The SMS Guide To Bitcoin & Cryptocurrency

Welcome back, Smart Money Squad! When we last checked in, we delved into how we can make money through bank account bonuses for the upcoming holiday season. While I do love the world of credit cards, churning & saving money, I’m here to talk to you today about something I am incredibly passionate about and I hope you’ll enjoy: the world of cryptocurrency.

By now, I’m sure you’ve heard the talk around the water cooler. People are buzzing about this strange new money called “Bitcoin”, and for good reason. Bitcoin, cryptocurrency’s current champion and by far the largest digital currency, has skyrocketed in value over the past year.  When we think about our 401k or our Roth IRA, conventional wisdom would tell you that 12% is a fantastic return on your investment. That’s the S&P 500 average year-over-year & what you would typically expect to annually return by keeping your money in the stock market long-term. Bitcoin, however, has put this figure to shame. Here’s the one year value chart for bitcoin (courtesy of Coinbase):

As you can see, bitcoin has risen 2096.02% over the course of the past year. That is an INSANE figure for any investment and certainly growth that has Wall Street drooling. With that in mind, I’m here to give you a little background on the world of cryptocurrency and how you can potentially get started with an investment.

What is Bitcoin?

When I try to describe the concept of bitcoin/cryptocurrency to my friends, family and peers, it often becomes trivial explaining the technology behind the concept. Let’s break down our current monetary system in the US before jumping to the world of bitcoin. The U.S. dollar is a currency that is regulated by the Federal Reserve (government) and has transactions confirmed by three parties: the sender, the receiver & a clearing house. 

If I wanted to send Alex money through my bank, both my bank & Alex’s bank would have to confirm the transaction before going to a trusted medium to make sure this money transaction is indeed valid. Sounds complicated, sure, but this is the basis upon which the U.S. monetary transaction is founded.

This is where the concept of bitcoin differs from the U.S. dollar: bitcoin does not need the regulation of the third party to confirm a transaction.  Bitcoin instead relies upon blockchain technology to confirm its transactions, a field that is revolutionizing the way we think about recording data.

Blockchain Technology

The blockchain technology that is the foundation of bitcoin works uniquely to record the thousands (by now, maybe millions!) of transactions that occur daily on the bitcoin network. The blockchain functions by having thousands of people around the world run programs on their computer to “mine” bitcoin; essentially, the programs work to confirm that each transaction is valid before adding the transaction to the blockchain. 

As such, every confirmed transaction is readily available to view on the blockchain and works as bitcoin’s version of a “ledger”. The bitcoin miners that run these programs on their computers use an exorbitant amount of electricity (hence the high costs of mining) but in turn are rewarded with bitcoin for their mining efforts.

All in all, the blockchain works as our trusted third party without having to be regulated by a government entity. Because the blockchain technology is in place, we can trust that there will not be fraudulent transactions (i.e. trying to send money twice) & can feel safe knowing a transaction will go through as planned.

Why Should I Buy Cryptocurrency?

While the concept of cryptocurrency remains fuzzy to many, I’m here to ease your worries. Cryptocurrency has a variety of uses that make it a viable option to invest in as it continues to explode onto the Wall Street scene. 

• You could simply treat cryptocurrency as a "stock" investment, diversifying your portfolio. This would conceptually be no different than investing in an individual stock or a valued commodity like gold. Simply treat bitcoin as you would Apple stock when taking that next $200 out of your paycheck to invest.

• Cryptocurrency is indeed valid tender across many different mediums, many of which currently lie online.  A few major U.S. companies that accept bitcoin include Microsoft, Wordpress & Overstock, to name a few. Japan made news earlier this year when announcing that bitcoin would be accepted as legal tender across all businesses as early as next year. Adoption has already begun both in Japan and neighboring countries; it may only be a matter of time before it hits the U.S. We’ve already got bitcoin ATMs popping up around the country (the nearest one to me is 10 miles away) and with the rise of payment options like Apple Pay/Samsung Pay, it’s only a matter of time before bitcoin payments become the norm.

• The fees associated with utilizing cryptocurrency are much less than those of our U.S. dollar counterparts. When we send money via a card in the U.S., we are often hit with a 3% processing fee. How many of us have tried to pay our rent or an electric bill with a credit card? I know I have-and I remain frustrated every time by having to fork over anywhere from 2-3% to simply pay a bill. Cryptocurrency transactions offer a cost-efficient solution to this, especially newer cryptocurrencies like Ethereum and Litecoin.

• Last but not least, the speeds of the transactions in cryptocurrency are unparalleled. If I want to send somebody money through a bank wire-to-wire transfer, the money typically arrives in 3 days. Cryptocurrency eliminates that lag time and ultimately sends your money quickly. While bitcoin does tend to take a bit longer than the aforementioned ethereum and litecoin, all of these cryptocurrencies are sure to get your money moving faster than the current U.S. banking system.

How Do I Buy Cryptocurrency?

Once you’ve made the decision to invest in cryptocurrency, we now need to answer the question of where to purchase. The easiest method (and the one that I use) to purchase cryptocurrency is through an online wallet. Coinbase is the most widely recognized online wallet (currently #9 on the Apple top charts) and a very simple solution to purchase cryptocurrency.

Simply signup for an account on Coinbase, verify your identity, and you’re well on your way to purchasing your first amount of bitcoin. If you do decide to utilize Coinbase as your online wallet, I’d simply ask that you please utilize my sign-up link when purchasing. We’ll both get $10 in bitcoin (BTC) with an initial purchase!

https://www.coinbase.com/join/580e43f9ff90ca0fc31fa822

If you don’t like the setup of Coinbase or wish to utilize other online wallets, here is a list of a few leaders in the industry:

·         GDAX-I use this as well, owned by Coinbase but fees are less

·         Bitstamp

·         Gemini

·         Kraken

Where do I store my Cryptocurrency?

Once you’ve purchased your cryptocurrency, there are a few different options of how to store it. We’ll use bitcoin as the specific example for this-if purchasing other cryptocurrency, I’m more than happy to discuss methods of storage offline or in the comments section.   

•  Download a software wallet. I utilize Electrum as my specific wallet when storing my bitcoin and it’s always worked smoothly. Once you have received your bitcoin from the online wallet of your choice, you can send the bitcoin to an electronic address (typically 30-35 characters) that is linked to the software wallet you ultimately store the currency on. When clicking send, I would simply paste the electronic address associated with my software wallet and confirm the transaction. This works almost identically to any cash-sending app we use today (Venmo, Cash, Paypal) but instead of a phone number/email address as the recipient, we send to something like this:

If you lost the computer/phone that had the cryptocurrency on it, fear not. Electronic wallets are equipped with a seed (think password) that consists of 15 randomized words that function as the safeguard to your account. You should write these words down and store them somewhere safe-if you lose access to your electronics, this will be the only way to access your cryptocurrency.

• Store your cryptocurrency on the online wallet. While this is not the recommended method, this works for many people who prefer to be passive with their investment. Online wallets will store your currency free of charge; however, you are at the mercy of the wallet’s functionality when looking to make transactions. If Coinbase went down (which it often does with increased web traffic), you have no access to your cryptocurrency for a prolonged period of time. 

There is certainly nothing wrong with storing your currency in online wallets, but I liken it to having all of your money at the bank. If the banks shut down, you won’t have access to your money. I prefer to have a bit of liquidity when investing, which storing in a software wallet provides.

Tax Obligations

I would be remiss if I did not mention that there is a tax obligation associated with buying cryptocurrency. The tax on any profit made by investing in cryptocurrency is treated like capital gains tax, meaning that any post-tax dollars you invested will be taxed again on the profits only. Any time that you move your investment from cryptocurrency to USD, that is considered a taxable event. For example, let’s say I bought $100 of bitcoin in August and sold that same amount of bitcoin for $300 in December. I’d be taxed on the $200 of profit at the short-term capital gains tax, explained below.

There are two different tax rates that you can be taxed at, depending on how long you hold the cryptocurrency in question.

• If you held the cryptocurrency for less than one year before converting back to USD, the profits would be taxed at the same rate as your marginal tax bracket (think 10%, 15%, 25%, 28%, etc.)

• If you held the cryptocurrency for more than one year before selling back to USD, the profits are considered long-term capital gains and are taxed at 0%, 10% or 20% depending on the tax bracket that you fall into.

When dealing with large tax implications, it’s always safe to consult with a  tax professional and get their advice on how much of the profits you should be withholding for tax. You can also report your losses and receive a $3,000 deduction/year that can be rolled over into following years if you lost more.

Final Thoughts

Cryptocurrency is a booming industry that continues to see explosive growth in 2017. The field projects to continue growth throughout the coming years; however, we must remember that NOTHING IS CERTAIN IN INVESTING. Bitcoin has swings that range from hundreds to thousands of dollars daily, a figure that may scare off those who want to be risk-adverse when investing.

Ultimately, it is imperative to keep in mind that anything you are investing is money that you can afford to lose. With the crazy swings that cryptocurrency take, it’s easy to panic sell. Holding these investments long-term is sage advice in nearly every investment and what will ultimately pay dividends in the future.

If you liked this blog, please share to your friends & let us know how we did in the comments section. I’m happy to answer any of your questions on cryptocurrency and hope to connect with many of you soon!  

Cheers,

Ty