Over the last few years, Cryptocurrency has gained widespread acceptance. The interest in Crypto touched new highs, with many start-ups and Crypto exchanges foraying into the space.
There are currently thousands of Cryptocurrencies available all around the world. Bitcoin, Ethereum, Cardona, Dogecoin, Tron, and Ripple are just a few of the most well-known digital currencies.
Bitcoin is the first and largest virtual currency, accounting for approximately 40% of the total market capitalization of all Cryptocurrencies combined.
However, with the increased popularity of the new asset, there are five important things one should know before investing in Cryptocurrencies.
Cryptocurrencies are decentralized
Cryptocurrencies use blockchain technology to create decentralized networks. Blockchain is an organisational mechanism for ensuring transactional data integrity. Cryptocurrencies are decentralized, which means they are not controlled or regulated by any government entity. It essentially means that Crypto is a form of digital asset that is based on a network distributed across a large number of computers around the world. Governments and other authorities have no control over them because of their decentralized nature.
Speculative in nature
Since Cryptocurrencies are still in an evolving stage, several financial experts believe that they will turn out to be a short-lived fad. However, some financial experts believe that Cryptocurrencies will destabilize the current financial system and usher in a new transaction system. It is likely that the majority of Cryptocurrencies will not survive, and a handful of the best ones will. There is a dearth of understanding regarding numerous aspects of Cryptocurrencies, most notably their utility. Some treat it as currency, some use it for payments, others for participating in communities, while the majority regard it as a speculative investment.
Blockchain-based investments, such as Bitcoin, are inherently volatile and unpredictable due to their speculative nature. Cryptocurrency values are incredibly volatile. They are traded 24/7 around the world, often by anonymous investors who can manipulate the market due to a lack of regulation. There is a lack of information on what drives prices either way. Often, the whiff of regulatory action in any country can drive prices down. The volatility of the cryptocurrency market surpasses that of the stock market. The markets will be shocked if a stock index drops 10%. On Crypto exchanges, though, 10% of moves are virtually everyday events. A rapid rally can bring you money quickly, but a quick drop can wipe you out completely.
Subject to cyber attacks
Cryptocurrencies, despite being built on extremely secure blockchain technology, may be vulnerable to cyber security risks. While a blockchain can be secure, the exchanges that play a critical role in boosting the amount of Crypto trading, enabling Bitcoin and other such currencies, do not use the same technology. As a result, they are vulnerable to a variety of cyber attacks. Scammers are impersonating or spoofing social media identities in order to deceive consumers into giving them access to their cryptocurrency wallets. There have been a few cases where major Crypto exchanges have been hacked, and many investors have lost their cryptocurrency holdings.
Gains from Cryptocurrency taxed
Although these virtual online currencies are still unregulated, gains made from them are subject to capital gains tax in many countries. In India as per the Income Tax Act, the Finance Minister announced a 30% tax on earnings on the transfer of virtual digital assets. In the United Kingdom, an individual gaining above their tax allowance will be taxed at 10% up to the basic rate tax band (if available) and 20% on gains at the higher and additional tax rates.