will rise, or they can select a Sell position – there they feel the price will fall. For every point the market moves in the correct direction, the investor will make a profit.
For more information on trading crypto and derivatives with Eightcap, see the guide here.
More about IRAs (Crypto Individual Retirement Accounts)
Another option for investors looking for crypto opportunities are Individual Retirement Accounts (IRAs) which are long term retirement investment vehicles. As crypto investing has increased in popularity and as increased volatility across other asset classes hampers growth, IRAs have looked for new ways to diversify portfolios.
Fund managers for many IRAs have started to explore the opportunities around cryptocurrencies and there are several funds that now offer long term crypto investment options. When choosing an IRA it is important to choose a leading fund that has deep industry experience and expertise. As an investor it is also critical that those choosing an IRA understand now only the cryptocurrencies within a specific portfolio, but the other asset classes which make up the fund too. Many funds have deep dive research and market analysis available on their website, with historical performance indicators and graphs for further research.
Crypto Health Savings Accounts (HSAs)
Crypto Health Savings Accounts are a tax efficient way to grow wealth over the longer term. Traditionally these vehicles used established asset classes and health plans, but increasingly there are options to add crypto to HSAs through a custodian or fund manager. Diversifying your HSA in this way can help even out the weighting of a portfolio and offer greater protection against risk.
To add cryptocurrency to an HSA, investors need a trading account to add funds and select the crypto currencies that present the most opportunity. This can be done directly with HSA providers, and it is an avenue worth exploring for investors looking to maximize current holdings while adding an additional layer of flexibility to HSA investments.
How to begin investing in crypto?
At Eightcap we understand the cryptocurrency market well and our experience in supporting traders is unmatched. We offer a demo account for clients who want to test strategies, dip a toe in the water or try out different cryptos – without spending real money.
With over 300 crypto derivatives, traders can speculate on market volatility using a CFD account without the need to own any underlying assets.
Learn more about trading cryptocurrency CFDs on our Education Hub, or subscribe to Eightcap’s Week Ahead Newsletter for more trading insights, analysis and news on all the biggest cryptocurrency stories.