Unless you've been living under a rock recently, you've probably heard of cryptocurrency - the latest big thing in money.
And with the right strategy, it is an increasingly viable method of investment.
While cryptocurrency started as a niche thing that not many people understood, it is rapidly becoming a more mainstream option.
You still can't do a lot of tangible spending with it. You aren't going to be popping to the local dairy to buy a bottle of milk with Bitcoin, for example. But, it is becoming a popular investment choice.
If you are tech-savvy or keen to try new things, you might be thinking about adding some cryptocurrency to your portfolio. As with any investment, however, it pays to do your research and tread carefully.
So, to get you started on the right foot, we’ve assembled the fundamentals of what you need to know about cryptocurrency investing.
What Is Cryptocurrency?
Investing in cryptocurrency can seem confusing. After all, the word currency is right there in the title. Yet, you can’t spend it like a traditional currency.
Cryptocurrency isn't owned by a bank, big financial institution or a government. It is known as decentralised finance and is owned by its creators and its participants. It is backed by blockchain technology which is used to create digital records of all cryptocurrency transactions around the globe.
The first, and possibly still best-known, cryptocurrency is Bitcoin, created in 2009. Since then, many other currencies have emerged, including Dogecoin and Ethereum.
Like other investment opportunities such as stocks, shares and gold, the value of cryptocurrency can go up and down. The crypto market is affected by general economic feeling, supply and demand, and negative or positive press, just like traditional markets.
How Do You Get Started?
You can't go to a bank or a traditional financial advisor to buy cryptocurrency. Instead, you need to purchase through a cryptocurrency exchange.
Some are licensed in New Zealand, which gives you peace of mind that your access is secure and the trade is legitimate. Some overseas-based exchanges will also accept New Zealand customers, but you may be hit with extra fees.
Then you need to research which currency you are interested in. You might go with one that is doing well in the market, or you might choose one whose creators align with your values or interests. You might chose a range to cover your bases.
Once you've chosen, you'll need to set up an account and virtual wallet. This allows you to access your currency if you want to exchange or sell it or buy more.
How Can You Make Money From Cryptocurrency
While not a currency you can spend directly, there are a number of different strategies that you can use to make money with crypto.
Which strategy you choose will depend on your knowledge and appetite for risk. These are some of the strategies that you can use:
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Investing: A long term buy and hold strategy that sees you hold onto crypto assets while they grow in value.
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Trading: Utilises short term opportunities as the price of cypto assets increase and decrease. This strategy requires decent analytical knowledge.
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Staking and Lending: A strategy that effectively sees you ‘lend’ your crypto and receive rewards for doing so, similar to the way a bank would pay you interest on your savings.
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Mining: This is a strategy that is exactly as is sounds, you effectively ‘mine’ crypto and are rewarded with new coins.
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These are just some of the strategies that you can use to make money with cryptocurrency. All of them will require some level of knowledge and skill, so it just depends how much time and energy you want to dedicate to your crypto investments.
Don’t Forget Your Tax Obligations
Did you know you might have to pay tax on your cryptocurrency? Yep, that's right. Just because it exists only in digital form, it doesn't mean that you aren't liable for it.
In the beginning, the tax obligations on cryptocurrency investors weren't overly clear, but as the market becomes more popular, the rules are becoming tighter.
In New Zealand, you may need to pay tax on crypto assets when you acquire them or sell them. Either by switching between currency types or selling them out for real money. Your tax obligations will differ if you invest as an individual or use the investment as a business asset.
One thing to remember is that many cryptocurrencies are traded in overseas markets, and so you may hold currencies valued in different foreign currency rates or with no real dollar rate at all. When you are preparing your tax return, you need to carefully calculate the NZ dollar value of your assets to ensure you are paying the right amount of tax.
The crypto market can also be volatile. So, it is important to watch your investments to ensure you are recording an accurate total value and your profit or loss over the year.
Because cryptocurrency is a fast-evolving sector, it's also likely that tax rules will also evolve further over time. Which leads us to:
Ensure Your Cryptocurrency Investments Are Sound
If you are thinking about getting started with cryptocurrency, either personally or as business assets, and you'd like some advice on planning your investments and keeping on top of your tax obligations, we can help.
At Wise Advice, we have our fingers on the pulse of the crypto market and the latest guidelines around tax and reporting.
Book a time to speak with one of our specialist crypto accountants. Let us show you how we can make sure your accounts are straight and ensure your cryptocurrency works for you.
