In the 15 or so years since bitcoin, the first cryptocurrency, was created, this evolving area of digital currency has exploded. Now there are a number of working cryptocurrencies, with functions ranging from payment to service to media and entertainment usages.
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With anything new and exciting in the finance space comes experts looking to sell you on them, assuring you that their cryptocurrency is the next hot thing. But what do you need to know before buying any new cryptocurrencies?
Experts offered some key things to watch out for.
Cryptocurrencies Are Not Yet Widely Accepted
You may know the name bitcoin, and thus think it’s a widely accepted form of crypto, but according to Brian Spinelli, CFP and co-chief investment officer at Halbert Hargrove, it’s still establishing itself.
“As a currency, we have very easy ways to make payments right now, and changing that does not appear quickly or in the near future,” Spinelli said. “Most people are not yet using it day to day.”
While a global adoption of bitcoin would make that more likely, it’s not going to be a straight line.
“[L]ike any asset with volatility, it will have its period of setbacks. Wondering if it’s going to crash anytime soon is similar to trying to forecast how public stocks are going to behave anytime soon,” Spinelli said.
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Cryptocurrencies Are Volatile
Another issue is that cryptocurrencies are volatile. Even the relatively “senior” bitcoin is still “an emerging asset,” Spinelli pointed out, with “a lot of volatility.”
While it’s reasonable to buy a small amount of cryptocurrencies, you don’t want to pack your portfolio tight with them, because you don’t know how they’ll perform.
Follow Cybersecurity Best Practices
Any time you’re looking into investing in a new cryptocurrency, you should follow cybersecurity best practices to avoid falling for a scam, according to Shane Cummings, CFP, wealth advisor and director of technology and cybersecurity at Halbert Hargrove.
“Don’t respond to phishing texts or emails directing you to login to a website. Legitimate services will typically ask you to login but will not give you a direct link. Hackers will create a website with a subtle difference in spelling of an address that people may miss, (such as amaz0n.com instead of amazon.com) and direct investors to a fake website to capture their information,” he explained.
Also, it is typically not a good idea to send digital assets as a form of payment for a transaction.
“Criminals like to receive payment in crypto because funds cannot be recovered or tracked easily once they have been transferred.With regular currency transactions, at least you have recourse with a bank or credit card issuer.”
Avoid the Too Good To Be True
Also, as with other investment opportunities, if it sounds too good to be true, it probably is, Cummings said.
“It’s hard not to be tempted by the stories of early crypto investors who made millions, but these days, it’s much harder to replicate that kind of performance with digital assets and any investor should exercise caution with a token or digital asset promising outstanding returns over a short period of time,” he said.
Know Your Red Flags
Be aware of other red flags before purchasing a new cryptocurrency, as well, Cummings warned.
Because new cryptocurrencies can carry significant risk, investors should engage in due diligence to assess “liquidity, market trends and sentiment data to spot potential red flags,” he said.
Understand Tax Implications
“If you’re buying cryptocurrency, you need to understand how every transaction could impact your taxes, according to Derek Wride, founder of CPAI, an AI powered crypto tax reconciliation, preparation and filing platform.
He said that the IRS still applies outdated financial principles to crypto, meaning many traders unknowingly trigger taxable events without realizing it.
“We’ve seen it happen too often: Someone makes a big profit in a bull run, only to lose everything in a market dip but they still owe taxes on the gains they once had.”
Keep Good Records
The best way to protect yourself is to keep good records and track everything, Wride said. “Many traders don’t remember which wallets they used or what transactions they made, and that becomes a nightmare at tax time.”
Crypto tax rules are complicated, he warned, but if you take control of your data now, you’ll avoid costly surprises later and you’ll be in a much stronger position to manage your investments wisely.
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This article originally appeared on GOBankingRates.com: 7 Things To Know Before Buying New Cryptocurrencies
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