If it seems like a lot of people bought Bitcoin for the first time last year, that’s probably because they did.
Fifty-five percent of Bitcoin investors say they started investing in 2021, according to a study by crypto firm Grayscale Investments. Along with Ethereum, experts generally consider Bitcoin a better fit for holding and increasing in value than other altcoins, which remain much more speculative and unpredictable.
“Bitcoin is definitely the friendliest crypto to get into, but you can get really into the weeds very quickly. And there’s a lot of unregulated risk in crypto, so if you’re not a seasoned investor, you can get in trouble,” says Humphrey Yang, the personal finance expert behind Humphrey Talks.
If you’ve recently incorporated crypto into your investment portfolio, or you’re thinking about investing in Bitcoin or Ethereum for the first time, here are five things to keep in mind.
5 Things New Crypto Investors Should Know
1. Build Your Crypto Knowledge
OK, you own a little Bitcoin or Ethereum. But now what? Before you try to move onto more advanced crypto investments, Yang recommends doing your research and having an understanding of what you’re investing in. It may take time to build up the knowledge you need to make a decision, so think of it with a long view in mind and don’t go looking for quick, easy money.
“If you don’t know what you’re buying, even with Bitcoin and Ethereum, that’s a good sign you should not be messing around with some of the smaller altcoins,” says Yang. “A lot of altcoins are just small projects started by Joe Schmoe and Jim Schmoe in their garage.”
The same advice applies if you’re interested in staking, mining, or crypto liquidity pools. You never want to put your money into something you don’t fully understand, says Doug Boneparth, a financial advisor and president of Bone Fide Wealth in New York.
“Before you invest your money, invest your time and your energy to learn more about it,” says Boneparth. “You don’t need to be an expert, but you need to understand the basics.”
2. Tune Out the Noise
There are more than 15,000 different cryptocurrencies, and it can get “very noisy” and “confusing,” according to Boneparth. That’s why educating yourself on crypto and tuning out the noise are both so essential.
Stay the course, and don’t let the hype of certain crypto investments result in fear-of-missing-out (FOMO). Maintain a healthy dose of skepticism with influencers’ advice on crypto, and watch out for strangers writing to you directly about get-rich-quick crypto schemes. Experts recommend most investors stick with the two most well-established coins — Bitcoin and Ethereum.
“It can create a very confusing environment to figure out what’s what and who is who, especially when you have a lot of people really pumping it or being very zealous about it,” he says.
3. When Trading Crypto, Keep the Tax Man in Mind
Another thing to keep in mind if you’re a new crypto investor is taxes, says Yang. Crypto holdings are taxed, similar to how other assets like gold and stocks are taxed. If you bought and sold Bitcoin, Ethereum, or any other crypto in 2021, you’ll be expected to report any profits or losses to the IRS during this year’s tax season, which started Jan. 24.
You may be wondering if you can file your own taxes or you need to bring in a crypto tax professional for some help. According to experts we spoke to, accounting for crypto in your tax return is relatively easy if all you did was buy and trade crypto within online exchanges. There are plenty of free software programs available, such as CoinTracker and TokenTax, that can help you generate the cost basis for your crypto trades and determine your capital gains and losses. Many of them are compatible with regular tax programs like TurboTax or TaxAct, so you can easily import the gains and losses they report to your tax return.
It’s when you get more active that it gets more complicated. For example, if you’re daily trading or even crypto mining, you may need to tap a tax professional who understands tax code related to virtual currencies and has experience reporting cryptocurrency gains and losses.
If you don’t know where to start, glance over our crypto tax guide and see our tips on how to find a crypto-knowledgeable tax expert.
4. Brace for Volatility
If you’re invested in crypto, you’re in for a wild ride. Cryptocurrencies are notoriously volatile investments, and you’ll need to be able to tolerate it as “any new technology is going to go through growing pains,” says Boneparth. It’s more reason for investors to play a steady long game, instead of trying to earn quick cash. If you’re in it for the long-term, then you don’t need to worry about short-term swings. In fact, the best thing you can do is adopt a “set it and forget” mantra with your crypto, says Boneparth.
“We’ve already seen epic rallies and huge corrections, and if you’re not disciplined, you’re not going to be able to deal with that,” says Boneparth. “And if you can’t deal with it, your emotions will take over. If they take over, you could make an emotional decision around your money.” Investing based on emotion can lead to bad and impulsive financial decisions, which can hinder your long-term financial goals.
It only takes a brief look at Bitcoin’s price history to see how volatile it is. That’s why experts say cryptocurrency investments should make up no more than 5% of your total portfolio.
5. Protect Your Crypto Investments
Scammers stole an all-time high of $14 billion in crypto assets in 2021. To protect yourself from hacks and scams, prioritize safeguarding your crypto by implementing good digital security habits and watching out for common red flags. For instance, avoid promises of free money or any contractual obligations that lock you into holding crypto without being able to sell.
If you’re trading more than a few hundreds dollars of crypto, consider getting a crypto wallet for additional security. There are two types of crypto wallets: hot wallets and cold wallets. A hot wallet stores crypto online, while a cold wallet stores your crypto offline on a piece of hardware. If you put your crypto in a hot wallet, see that it has robust security measures, including two-factor authentication, allows for a portion stored in a cold wallet, and private insurance policies in case of theft or hacking.
You get one unique key to access your wallet, which means you need to be extra careful about not losing your key or having it stolen. Avoid sharing your private key with anyone and maintain strong, regularly updated passwords.