Updated December 24, 2022

Dos and Donts For Investing In Ethereum From Overseas Duty

If you are interested in investing in Ethereum, Bitcoin, or other cryptocurrency from an overseas duty location, there are some things you need to know about protecting your investment and […]

Table of Contents

    If you are interested in investing in Ethereum, Bitcoin, or other cryptocurrency from an overseas duty location, there are some things you need to know about protecting your investment and making sure you don’t lose your money.

    Know The Rules

    As a military member, you have much more to lose by not following the rules of cryptocurrency investing. Why? Security clearances, for a start, can be jeopardized by those who do not follow federal law and that includes investing in crypto.

    What kind of laws do we mean? For starters, anyone who holds accounts in overseas holdings is required to report those accounts to the Internal Revenue Service.

    If you have holdings worth more than $10K in overseas accounts, you need to discuss your tax position with a qualified tax professional or contact the IRS for information on how to properly file in such cases.

    In addition to IRS guidelines for individuals, a law called the Foreign Account Tax Compliance Act requires such taxpayers to report overseas accounts on IRS Form 8938.

    Ignorance Of The Rules Is No Excuse

    Failure to do so, intentional or not, could create problems for someone about to be reviewed for a security clearance. Don’t take an unnecessary risk-if you don’t know or are not sure, ask a tax professional or contact the IRS.

    Furthermore, you may be subject to the laws of your host country if you are investing in cryptocurrency in the host nation you have PCSed to–Status of Forces Agreements may or may not apply to investments made in another country–you will need to understand any laws you may be subject to as an American investing while living in a foreign country.

    How will such laws affect your ability to invest while serving “in-country”? Will they affect you? If you don’t know the answer, you’re already at a disadvantage. Know before you invest.

    For example, in Germany, cryptocurrency is defined as a financial instrument that can be taxed. Some uses of cryptocurrency in Germany may require a permit. In America, Ethereum, Bitcoin, and other virtual currencies are regulated as property and not as a financial instrument.

    That distinction might not mean much to some, but in the eyes of the law, it is a major difference.

    The Unregulated Nature Of Ethereum

    The problem with people investing in cryptocurrency while serving in the military from an overseas location? More often than not for some users there is a serious issue with not being able to keep up with the latest trends and developments that affect how virtual currency is bought and sold.

    A good example?

    China Bans Cryptocurrency

    On May 18, 2021, Reuters.com reported that China issued a ban on that nation’s financial institutions working with cryptocurrency.

    China-based companies cannot offer services related to cryptocurrency transactions, and the Chinese government issued a warning to investors not to engage in “speculative crypto trading” according to Reuters.

    If you are investing in cryptocurrency from overseas it pays to know what kind of geopolitics (such as China’s move against virtual currency) could affect the Bitcoin investment world. Being ignorant of issues like these when dealing with an unregulated and highly volatile form of speculative investment is a recipe for serious loss of your principal investment.

    Technical Issues

    Online trading has its share of perils starting with the most basic technical issues–online connectivity. If you lost your connection during a crucial moment in an Ethereum trade, will you lose the transaction altogether? That is a common worry among those who have not traded online before.

    The real issue isn’t so much whether you will lose your transaction altogether if you experience internet trouble, but whether or not you missed out on a chance to buy or sell at an ideal moment.

    Some will play a risky game with cryptocurrency, treating it like a day trading situation or investing aggressively enough to want to monitor prices in real time before making the right move to sell or buy.

    For these people, the loss of connectivity could be far more troublesome than those who treat crypto like a fun hobby. If your goal is to buy and sell for profit like a pro or semi professional investor, any local issues you have with your internet connection in the host country could be a serious issue.

    Securing Your Investment

    One of the first things you learn about investing in crypto is that you have to hang on to your secure keys for each Bitcoin or other type of currency you have. Lose your crypto keys and you lose your Ethereum.

    People tend to store their keys in several ways–on a thumb drive, stored in the cloud, or even printed on paper and locked away.

    Your preferred method of storing these valuable keys may work for you when things are normal, but if you go on a PCS move and don’t take steps to safeguard your cryptocurrency you could lose your investment. How can this happen?

    • The thumb drives you store your cryptocurrency get accidentally packed in your household goods, leaving you unable to access your virtual money until the shipment arrives at your new assignment anywhere from 6-12 weeks from the time it departs your previous duty station.
    • The same scenario above, but the drive or other storage method you were using gets damaged, destroyed, or lost in the move.
    • You leave your cryptocurrency platforms unused for a longer-than-usual length of time and your account is hacked or otherwise compromised.
    • Your data is stored on drives or by other means and you’ve remembered to keep it out of your household goods, but the bag or drives containing this information are stolen while you are in transit.
    • The exchange you registered with to trade virtual currency goes out of business while you are in the middle of PCS travel. This isn’t as much of an issue for those who don’t store their crypto keys offline, but it can be a serious issue for those who aren’t as diligent about anticipating such contingencies.

    In each one of these scenarios, there are simple solutions that can be used to add more protection against data loss. In the case of your crypto accounts, the most important thing to do is to NOT store your Ethereum or Bitcoin on a third party exchange for an extended period of time.

    Use complicated passwords, change your passwords just before you embark on your PCS travel, and make sure to safeguard your passwords carefully.

    Remember, if you lose access to your crypto keys, you lose your money and that may be as true of a lost password to a crypto exchange as it is lost keys themselves.

    For all other scenarios in the list above, making copies of your bitcoin keys and keeping them in an extremely safe place is the most effective way to prevent a loss of your investment. Traveling with your Bitcoin keys or Ethereum keys is much safer when you have redundant copies of those keys.

    You may consider printing a list of these keys and putting them into a safe deposit box or some other form of secure or more secure storage ahead of any travel you have to do.

    • Veteran.com Team

      Written by Veteran.com Team

      The editorial team here at Veteran.com works to help the U.S. military community discover the many military benefits available to them. Our team is supported by our Veteran Review Board and its Standard of Care, which all content on Veteran.com is reviewed to meet.

    Updated October 29, 2021

    Dos and Donts For Investing In Bitcoin

    What do you need to know about investing in Bitcoin, Ethereum, and other cryptocurrency? In some instances it’s the same thing you need to know about any investment–how much to […]

    Table of Contents

      What do you need to know about investing in Bitcoin, Ethereum, and other cryptocurrency? In some instances it’s the same thing you need to know about any investment–how much to invest, when to cut your losses, what makes a risky investment dangerous compared to more conservative approaches, etc.

      Cryptocurrency investing requires you to remember and respect three basic very important things:

      • Virtual currency is not a stable investment platform compared to mutual funds, bonds, Treasuries, etc. It can suddenly gain or lose value dramatically in a very short period of time.
      • Virtual currency depends on the user storing and safeguarding cryptokeys for each Bitcoin or other currency. If you lose the keys, you lose the money. We’ll repeat that again below for emphasis. It’s how many newcomers get burned.
      • Virtual currency is not regulated in the United States as currency. It is treated as property instead. Tax consequences may apply and you must report all required income or earnings from the sale, trade, or use of virtual currency as per IRS laws. These laws are subject to change and change often.

      The rules for reporting Bitcoin earnings as appropriate are found on the IRS official site. There are some more complicated rules for virtual currency as used as what is known as a “capital asset.”

      You should consult a tax professional to determine whether your involvement in cryptocurrency sales, trades, or other transactions results in your having a capital asset or not. Remember, tax code changes are common. Today’s tax law is not set in stone.

      There are less obvious things about investing in cryptocurrency–some of which has specifically to do with the nature of the investment you’re making. Here are some very important dos and don’ts to follow–disregard at your own risk.

      Bitcoin DO: Treat virtual currency like any other investment. That means being smart about your money, not putting all your cash into one type of investment, and maintaining a diverse portfolio. If all your money is invested in virtual currency, you are already taking an unacceptable risk of loss.

      Bitcoin DON’T: Don’t invest in virtual currency without a stop-loss plan. This means setting up parameters when you will stop investing, try to sell your investment, or buy-and-hold depending on the risk tolerance you have.

      If you invest in Bitcoin without a strategy for getting out of the investment should it begin to falter, you WILL LOSE your money at some point.

      Bitcoin DO: Understand the nature of your investment. By this, we mean understanding how Bitcoin gains value (investor enthusiasm) and what Bitcoin is NOT (an investment backed by fiat currency, which is real-world money).

      If you do not understand this, you WILL LOSE your investment at some point. Knowing how virtual currency works is key to making smart choices about investing in it.

      You will need to learn some things about the technology behind virtual currency like Bitcoin and Ethereum. Not understanding the technical aspect of this type of investing puts you at a serious disadvantage. Your risk of loss is elevated significantly if you do not understand how this type of investing works.

      If you have never heard of a margin call and don’t know what the consequences of leaving your money in an account subject to such, you likely aren’t ready for investing in virtual currency…yet. Do your homework and learn some investing basics BEFORE you commit your hard-earned cash. You’ll be very glad you did.

      Bitcoin DON’T: Do not invest money in Bitcoin or Ethereum without first researching how to purchase, trade, and spend virtual currency.

      Why do we say this? Because much like traditional investing, you don’t just log onto a website and start putting your money into investments.

      You need an account, you may be required to provide identity verification for traditional investing (not necessarily true with virtual currency), you need to understand the applicable exchange rates, but where virtual currency is concerned you ALSO need a place to STORE your virtual currency.

      These are known as digital wallets and you will need to understand how they work and why before you spend any money on Bitcoin. You should also know that Bitcoin wallets can be lost, stolen, compromised, etc. If you lose the data in your virtual wallet, you lose your investment. Why?

      Because Bitcoin relies on something called keys–these are codes that identify your virtual currency.

      These keys are basically the things you need to use your Bitcoins and without those keys, you CANNOT access, spend, trade, or sell them. You can store these keys in a digital wallet which may be stored on a portable drive, or online.

      But you can also store them on paper and manually plug the keys in. Lose the keys, lose the money. It’s that simple.

      Bitcoin DON’T: Do not rely on any single storage solution for your virtual currency keys. See the above warning about what happens if you lose your keys.

      There is, at press time, no realistic way to recover unbacked-up lost or stolen keys without physically getting the hard drive, paper, or some other recorded evidence of the numbers.

      This includes most forensic hard drive extraction techniques–it is extremely unlikely that you can recover lost keys using hard drive recovery methods. If you do not have the numbers assigned to your keys and cannot retrieve them in some way, you lose your investment. Make backups. Often.

      Bitcoin DO: Pay close attention to the tastemakers and trendsetters involved in virtual currency including Bitcoin, Ethereum, etc. Why? Because virtual currency is volatile and subject to influences other types of more stable investments are resistant to.

      When a single social media post on Twitter can dramatically change the value of Bitcoin, that’s a force you should respect in terms of your ability to make money rather than lose it.

      Bitcoin DON’T: It is a very bad idea to leave your assets or money in a digital currency exchange. Use the exchanges to make the transaction but DO NOT treat the exchange like your digital wallet.

      Why? Exchanges are extremely prone to hacking attempts by nature. There are also plenty of Bitcoin and virtual currency scams out there.

      It pays to thoroughly research the exchange you are considering for your virtual currency transactions. Use trusted, reputable exchanges with good ratings and RESEARCH THE EXCHANGE ON GOOGLE to see what other investors are saying.

      Don’t take the word of a handful of strangers. Read what A LOT of strangers write about the exchange you’re considering.

      Bitcoin DON’T: As mentioned earlier, virtual currency is treated as property, not cash, for income tax purposes.

      If you earn money trading, selling, or using Bitcoin, you will be required to report the appropriate earnings on your taxes according to federal law. DO NOT be ignorant of the tax consequences, failure to report income as required can result in the IRS revisiting your tax return later if it is not detected right away.

      Bitcoin DO: Do explore your options for more stable versions of virtual currency known as “stablecoins.” These are virtual currencies that have actual cash backing them and securing their value.

      Not all virtual currencies are designed the same, however and you may or may not find the longevity of any given brand new “altcoin” or stablecoin to be questionable without establishment of a track record showing the currency can compete in the marketplace.

      Many alternatives show up, make a splash, and then fade away in a comparatively short amount of time.

      Bitcoin DON’T: Do not assume that past performance on ANY investment is a predictor of future results. This is not something you can rely on–it’s Investment 101 advice, but many people make the mistake of assuming that if an investment has done well up to this point that it will definitely continue to do so.

      The nature of any investing involves risk–don’t ignore these risks.

      Bitcoin DO: Definitely DO avoid group efforts to alter the value of virtual currency. This activity is known by several nicknames including “pump and dump”.

      These operations attempt to gather a group of investors together to artificially manipulate the price of a virtual currency before dumping it for a profit. These schemes are not only illegal, they are full of risk. As a member of such a group, unless you are a part of the inner circle of the plan you will likely get squeezed out by being informed just a bit too late that its is time to sell the currency.

      Pump and dump schemes are unethical, illegal, and may be part of a larger scam to part you from your money.

      • Veteran.com Team

        Written by Veteran.com Team

        The editorial team here at Veteran.com works to help the U.S. military community discover the many military benefits available to them. Our team is supported by our Veteran Review Board and its Standard of Care, which all content on Veteran.com is reviewed to meet.

      Updated July 11, 2021

      Investing in Bitcoin through a Thrift Savings Plan (TSP)

      Due to Bitcoin’s rise in popularity, many service members and veterans ask about adding it to their retirement portfolios. In theory, adding cryptocurrency to a retirement portfolio will add both […]

      Table of Contents

        Due to Bitcoin’s rise in popularity, many service members and veterans ask about adding it to their retirement portfolios. In theory, adding cryptocurrency to a retirement portfolio will add both asset diversification and potential upside. While investing in Bitcoin through a Thrift Savings Plan (TSP) is not allowed, we’ll use this article to explain an alternative for TSP account holders.

        Specifically, we’ll discuss the following:

        • Thrift Savings Plan Overview
        • Using an SDIRA to Indirectly Invest in Bitcoin with TSP Funds
        • Transferring TSP Funds to an SDIRA to Invest in Bitcoin
        • Risks of Investing Retirement Funds in Bitcoin
        • Final Thoughts

        Not financial or tax advice. This article is strictly educational and is not investment advice.

        Thrift Savings Plan Overview

        TSP Overview

        The Thrift Savings Plan, or TSP, serves as the government’s version of a private company 401k plan. That is, the TSP provides government employees, military members, and other eligible participants a tax-advantaged retirement account option. And, most plan participants receive some form of government match on their contributions, further increasing the retirement benefits of a TSP.

        TSP participants can contribute funds to one of two account types, each of which offers its own unique tax advantage for retirement saving. With a traditional TSP, participants get a tax benefit now. Every dollar they contribute to a TSP plan up to an annual limit reduces their current taxable income. For example, a $10,000 contribution to your TSP would reduce the amount of taxable income for the year by $10,000, saving you money on your current tax bill. However, with traditional TSPs, individuals pay taxes in retirement when they take distributions from their accounts.

        Alternatively, the Roth TSP provides a tax benefit later. You pay tax on contributed funds, but you can withdraw those contributions and associated earnings tax-free in retirement. This reduces your tax bill in retirement without providing any current tax savings.

        TSP Investment Options

        As a retirement plan, the TSP has the benefit of extremely low administrative expenses. Plan participants pay significantly less than the fees associated with most comparable retirement plans. But, the TSP also has one major disadvantage: limited investment options.

        TSP participants can choose between five individual funds, composed of different categories of stocks or bonds. Or, they can opt for a lifecycle fund, which includes a unique mix of these five individual funds tailored towards a target retirement date. While these options provide exposure to the broader market, they do not allow participants to invest in alternative asset classes (e.g. Bitcoin, real estate, precious metals, etc.).

        This limitation creates a dilemma for many TSP participants. If someone has saved a significant amount of money in a TSP, he or she may want to allocate a portion of those funds to alternative assets like Bitcoin. As the TSP does not allow this option, participants need to take a different route: transferring part or all of your TSP funds into a self-directed IRA, or SDIRA. We’ll discuss the considerations for this move in the next section.

        Using an SDIRA to Indirectly Invest in Bitcoin with TSP Funds

        A self-directed individual retirement account, or SDIRA, is a unique type of IRA. Unlike their IRA counterparts, SDIRAs allow account holders to invest in a far broader range of asset classes than just stocks, bonds, and mutual funds – to include cryptocurrencies like Bitcoin. This represents the primary practical difference between normal IRAs and SDIRAs. And, due to this additional complexity, most IRA custodians do not offer SDIRAs. Rather, if interested in this route, you’ll need to find an IRA custodian that focuses solely on self-directed IRAs.

        Some of these alternative assets available in an SDIRA have significantly greater risk than more traditional investments, which is why only experienced investors should consider SDIRAs. But, if interested in A) investing in Bitcoin with your TSP funds, and B) receiving the tax advantages of a retirement account, transferring your TSP to an SDIRA may make sense. More precisely, making this move allows individuals to indirectly invest in Bitcoin with TSP funds.

        Transferring TSP Funds to an SDIRA to Invest in Bitcoin

        To actually make the transfer from a TSP account to an SDIRA, participants need to take the following steps. Additionally, most TSP participants must have separated from military service to do this, as the TSP only allows for two types of in-service withdrawals (financial hardship and age-based “59 ½” withdrawals).

        Step 1: Identify an SDIRA Custodian

        Most IRA custodians do not also serve as SDIRA custodians. Consequently, you first need to find a designated SDIRA custodian. But, due to the complexity of different alternative assets offered in these retirement accounts, you should also find a custodian that specializes in your desired asset class. In this case, if you want to use your SDIRA to invest in Bitcoin, you can – and should – find a custodian that focuses its services on cryptocurrencies.

        Step 2: Conduct the TSP to SDIRA Transfer

        Once you’ve identified your account custodian, you need to fund the SDIRA. Before making any requests of the TSP, alert your new SDIRA custodian that you will be completing a direct rollover from your TSP account. While you can conduct an indirect transfer, which sends you a check that you then forward to the SDIRA custodian, this poses far more risk of making a mistake that could trigger taxes and penalties.

        Once you’ve alerted your SDIRA of the impending rollover, you can begin the transfer process with the TSP. Fortunately, the TSP website makes transferring your funds a relatively straightforward process. When you log into your TSP account online, there’s an option for a full withdrawal. The website will walk you through its withdrawal wizard, which will ask you a few questions and use your responses to automatically complete Form TSP-70, Request for Full Withdrawal (alternatively, use Form TSP-77, Request for Partial Withdrawal When Separated, if you prefer to leave some funds in your TSP). Of note, if married, you’ll need to notarize this form, as well.

        After you’ve completed the Form TSP-70, you can send it directly to your SDIRA custodian. Then, this new custodian can directly handle the TSP to SDIRA rollover on your behalf. This limits the likelihood of mistakes. Alternatively, you can submit the form directly (the TSP website lets you upload it). Regardless of which path you choose, the TSP will eventually acknowledge that A) it received your withdrawal request, and B) has completed the associated account transfer to your SDIRA.

        NOTE: If rolling over your traditional TSP to a traditional SDIRA, you will not trigger a taxable event. But, if you choose to convert your traditional TSP into a Roth SDIRA, you will need to pay the associated income taxes, as all of your prior TSP contributions and investment growth have been with pre-tax funds. When you complete a withdrawal, the TSP will issue you a 1099-R, which will clearly indicate the taxable amount of the funds moved into your new SDIRA for tax filing purposes.

        Step 3: Choose Your Investments

        Once your SDIRA custodian receives the TSP funds, you need to choose your investments. For individuals who want to invest in Bitcoin, choosing a custodian familiar with cryptocurrency will make this a far smoother process. Simply put, these custodians focus primarily on this sort of investment, meaning they will intimately understand the ins and outs of purchasing Bitcoin with your retirement funds.

        But, from a compliance perspective, it’s important to understand that all investments will be completed in the name of the SDIRA – not you personally. More precisely, the IRS considers SDIRAs separate legal and taxable entities from the individual account holder. This means that you need to pay all investment-related expenses from the SDIRA, and you must receive all investment income into the account.

        Risks of Investing Retirement Funds in Bitcoin

        Before taking any steps to invest TSP funds in Bitcoin, you should consider the below risks.

        Volatility

        Cryptocurrencies like Bitcoin represent one of the most volatile asset classes currently available. While stocks regularly go up and down, they rarely face the same level of astronomical growth immediately followed by massive crashes that come with cryptocurrency investments. Bottom line, be prepared for massive value swings – for better or worse – with your Bitcoin holdings.

        Lack of Regulation

        Unlike government currencies and publicly-traded stocks and bonds, Bitcoin is not regulated. To some, this serves as a tremendous advantage (e.g. criminals who want to avoid government scrutiny and money trails). But, this lack of oversight also presents tremendous risk, as you largely have no legal recourse if anything happens to your Bitcoin holdings (e.g. you lose them when your cryptocurrency exchange is hacked, which has occurred multiple times).

        Valuation Difficulties and Speculative Nature

        In many respects, individuals do not invest in Bitcoin – they speculate. That is, they buy the cryptocurrency in the hope that it’s value will increase and they can resell holdings for a profit. This is due to the fact that, unlike more traditional assets like stocks, bonds, and real estate, no standard valuation model exists for Bitcoin. As it doesn’t produce income (like a company or rental real estate), Bitcoin’s value is derived solely from what the market will pay for it. In other words, many Bitcoin speculators adhere to the “next dumbest person” approach, betting that someone will be willing to buy the cryptocurrency for more than they paid for it.

        Final Thoughts

        Due to the TSP’s limited fund options, participants cannot directly invest in Bitcoin through the Thrift Savings Program. Rather, they first need to transfer money in a TSP into an SDIRA, at which point they can invest directly in Bitcoin or other alternative assets.

        But, before making this move, investors should consider the risks associated with cryptocurrencies, particularly their volatile nature. Rather than invest all of your TSP funds in Bitcoin, it’s far safer to invest a portion, preferably an amount you can lose without crippling your retirement prospects. This exposes you to potential upside while mitigating the risks of massive volatility.

        • Veteran.com Team

          Written by Veteran.com Team

          The editorial team here at Veteran.com works to help the U.S. military community discover the many military benefits available to them. Our team is supported by our Veteran Review Board and its Standard of Care, which all content on Veteran.com is reviewed to meet.

        Updated June 6, 2021

        Guide to Investing in Cryptocurrencies

        As cryptocurrencies have skyrocketed in popularity (and value), more and more service members have decided to get in on the action. But, for the uninitiated, the world of cryptocurrencies can […]

        Table of Contents

          As cryptocurrencies have skyrocketed in popularity (and value), more and more service members have decided to get in on the action. But, for the uninitiated, the world of cryptocurrencies can seem completely foreign. To help, we’ll use this article as a guide to investing in cryptocurrencies.

          Guide to Investing in Cryptocurrencies

          Specifically, we’ll discuss the following:

          • What are Cryptocurrencies?
          • How to Invest in Cryptocurrencies
          • Risks of Investing in Cryptocurrencies
          • Cryptocurrency Tax Implications
          • Final Thoughts

          Not financial or tax advice. This article is strictly educational and is not investment advice.

          What Are Cryptocurrencies?

          Overview

          According to the IRS, a cryptocurrency: […] Is a type of virtual currency that utilizes cryptography to validate and secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. But, unlike traditional currencies like the US dollar, no central government or financial authority controls cryptocurrencies. Rather, mathematics and the decentralized control enabled by this distributed, publicly-available ledger “regulate” cryptocurrencies. Basically, because anyone can see this virtual ledger, people are incentivized to follow the rules.

          As a virtual currency, cryptocurrencies also function as a medium of exchange. That is, using this blockchain technology, two people can exchange cryptocurrency to settle a transaction (e.g. one person transfers an agreed upon amount of cryptocurrency to another to purchase an automobile). For instance, Bitcoin, one of the most popular cryptocurrencies, provides both public and private signatures to all users. That way, in a transaction, the sender and receiver must sign off on the exchange with both of these signatures, which are automatically verified for accuracy.

          However, unlike the US dollar or other fiat currencies, the value of cryptocurrency is not supported by the good faith of a government. Rather, crypto values fluctuate based on the whims of the market and the associated supply and demand factors. This means that, in the right situations, the value of cryptocurrencies can skyrocket. But, the opposite remains true – market factors can lead to massive collapses in cryptocurrency value.

          Due to this volatile nature, many people now view cryptocurrency primarily as an investment – not a medium of exchange. If you think the value of your crypto holdings could increase from $20 to $2,000, why would you risk buying a pizza with your cryptocurrency worth $20 today? In other words, people now see investing in cryptocurrencies as a way to make a significant amount of money – not buy things.

          Bitcoin was the first cryptocurrency, but it’s no longer the only one. Since its creation in 2009, thousands of other cryptocurrencies have entered the market. Bitcoin remains the largest by market share, but here are some of the major alternatives:

          • Ethereum
          • Tether
          • Binance Coin
          • Cardano
          • Ripple
          • Dogecoin

          Each cryptocurrency has its own unique characteristics, meaning investors should carefully weigh the pros and cons of each sort before purchasing any for investment purposes. But, as the longest-established cryptocurrency, Bitcoin is generally viewed as the most reliable of these cryptocurrencies.

          How to Invest in Cryptocurrencies

          Prior to buying cryptocurrencies, people should first understand that “investing” is a bit of a misnomer. When you buy a cryptocurrency, you don’t receive dividends, interest, or rents like you would with other investments. Instead, you bet that you can sell your holdings for more than you bought them. As a result, purchasing cryptocurrencies is more speculation than investing.

          Having said that, you can potentially make a lot of money on a smart crypto purchase. If willing to accept the risks for these potential returns, the question becomes, how do I actually buy cryptocurrencies?

          Cryptocurrency Exchanges

          To purchase crypto, most people use cryptocurrency exchanges. With these exchanges, users register an account and are then able to:

          • Buy cryptocurrencies with fiat currencies (e.g. US dollars, Euros, etc.)
          • Buy and sell cryptocurrencies using other cryptocurrencies

          As with traditional currency exchanges, users will see real-time prices on these exchanges. For example, if a given cryptocurrency is trading at $15, you can purchase 100 units of that particular currency for $1,500 ($15 x 100).

          Hundreds of cryptocurrency exchanges exist, but some of the most popular ones include:

          Additionally, these exchanges host what’s known as a crypto wallet, a tool for holding all the cryptocurrency you hold. With an online exchange, the incorporated crypto wallet is a web-based one. This gives you the advantage of being able to access your holdings from any internet-connected device. But, an online wallet also creates the associated risk that someone can hack into that wallet.

          Exchanges vs. Wallets

          You can also purchase cryptocurrency directly from other people, that is, not on an exchange. But, to do this, you’ll need a crypto wallet. While most exchanges include embedded wallets, a wallet and exchange are actually two different things. An exchange lets you purchase cryptocurrency on the open market, whereas a crypto wallet stores all of your cryptocurrency holdings.

          With a wallet embedded on an exchange, you inherently sacrifice some privacy, as you do not have complete control over that wallet. Alternatively, you can use a dedicated crypto wallet. Most of these are held offline, which A) grants you full control, and B) minimizes the likelihood of someone hacking into it to steal your crypto holdings via an exchange vulnerability.

          Cryptocurrency Investing Steps

          Having outlined the uses – and differences – of a cryptocurrency exchange and wallet, here are the standard steps to investing:

          • Step 1: Register with a cryptocurrency exchange.
          • Step 2: Connect your bank account to the exchange.
          • Step 3: Submit a purchase order for cryptocurrency.
          • Step 4 (optional): Transfer your purchases into a dedicated cryptocurrency wallet.

          Once you complete Step 3, you have effectively traded your US dollars for cryptocurrency. When you decide to sell some of these holdings, you simply reverse the steps. Instead of creating a purchase order on an exchange, you create a sell order, selling your holdings for the current market rate.

          Risks to Investing in Cryptocurrencies

          Before investing in cryptocurrencies, you should consider the below risks.

          Volatility

          Cryptocurrencies represent one of the most volatile asset classes currently available. While stocks regularly go up and down, they rarely face the same level of astronomical growth immediately followed by massive crashes that come with cryptocurrency investments. Bottom line, be prepared for massive value swings – for better or worse – with your crypto holdings.

          Lack of Regulation

          Unlike government currencies and publicly-traded stocks and bonds, cryptocurrencies are not regulated. To some, this serves as a tremendous advantage (e.g. criminals who want to avoid government scrutiny and money trails). But, this lack of oversight also presents tremendous risk, as you largely have no legal recourse if anything happens to your crypto holdings (e.g. you lose them when your cryptocurrency exchange is hacked, which has occurred multiple times).

          Valuation Difficulties and Speculative Nature

          As stated, individuals do not invest in cryptocurrency – they speculate. That is, they buy the cryptocurrency in the hope that it’s value will increase and they can resell holdings for a profit. This is due to the fact that, unlike more traditional assets like stocks, bonds, and real estate, no standard valuation model exists for cryptocurrency. As it doesn’t produce income (like a company or rental real estate), cryptocurrency value is derived solely from what the market will pay for it. In other words, many crypto speculators adhere to the “next dumbest person” philosophy, betting that someone will be willing to buy the cryptocurrency for more than they paid.

          Cryptocurrency Tax Implications

          In addition to the above cryptocurrency risks, borrowers should also consider the potential tax implications. Due to the fact that the IRS treats cryptocurrency as property, sales are subject to property-related taxes. In other words, if you sell your holdings for more than you purchased them, you will be subject to capital gains taxes. And, depending on how long you hold that cryptocurrency, you’ll either pay ordinary income tax rates or the more favorable long-term capital gains rates.

          If unsure of the tax implications of a cryptocurrency sale, you should consult with a tax professional. With proper planning and tax strategies, you can at least minimize the tax bill you’ll face for a sale.

          Final Thoughts

          Investing in cryptocurrencies offers the potential for huge returns. But, it can just as easily lead to massive losses. Before using this guide to invest, be sure to consider the associated cryptocurrency risks. As a rule of thumb, you shouldn’t invest more in crypto than you’re willing to completely lose – as that could realistically happen.

          • Veteran.com Team

            Written by Veteran.com Team

            The editorial team here at Veteran.com works to help the U.S. military community discover the many military benefits available to them. Our team is supported by our Veteran Review Board and its Standard of Care, which all content on Veteran.com is reviewed to meet.

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