Cryptocurrency vs traditional investments
While cryptocurrency is a relatively new technology, the nature of investing in it doesn’t differ tremendously from traditional stocks or other currencies. Like with any investment, you’re accepting a certain amount of risk in hopes of earning a return.
Cryptocurrency, however, still remains a greater risk overall than stocks. The entire point of cryptocurrency is to remain unregulated by any single government or regulatory body, but this leads to increased volatility. Furthermore, you need to take other things into consideration like cybersecurity and storage.
Cryptocurrency investments are currently not available through traditional brokerages, so you need to use a crypto trading platform to access them. Likewise, you cannot invest in tax-advantaged accounts like the TFSA or RRSP, which means you need to be responsible for your own income taxes on your investment gains as well.
8 Cryptocurrency trading tips to help you start investing
If you’re feeling overwhelmed by everything you have to keep track of when building a cryptocurrency portfolio, don’t worry! We’ve got an entire guide on cryptocurrency that covers all you need to know before you start buying and selling. However, when you feel that you’re ready to begin investing, here are 8 important things to remember:
1. Take cybersecurity seriously
When it comes to protecting your coins, treat them the same way you would real money in your online bank account. Many people are unintentionally lazy or careless with online security.
If you have bad habits like using easy to guess passwords or using the same password for every single website, now is the time to correct your behavior. Make sure your passwords are long and difficult to guess. Use different passwords for each website you log into, and change them a few times per year. One of the best things you can do is use a password manager to help you keep track of everything.
2. Cryptocurrency is not insured
Crypto trading platforms are not insured. When you keep your money with a CDIC insured Canadian bank, you’re protected in the event of the financial institution’s failure. This means that even if the bank goes under, you will still get your money back.
Cryptocurrency is not insured the same way. If the trading platform or crypto bank you’re using goes belly up or is hacked, it’s possible that your money is gone for good! To minimize this risk, keep any crypto that you’re not actively trading stored off the trading platform.
There is one exception: your coins with Wealthsimple Crypto are held by Gemini Trust Company LLC, which has over $200 million in cold storage insurance coverage.
3. Use a cryptocurrency wallet
When it comes to protecting your cryptocurrency, one of the best things you can do is store it in a digital or hardware wallet. You don’t want to leave your cryptocurrency on the trading platform where it is vulnerable to hackers. Instead, you want to use a wallet.
You can choose to install a digital wallet on the hard drive of your computer, or you can purchase a physical hardware wallet, like a Ledger device. A hardware wallet isn’t that different from the wallet you keep in your pocket or purse to carry traditional currency. Like your regular wallet, if you lose it, your crypto is lost too! For this reason, keep your cryptocurrency wallet in a safe place, like a small household safe or safety deposit box at your bank.
4. Transaction fees
While Wealthsimple Crypto doesn’t charge any trading fees or commissions on your trades, all cryptocurrency transactions carry transaction fees.
When you move crypto coins from your wallet to a trading platform or vice versa, you pay a small transaction fee for doing so. The fee for transferring cryptocurrency between platforms is usually a small fractional piece of a coin. It’s not, however, a flat rate and will vary depending on the time you make the transfer and the size of your transaction.
A fee for moving Bitcoin is charged because every transaction gets added to the blockchain. This is the reason the amount of the fee varies based on market congestion and the amount of cryptocurrency you’re moving.
I think of Bitcoin transaction fees like ECN (electronic communication network) fees charged by my brokerage account when I trade ETFs. These are small, unavoidable charges that are simply part of digital trading. Nevertheless, there’s no reason to pay more fees than you have to. Transaction fees should discourage you from unnecessarily transferring your crypto between accounts or platforms. Leave it in your wallet where it can grow in value.
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5. Coin conversion fees
Bitcoin still dominates the cryptocurrency space, but it’s likely not the only coin you’ll have in your portfolio. There are other cryptocurrencies that can earn you profits besides Bitcoin. When converting one cryptocurrency into another, you’ll pay a currency conversion fee, the same as you do when changing currencies in traditional fiat money.
Similar to transaction fees, coin conversion fees will depend on the amount of crypto you’re exchanging, when you are exchanging the currency, and what coin you’re converting it to. Different trading platforms can offer different exchange rates for coins but remember you’ll pay transaction fees to move your cryptocurrency between them so make sure to factor that into your costs.
6. Cryptocurrency gains are subject to income taxes
While many people try to use cryptocurrency to avoid all the downsides of regular money, they still can’t outrun income taxes. If you purchase a cryptocoin, it goes up in value, and then you sell, your capital gains are subject to income taxes.
It is your responsibility to keep track of your cryptocurrency trades so you know exactly how much money you’ve earned (or lost) in your investments.
Because cryptocurrency is still largely unregulated, trading platforms will not typically issue the tax summary of your account at the end of the year the way that traditional brokerages do. Nevertheless, you will still need to report this information to the CRA. Keep track of the amount you deposit to your cryptocurrency accounts, as well as the trades that you make so you can easily calculate any income taxes you owe at the end of the year.
7. Don’t misplace your coins
Believe it or not, misplacing coins is one of the most common ways people lose money in the crypto world.
As many as 1 in 5 Bitcoins have been misplaced. People have lost them in various ways: forgetting pins, accidentally wiping hard drives with wallets, or actually misplacing the hardware wallet holding their Bitcoin. Yours truly wiped a computer hard drive with at least 3 full Bitcoin in 2012 thinking “this cryptocurrency nonsense will never amount to anything”. But I’m not in bad company: even Elon Musk has misplaced Bitcoin. The best way to avoid misplacing coins is to avoid dealing with them in the first place by using a trading-only Crypto platform.
Try to limit how many platforms and wallets you’re using to manage your crypto. After all, this is the same hassle as having too many bank accounts. One or two trading platforms and one wallet for storing your coins is more than enough to manage your cryptocurrency portfolio. Make sure you know where your coins are stored, and how to get them.
8. Don’t forget to invest in the traditional stock market
Even if you’re a cryptocurrency enthusiast, you shouldn’t neglect the traditional stock market. While crypto continues to gain legitimacy every year, it’s still centuries behind the established global stock market that has consistently built wealth for investors.
If you’re just starting out investing in cryptocurrency, start by putting 1% to 3% of your total wealth into a small mix of 2-3 different cryptocurrencies. Over time, you may increase your cryptocurrency holding to be 5% or up to 10% of your total investment portfolio.
While it might be tempting to allocate more cash to cryptocurrency, it’s important to remember that diversifying your portfolio and rebalancing when necessary is the key to reducing risk when investing. A robo advisor like Wealthsimple can take care of investing in the stock market while you manage your crypto trading. Additionally, if you only have a small pool of money to play with, there are other ways to invest.
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Cryptocurrency is worth exploring as part of your investment portfolio but should be approached with caution and extra care. As with investing in the traditional stock market, protecting your capital is equally as important as seeking investment gains. That being said, there are still ways to make money on Bitcoin when it goes down if you know what you’re doing. With that in mind, if you look out for security, fees, and taxes, you’ll surely get to enjoy the profits!