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How To Invest In Cryptocurrencies: The Ultimate Guide For Beginners

[Updated - Feburary 21st 2019]

Cryptocurrencies have been discussed quite intensely in recent years. How many times have we heard stories of people becoming millionaires overnight and at the same time stories of people who have lost hundreds of thousands of dollars in hopes of making money quickly?

So, if you want to invest in crypto in a safe way then this guide is for you. The purpose of this guide is to educate investors as much as possible and reduce speculation in the market.

If you want to learn more about cryptocurrencies yourself, you can take a look at our beginner courses on cryptocurrencies.

Disclaimer before proceeding: We are not a financial institution: All we prove is educational material: do not take this information as professional investment advice.

How To Invest In Cryptocurrencies 101

The fact that you are reading this guide shows us that you are interested in investing in cryptocurrencies. These immutable and exchangeable cryptographic tokens promise to become hard and non-manipulable money for the whole world. Their proponents see a future in which Bitcoin or other cryptocurrencies will replace euros, dollars, etc. and create the first free and hard world currency.

Aside from what has already been said, there are three good reasons to invest in cryptocurrencies.

First, because you want to hedge your net wealth against the fall of the dollar empire, which many people inevitably will at some point. Second, because you support the social vision behind cryptocurrencies - that of free and hard money for the whole world. Third, because you understand and like the technology behind it.

However, there are also very bad reasons to invest in cryptocurrencies. Many people fall victim to the hype that surrounds every cryptocurrency bubble. There is always someone caught by FOMO (fear of missing out) shopping massively at the height of a bubble, just hoping to make quick money without understanding cryptocurrencies at all. That's a bad reason. Do not do that. Learn Before You Invest.

Early investors in Bitcoin and Ethereum made millions of dollars in pure profits. If you see the following graphic you will know exactly what we mean.

In a year-long period from December 2016 to December 2017, Bitcoin went from $ 750 to a staggering $ 10,000! That means anyone who invested $ 10,000 in December 2016 would get a mind-numbing $ 133,333 in exactly 365 days. In fact, the total market cap of cryptocurrencies went up to a staggering $ 500 billion by the end of 2017.

Stories like this are flooding the internet and more and more people have joined the crypto hype to get a piece of that cryptopia. However, as more and more speculators flooded the market, the inevitable happened.

The market took a big leap.

With Bitcoin took a dip, all other currencies took a dip, and many people lost all of their life savings.

In this guide, we'll show you how to educate yourself to make a smart investment. With that said, let's begin our first lesson.

Be okay with taking calculated risks

Since the volatility of cryptocurrencies roughly exceeds that of any other asset class, they are not a normal investment. Also, there is always a risk that your country may ban cryptocurrency trading and exchanges. If so, then you should make your peace of mind not to liquidate your crypto assets.

So the most important takeaway thing is to only risk as much money as you can afford. As Wence Casares, CEO of Xapo, sums it up in an AMA on bitcoin.com:

“I always tell them [my family] that the second stupidest thing they could do now is have a lot of bitcoins that they can't afford to lose and the stupidest thing they could do is none to own."

Remember that there are other coins

Bitcoin was the cryptocurrency until the end of 2016, and there wasn't a lot about it. If you wanted to invest in the success of cryptocurrencies, you bought Bitcoin. Period. Other cryptocurrencies - called "altcoins" - were just penny stocks in shady online markets, mostly used to keep miners GPUs working, pumping the price, and depositing the coins.

However, this has changed. While Bitcoin is still the dominant cryptocurrency, its share of the entire crypto market has fallen rapidly from 90 to around 40 percent in 2017 and is around 50% as of September 2018.

There are mutliple reasons for this. While Bitcoin remains the undisputed king of cryptocurrencies, many people have questioned its future utility. Firstly, there were new and exciting cryptocurrencies, secondly, Bitcoin was suffering from severe performance issues and it looked like the Bitcoin community was not around to solve this problem. The block size issue in particular was a huge controversy in the community, which ultimately led to the creation of bitcoin cash and the division of the community.

So the question is, what coins can you potentially invest in?

Well, for that you go to coinmarketcap.com.

This website lists cryptocurrencies in descending order of market capitalization. Market capitalization means the value of all available tokens. It's not a perfect metric, but it's probably the best we have for knowing the value of a cryptocurrency.

This is why coinmarketcap is a useful tool to have on hand.

Think about the utility that brings the coin into the system

So you've gone through the market capitals and decided on the bundles of coins that you wanted to invest in? Great job. However, this is where the real work begins.

The first thing to do is read their whitepaper. Well, we understand that reading PDFs may not be the most exciting things to do, but it is imperative that you get it into the job beforehand before you reap any benefits.

If you read the whitepaper yourself, you will get two huge benefits:

First, you will know more about the coin itself and learn about the benefits it brings to the ecosystem.

Second, a poorly written white paper is often a good indicator of whether or not a project should be invested. If the team itself cannot simply explain the real usefulness of their token, then it is probably not worth investing in.

A white paper is the bread and butter of all ICOs. According to Wikipedia. “A whitepaper is an authoritative report or guide that concisely informs readers about a complex topic and sets out the issuing body's philosophy on the matter. It is designed to help readers understand a problem, solve a problem, or make a decision. "

In simpler terms, a whitepaper can tell potential investors everything they need to know about the project. This is why an ICO that doesn't have a whitepaper should simply be overlooked.

Another thing that most ICOs realize is that majority investors just don't bother reading the whitepaper. This is why they just outsource their whitepapers to cheap freelance writers who end up creating real art. “Art” is of course used very generously here. Checkout this gem of a whitepaper by Arbitrage Crypto Trader.

Here is an excerpt from the whitepaper:

“However, the arbitration has not finally died. He in turn for it, thanks to the appearance of cryptocurrency. We all see that right now quotes bitkoyna on different exchanges differ from each other by 1- 5%. And for some of the Altocums the difference can sometimes be up to 50%. "

It's ok, don't make sense of it.

A well-designed white paper can define a generation. Just look at what Bitcoin's whitepaper did to that era. No attention should be paid to an ICO that doesn't make an effort.

After reading a properly written white paper, there are a few decisions you need to make.

Check # 1: The value the project brings

First, check out the project to see if the coin is bringing any real benefit to the ecosystem. The perfect example of this is Ethereum. There's a reason it took so quickly, think about the sheer value it brought in. For the first time, developers around the world had a platform with which they could build their own dapps on a blockchain.

Pay attention to the problems that cryptoworld desperately wants to solve, especially: data protection, scalability and interoperability. A great way to make your investment is to find the projects that specifically work to solve the above problems. Here are some of the projects trying to solve each of the three problems above:

Data protection: Monero, Zcash, Dash

Scalability: OmiseGo, Cardano

Interoperability: AION

Check # 2: does the project need tokens?

So how do you make sure you are getting good quality tokens?

You inspect the project and ask yourself the following questions:

Does this project have to be on the blockchain?

Does this project have to have tokens?

If the answer to any of these happens to be no, then those projects don't need a token and these projects do an ICO to raise funds. There is a way to find out the real usefulness of the token.

For this we will take the help of William Mougayar, who points out in his Medium article that there are three principles to token utility:

Role.

Properties.

Purpose.

These three are locked in a triangle and look like this:

Each token role has its own set of features and purpose, which are detailed in the following table:

Let's examine each of the roles a token can play:

Law

By taking over a certain token, the holder receives a certain amount of rights within the ecosystem. For example, if you have DAO coins in your possession, you could have had voting rights within the DAO to decide which projects are funded and which are not.

Exchange of value

The tokens create an internal economic system within the boundaries of the project itself. The tokens can help buyers and sellers to trade value within the ecosystem. This helps people get rewards for completing certain tasks. This creation and maintenance of individual, inner economies is one of the most important tasks of tokens.

toll

It can also act as a toll gateway so that you can use certain functionalities of a certain system. B. in Golem, you must have GNT (Golem Token) in order to get access to the advantages of the Golem supercomputer.

function

The token can also allow the owners to enrich the user experience within the confines of the particular environment. E.g. in Brave (a web browser) holders of BAT (tokens used in Brave) are given the rights to enrich the customer experience by using their tokens to add advertisements or other attention-based services on the Brave platform.

currency

Can be used as a store of value that can be used to conduct transactions both inside and outside the given ecosystem.

Merit

Aids in the fair distribution of profits or other related financial benefits among investors in a given project.

So how does this all help in the token utility?

If you want to maximize the amount of utility your token can provide, you need to tick several of these properties. The more properties you can tick, the more utility and value your token brings into your ecosystem. If the role of your tokens cannot be clearly explained, or if it doesn't really tick more than one of the roles given above, then your token has no utility and you can do without it.

Why not go for useless tokens with little to no use?

To do this, we need to understand the concept of token speed. Token speed is an indication of how much people respect the value of that particular token. When people hold on to a token, it has slow speed. However, if people sell this token quickly for BTC, ETH or Fiat, then this token has high speed.

If you were to define token velocity strictly mathematically, it would look like this:

Token Velocity = total transaction volume / average network value.

If we were to reverse the formula, then:

Average network value = total transaction volume / token speed.

This leads to two conclusions:

More the token speed, less the average network value.

The more the transaction volume, the more the token speed.

This is why you should be working on a project whose tokens actually have a utility and give their users a reason to keep them.

Alright, now that you know what types of coins to invest in, now we're going to teach you how to look for any obvious signs of fraud.

Look out for obvious signs of fraud

Good coins have a transparent technical vision, an active development team, and a vibrant, enthusiastic community. Bad coins are transparent, promote fuzzy technical advantage without explaining how to get them, and have a community that is mostly focused on getting rich quick. Perhaps the worst cryptocurrencies are the MLM coins, for example Bitconnect. We'll talk a little more about Bitconnect in a little more. However, what are some of the more obvious signs of fraud?

# 1 The team

It really goes without saying that the success of a project is directly related to the credibility of the team. Let's put it this way: if you were investing your money in a company, wouldn't you want to know that the company is in good hands and that your money is valued significantly?

Let's look at one of the most successful projects of all time, OmiSego. Not only do they have an incredible team, they also have advisors like Vitalik Buterin and Lightning Network Creator Joseph Poon. So it's no wonder they haven't had any trouble getting their funds and their investors are now enjoying healthy returns too.

Compare that to this garbage.

Image credit: Reddit

Take a good look at the photo of this “incredible team”.

Yeah ... your eyes don't fool you, that's Ryan Gosling's photo on the team page.

Obviously, most of the time it won't be that obvious to know if the team is actually trash or not. In such cases, you should adopt a more hand-on approach.

First, search for the names of the team members on Google. Most of the time, they should have a LinkedIn profile. Do a quick search and find out more about the team members. Ask yourself the following questions:

Have you ever been involved in a successful ICO company?

Have you been involved in a reputable company (Google, Deloitte, etc.)?

Have you been recommended or endorsed by known people?

It doesn't matter if you come across as stalker. You need to do this work so that you don't waste your time and resources later.

Second, you should search for the team members' pictures on google. The reasons for this are again twofold.

First, you want to make sure that you don't get "catfished". That said, they don't post photos of random celebrities or stock photos on their team page.

Second, the person might use the same photo on different websites and projects. So it will give you a good idea of ​​whether or not the person actually exists and, if they are doing, what they are involved in.

# 2 pyramid scheme similarity

According to Wikipedia, “A pyramid scheme (commonly known as pyramid scams) is a business model that recruits members through a promise of payments or services to join the system instead of providing investments or selling products or services. As recruitment increases, recruitment quickly becomes impossible and most members are unable to profit. Therefore pyramid schemes are not sustainable and often illegal. "

An ICO that promises "guaranteed returns" on your investment is a scam.Any crypto investor worth their salt will tell you that there are no guarantees in the crypto world.

One of the most notorious examples of this is Bitconnect. Let's take a look at their website and promises.

If you see anything like this on a website then don't bother taking any of their bounties. Just because.

You don't want to end up with tokens like this:

# 3 Inactive GitHub repository

An active GitHub repository is a good indicator to show how serious the development has been in the project. Let's show you a good example of an active GitHub repository:

1,014 commits. This shows that developers are definitely giving the project their all.

Now compare that to Savedroid, who pulled off a stupid marketing stunt and alienated all of their investors.

Yup ... not good.

Buy Bitcoin ... without buying it

While buying cryptocurrencies was a real odyssey a few years ago, today you have a full spectrum of options.

Let's start by buying Bitcoin. That's the easiest part. Some people want to invest in Bitcoin without the hassle of storing it.

You can use investment vehicles like the XBT-Tracker (available on Swedish and German exchanges), the Bitcoin Investment Trust on Second Markets (USA), the Bitcoin ETI (Gibraltar and Germany) and some more. When Bitcoin goes up, more and more brokers and exchanges try to set up a Bitcoin-based financial product.

All of these investment products have in common that they allow investors to bet on the price of Bitcoin without actually buying Bitcoin. While most cryptocurrency fans think this takes away all of the fun and purpose, for many it is the easiest way to invest in Bitcoin's success. You can use the investment channels you are already used to and if something goes wrong you have your certificate and someone to take to court.

There is currently no such investment product that covers more cryptocurrencies. But there are some underway, both in the US and in Europe.

Buying Cryptocurrencies: The Two Types of Exchanges

The exchange serves one of the most critical functions in the crypto ecosystem. It basically acts as a portal between the fiat world and the crypto world. There are usually two types of exchanges:

Fiat to Crypto.

Crypto to Crypto.

Fiat to Crypto

Fiat to Crypto Exchanges helps you buy cryptocurrencies in exchange for fiat money. Coinbase is a perfect example of this type of exchange. Coinbase helps you buy BTC, BCH, LTC and ETH in exchange for fiat currency.

Crypto to Crypto

Then we have the crypto to crypto exchange. These exchanges help you exchange certain cryptos like BTC, ETH, BCH etc. for other cryptocurrencies. Binance is a good example of a crypto-crypto exchange.

While they offer quite valuable services, the problem is that they are all central, which makes them vulnerable. This is an extremely risky proposition considering the sheer amount of money these exchanges deal every single day.

When it comes to buying crypto from these exchanges yourself, it really isn't that complicated.

First, you open an account on the exchange

Then verify your identity - this is required due to anti-money laundering rules in most jurisdictions.

Pay your account with dollars or euros or whatever paper money you use. On some exchanges, such as Bitcoin.de, you do not have to deposit your account, but trade directly with other users.

Which exchange to use depends mainly on where you live. It is always better to use an exchange physically close to you. If it's in the same jurisdiction as you, then the best chance of getting your money back legally if some bad things happen. If there is no exchange in your jurisdiction, it is better to use exchanges based in stable countries with good legal systems.

Another factor in deciding which exchange to use is some coins to buy and your patience. If you want to get large sums of bitcoins quickly, you need to use one of the large exchanges that offer enough liquidity. If you only want to buy small amounts of coins and if you are in no hurry, you can try buying them on small exchanges. If your order is filled, you will most likely get better prices than on major exchanges. Check out the best crypto exchanges.

Is There a Good Time to Shop?

There is no general rule when to buy cryptocurrencies. Usually shopping at the height of a bubble is not a good idea, nor is it usually a good idea to buy when it crashes. Never catch a falling knife as the trader's wisdom says. The best time could be when the price is stable at a relatively low level.

The art of trading is deciding when a crypto is in bubble mode and when it hit the bottom after falling. What is easy to say in retrospect is a tough question in the present that can never be answered with absolute certainty. Sometimes a coin starts to raise, and after passing a mark where everyone thinks this must be the height of a bubble, the real rally is just about to begin.

For example, a lot of people didn't buy Bitcoin for $ 1,000 or Ether for $ 100 because it seemed insane expensive. But a few months later, those prices seem like a good time to start.

There are only two pieces of advice we can give about timing. First, don't compare crypto bubbles to traditional financial bubbles. 10 percent more is not a bubble, but can be daily volatility. 100 percent on top can be a bubble, but often it's just the beginning of it. 1,000 percent could normally be a bubble, but there is no guarantee that it will show up.

Second, take some time to watch. Don't shop because there was a crack. There could be another one. And don't shop because you fear it will explode tomorrow. Watch it, do your research, buy it when you think the timing is right. And perhaps most importantly, don't be a weak hand. Don't sell too early. Wait. The monetary revolution has just started.

How do you store cryptocurrencies?

All right, so you bought your cryptocurrencies, where exactly should you store them? Well, first and foremost ...

Keep them off the stock market!

There is absolutely no way that you should keep your coins in an exchange. There is a long history of hacks and bankruptcies in cryptocurrency markets, the most famous being the Mt. Gox hack that sucked hundreds of millions of customer dollars.

However, not all wallets are risky.

For people in the EU, for example, Bitcoin.de enjoys a strong level of trust. The exchange has been running since 2011 without losing customer funds, the owners are known in the German and European community and an annual audit by an external company checks whether all coins are available. However, this level of confidence can rarely be achieved if you hold a lot of altcoins. That is the risk you have to take.

If you really want to save your cryptos then you should take matters into your own hands and store them yourself. So, this is where you need to learn about crypto wallets.

Hot Wallets vs Cold Purses

Let's understand the basic distinction between the two with a real world example. Hot storage is like the wallets you carry in your pocket. The cold storage is basically something similar to your savings bank account. Keep this distinction in mind as we move forward. Basically, if you want to use your currency a lot, you have to use hot storage. On the other hand, if you want to save your money for a long time, then you have to use cold storage.

Hot wallet

Hot storage, in simple terms, is when you keep your cryptocurrency in a device that is directly connected to the internet. This connection makes a device “hot”.

You should think of Exchange wallets, desktop clients, and mobile wallets (any wallet that is present on a device that is ever connected to the internet) as a hot wallet. It's easy to access funds in a hot wallet, and if you live somewhere that accepts cryptos for micropayments, there's nothing wrong with using one for day-to-day expenses. Remember how fiat (government issued) currency. You could walk around with some of your wealth in a wallet for convenience, but keep the majority safe. Your hot wallet should behave just like a real wallet. They use it to carry a small amount of cash for easy access. That's all.

While the transaction is very easy with hot wallets, there is one major drawback when it comes to them. They are easy to hack. The whole crypto space has gained a lot in value lately and where there is value, crime is never far behind. Recent ransomware attacks and past compromises with major exchanges should be sufficient beacons for newbies.

Even if you don't store a lot of value on your hot wallet, it is important that you follow the backup steps within the recovery section of your wallet to avoid losing money to human error. With your private key and seed phrase intact, you should be able to restore any wallet painlessly enough.

Benefits of hot storage

Quick access to funds.

Large number of options and support for different devices.

User-friendly UIs make sending and receiving easy.

Disadvantages of hot storage

Cyber ​​crime exposed. Sophisticated hackers, ransomware, and other malicious actors pose a constant threat.

Damage to the device could destroy the wallet. Without careful securing of private keys and terms, you could permanently lose your cryptocurrency investment.

You could still lose / damage or have stolen the restoration details.

Now let's explore the different types of hot storage wallets that you can use.

Online wallets aka cloud wallets

Mobile wallets

Desktop wallets

Multisig wallets

Cooling wallets / storage

When you keep your currency in a device that is completely offline, it's known as cold storage. For those looking for the safest form of storage, cold purses are the way to go. These are best for long-term owners who won't need access to their coins for months or years.

You are not without risks of your own, but if you follow the directions correctly and take every possible precaution, they will be greatly minimized. Unfortunately, given the attention cryptocurrency has received in recent years, it has piqued the interest of attackers. With that in mind, using cold storage as a means of keeping your money is a far safer option.

San Francisco-based Bitcoin wallet and exchange service CoinBase holds 97% of its coin reserves in hardware and paper wallets. What are hardware and paper wallets? You will get to know it in a minute. For now, let's review the pros and cons of cold storage:

Advantages of cold storage:

A great place to hold large amounts of coins for a long time.

Provides a safety net against hackers and malicious people as it is completely offline.

Disadvantages of cold storage

It is still prone to external damage, theft, and general human carelessness.

It's not ideal for quick, daily transactions.

Setting up can be a little intimidating for beginners.

Now that we've seen both the pros and cons, let's take a look at some cool wallets that you can use to store your coins

Hardware wallets

Hardware wallets are physical devices that you can use to store your cryptocurrency. They come in a couple of forms, but the most common is the USB stick style typical of the Nano Ledger series. Although many swear by them, hardware wallets are still prone to compromise. First, trust that the company that created your wallet didn't log all of the private keys with a plan to hijack wallets in the future. This applies to those bought by the company itself, but especially if a hardware wallet was purchased second-hand. Under no circumstances should anyone ever use a used hardware wallet.

Even if loss or damage can cause disaster for the unprepared, hardware wallets can be restored. Therefore, securing your hardware wallet is just as important as securing your online hot wallets. You should keep restoration details in a safe place that only you and everyone you plan on leaving the money to know. Remember to open your wallet for your recovery details. Think very carefully about who (if anyone) you are sharing it with. It is also important that you transfer all of the coins to a new wallet should something unfortunate happen between you and anyone else who knows your private keys (spouse, etc.)

Here are some hardware wallets you can use:

Ledger Nano S.

Trezor.

Keepkey.

Paper wallets

Without a doubt, the safest way to store any cryptocurrency is by using a paper wallet. If you follow a few pointers below, you can set one up completely free of charge. This really makes you the master of your investment and, if precautions are followed, there is no way that anyone else could reveal your private keys. Of course, this means that keeping a record of them is even more important. Losing private keys means you will lose all of the contents of your paper wallet (but then again, that goes for every wallet out there.)

What is a paper exchange?

To keep it very simple, paper wallets are an offline cold storage method of storing cryptocurrencies. It involves printing your public and private keys on a piece of paper which you then keep and store in a safe place. The keys are printed in the form of QR codes that you can scan for all your transactions in the future. The reason it's so secure is because it gives you, the user, full control. You don't have to worry about the welfare of any hardware, nor do you have to worry about hackers or malware. All you have to do is take care of a piece of paper.

Do you need a paper wallet?

The answer to this question largely depends on your circumstances. If you are planning on trading a few coins the summer day, maybe not. Alternatively, if you are in for the long journey and don't intend to touch any part of your hiding place, then a paper wallet is the safest option available to you. The paper bags that you can use are as follows:

For Bitcoin, Litecoin, Dogecoin etc. you can use Wallet Generator.

For Ethereum and ERC20 tokens, you can use My Ethereum Wallet.

What about taxes and so on?

Disclaimer: We are not a tax office or tax advisor. If you have problems with taxes and large sums of money are at stake, it is better to consult your local tax advisor.

At the moment there are only a few tax advisors who know how to deal with cryptocurrencies. But it can be safely assumed that the number is growing rapidly and that cryptocurrencies will soon be a standard problem for tax professionals such as securities, stocks, ETFs, and real estate.

All we can offer here is an overview of the typical problems with cryptocurrencies and taxes.

No free lunch

Nothing is certain but death and taxes. The same goes for cryptocurrencies. If you make money by investing in cryptocurrencies, you will likely have to pay taxes. Like everything else.

How you need to tax cryptocurrency investment returns is your national tax jurisdiction.

The good news…

There is some good news about cryptocurrencies and taxes. First, cryptocurrencies are exempt from VAT in almost every country in the world. As with any financial product, you don't have to pay VAT when selling Bitcoin.There have been some ideas from tax authorities in Poland, Estonia, Germany, Australia and Sweden to impose VAT on crypto sales, but after the European Court of Justice put this down in a major ruling, VAT on bitcoins appears to have become a non-issue .

Another good news is that in some countries you have almost no tax to pay. Amazingly, Germany, a country usually known for very high tax rates, has become a tax haven for cryptocurrencies. Like the US and many other countries, Germany does not consider Bitcoin a financial product, but a property. That is, if you make money by trading it, you don't pay a flat rate tax on financial income - that is, 25 percent, for example on bank account interest - but you have to tax the profits of buying and selling cryptocurrencies like income.

no more like your home being sold as a security.

You bought 10 bitcoins for 1,000 euros and sold them for 2,000? Your taxable income increased by 10,000 euros.

You bought a Bitcoin for 100 euros and ordered a 10-euro pizza when the price was 1,000 euros? Her income increased by 9 euros. In most cases, the tax rate for this is higher than for financial gains.

There is a loophole, however. If you keep your coins for more than 1 year, you won't have to pay any taxes selling them. This rule was added to keep the day trading of other properties at dis-incentives and to stabilize the prices of owners. For cryptocurrencies, Germany and also the Netherlands, which apply the same rules, made it into tax havens. Some countries may have similar rules. If in doubt, your tax advisor can help you.

One problem that the one year rule poses is that you have to prove that you are holding the crypto for that period of time. Usually, exchanges can help you with printing your trading history. Also, you can use the public blockchain as proof of storage. In most cryptocurrencies, it is transparent when coins are received and issued from a certain address. But not in all. For example, Monero uses ring signatures and confidential transactions, which are great tools for maintaining anonymity. But the downside is that they make it more or less impossible to prove that you are holding coins for more than a year. Perhaps you take this into account when choosing coins for your portfolio.

The bad news ...

Using a good exchange and keeping track of your trades is possible to tax bitcoin but also a pain in the butt. You have to calculate every single profit, not just from trading, but also from using bitcoins to pay for things.

But this is just the beginning. Things really get to be a complicated nightmare when it comes to altcoins. For the tax authorities, an altcoin like Bitcoin counts. In most countries this means that it is not a financial product but a property. If you buy it with Bitcoin and sell it for Bitcoin, you have to tax the difference, but not in Bitcoin, but in dollars or you national paper money. This means that in addition to keeping an eye on all of your altcoin trades, you also need to consider the price of bitcoin when buying and selling.

Obviously, that makes things extremely complicated. You can have a bad trade resulting in getting less bitcoin back than you invested, but still theoretically being taxable if the price of bitcoin goes up between your trades. So you lost money, but you have to pay taxes for that.

At this moment, you should accept that cryptocurrencies are something new and that you are not an expert in dealing with your financial authorities. Go for a tax advisor, educate them about cryptocurrencies, and look forward to speaking to confused financial authorities.

And enjoy investing in cryptocurrencies.

Cryptocurrencies have been discussed quite intensely in recent years. How many times have we heard stories of people becoming millionaires overnight and at the same time stories of people who have lost hundreds of thousands of dollars in hopes of making money quickly?

So, if you want to invest in crypto in a safe way then this guide is for you. The purpose of this guide is to educate investors as much as possible and reduce speculation in the market.

If you want to learn more about cryptocurrencies yourself, you can take a look at our beginner courses on cryptocurrencies.

Disclaimer before proceeding: We are not a financial institution: All we prove is educational material: do not take this information as professional investment advice.

Introduction: How To Invest In Cryptocurrencies - The Ultimate Beginners Guide

The fact that you are reading this guide shows us that you are interested in investing in cryptocurrencies. These immutable and exchangeable cryptographic tokens promise to become hard and non-manipulable money for the whole world. Their proponents see a future in which Bitcoin or other cryptocurrencies will replace euros, dollars, etc. and create the first free and hard world currency.

Aside from what has already been said, there are three good reasons to invest in cryptocurrencies.

First, because you want to hedge your net wealth against the fall of the dollar empire, which many people inevitably will at some point. Second, because you support the social vision behind cryptocurrencies - that of free and hard money for the whole world. Third, because you understand and like the technology behind it.

However, there are also very bad reasons to invest in cryptocurrencies. Many people fall victim to the hype that surrounds every cryptocurrency bubble. There is always someone caught by FOMO (fear of missing out) shopping massively at the height of a bubble, just hoping to make quick money without understanding cryptocurrencies at all. That's a bad reason. Do not do that. Learn Before You Invest.

Early investors in Bitcoin and Ethereum made millions of dollars in pure profits. If you see the following graphic you will know exactly what we mean.

In a year-long period from December 2016 to December 2017, Bitcoin went from $ 750 to a staggering $ 10,000! That means anyone who invested $ 10,000 in December 2016 would get a mind-numbing $ 133,333 in exactly 365 days. In fact, the total market cap of cryptocurrencies went up to a staggering $ 500 billion by the end of 2017.

Stories like this are flooding the internet and more and more people have joined the crypto hype to get a piece of that cryptopia. However, as more and more speculators flooded the market, the inevitable happened.

The market took a big leap.

With Bitcoin took a dip, all other currencies took a dip, and many people lost all of their life savings.

In this guide, we'll show you how to educate yourself to make a smart investment. With that said, let's begin our first lesson.

Be okay with taking calculated risks

Since the volatility of cryptocurrencies roughly exceeds that of any other asset class, they are not a normal investment. Also, there is always a risk that your country may ban cryptocurrency trading and exchanges. If so, then you should make your peace of mind not to liquidate your crypto assets.

So the most important takeaway thing is to only risk as much money as you can afford. As Wence Casares, CEO of Xapo, sums it up in an AMA on bitcoin.com:

“I always tell them [my family] that the second stupidest thing they could do now is have a lot of bitcoins that they can't afford to lose and the stupidest thing they could do is none to own."

Remember that there are other coins

Bitcoin was the cryptocurrency until the end of 2016, and there wasn't a lot about it. If you wanted to invest in the success of cryptocurrencies, you bought Bitcoin. Period. Other cryptocurrencies - called "altcoins" - were just penny stocks in shady online markets, mostly used to keep miners GPUs working, pumping the price, and depositing the coins.

However, this has changed. While Bitcoin is still the dominant cryptocurrency, its share of the entire crypto market has fallen rapidly from 90 to around 40 percent in 2017 and is around 50% as of September 2018.

There are mutliple reasons for this. While Bitcoin remains the undisputed king of cryptocurrencies, many people have questioned its future utility. Firstly, there were new and exciting cryptocurrencies, secondly, Bitcoin was suffering from severe performance issues and it looked like the Bitcoin community was not around to solve this problem. The block size issue in particular was a huge controversy in the community, which ultimately led to the creation of bitcoin cash and the division of the community.

So the question is, what coins can you potentially invest in?

Well, for that you go to coinmarketcap.com.

This website lists cryptocurrencies in descending order of market capitalization. Market capitalization means the value of all available tokens. It's not a perfect metric, but it's probably the best we have for knowing the value of a cryptocurrency.

This is why coinmarketcap is a useful tool to have on hand.

Think about the utility that brings the coin into the system

So you've gone through the market capitals and decided on the bundles of coins that you wanted to invest in? Great job. However, this is where the real work begins.

The first thing to do is read their whitepaper. Well, we understand that reading PDFs may not be the most exciting things to do, but it is imperative that you get it into the job beforehand before you reap any benefits.

If you read the whitepaper yourself, you will get two huge benefits:

First, you will know more about the coin itself and learn about the benefits it brings to the ecosystem.

Second, a poorly written white paper is often a good indicator of whether or not a project should be invested. If the team itself cannot simply explain the real usefulness of their token, then it is probably not worth investing in.

A white paper is the bread and butter of all ICOs. According to Wikipedia. “A whitepaper is an authoritative report or guide that concisely informs readers about a complex topic and sets out the issuing body's philosophy on the matter. It is designed to help readers understand a problem, solve a problem, or make a decision. "

In simpler terms, a whitepaper can tell potential investors everything they need to know about the project. This is why an ICO that doesn't have a whitepaper should simply be overlooked.

Another thing that most ICOs realize is that majority investors just don't bother reading the whitepaper. This is why they just outsource their whitepapers to cheap freelance writers who end up creating real art. “Art” is of course used very generously here. Checkout this gem of a whitepaper by Arbitrage Crypto Trader.

Here is an excerpt from the whitepaper:

“However, the arbitration has not finally died. He in turn for it, thanks to the appearance of cryptocurrency. We all see that right now quotes bitkoyna on different exchanges differ from each other by 1- 5%. And for some of the Altocums the difference can sometimes be up to 50%. "

It's ok, don't make sense of it.

A well-designed white paper can define a generation. Just look at what Bitcoin's whitepaper did to that era. No attention should be paid to an ICO that doesn't make an effort.

After reading a properly written white paper, there are a few decisions you need to make.

Check # 1: The value the project brings

First, check out the project to see if the coin is bringing any real benefit to the ecosystem. The perfect example of this is Ethereum. There's a reason it took so quickly, think about the sheer value it brought in. For the first time, developers around the world had a platform with which they could build their own dapps on a blockchain.

Pay attention to the problems that cryptoworld desperately wants to solve, especially: data protection, scalability and interoperability. A great way to make your investment is to find the projects that specifically work to solve the above problems. Here are some of the projects trying to solve each of the three problems above:

Data protection: Monero, Zcash, Dash

Scalability: OmiseGo, Cardano

Interoperability: AION

Check # 2: does the project need tokens?

So how do you make sure you are getting good quality tokens?

You inspect the project and ask yourself the following questions:

Does this project have to be on the blockchain?

Does this project have to have tokens?

If the answer to any of these happens to be no, then those projects don't need a token and these projects do an ICO to raise funds. There is a way to find out the real usefulness of the token.

For this we will take the help of William Mougayar, who points out in his Medium article that there are three principles to token utility:

Role.

Properties.

Purpose.

These three are locked in a triangle and look like this:

Each token role has its own set of features and purpose, which are detailed in the following table:

Let's examine each of the roles a token can play:

Law

By taking over a certain token, the holder receives a certain amount of rights within the ecosystem. For example, if you have DAO coins in your possession, you could have had voting rights within the DAO to decide which projects are funded and which are not.

Exchange of value

The tokens create an internal economic system within the boundaries of the project itself. The tokens can help buyers and sellers to trade value within the ecosystem. This helps people get rewards for completing certain tasks. This creation and maintenance of individual, inner economies is one of the most important tasks of tokens.

toll

It can also act as a toll gateway so that you can use certain functionalities of a certain system. B. in Golem, you must have GNT (Golem Token) in order to get access to the advantages of the Golem supercomputer.

function

The token can also allow the owners to enrich the user experience within the confines of the particular environment. E.g. in Brave (a web browser) holders of BAT (tokens used in Brave) are given the rights to enrich the customer experience by using their tokens to add advertisements or other attention-based services on the Brave platform.

currency

Can be used as a store of value that can be used to conduct transactions both inside and outside the given ecosystem.

Merit

Aids in the fair distribution of profits or other related financial benefits among investors in a given project.

So how does this all help in the token utility?

If you want to maximize the amount of utility your token can provide, you need to tick several of these properties. The more properties you can tick, the more utility and value your token brings into your ecosystem. If the role of your tokens cannot be clearly explained, or if it doesn't really tick more than one of the roles given above, then your token has no utility and you can do without it.

Why not go for useless tokens with little to no use?

To do this, we need to understand the concept of token speed. Token speed is an indication of how much people respect the value of that particular token. When people hold on to a token, it has slow speed. However, if people sell this token quickly for BTC, ETH or Fiat, then this token has high speed.

If you were to define token velocity strictly mathematically, it would look like this:

Token Velocity = total transaction volume / average network value.

If we were to reverse the formula, then:

Average network value = total transaction volume / token speed.

This leads to two conclusions:

More the token speed, less the average network value.

The more the transaction volume, the more the token speed.

This is why you should be working on a project whose tokens actually have a utility and give their users a reason to keep them.

Alright, now that you know what types of coins to invest in, now we're going to teach you how to look for any obvious signs of fraud.

Look out for obvious signs of fraud

Good coins have a transparent technical vision, an active development team, and a vibrant, enthusiastic community. Bad coins are transparent, promote fuzzy technical advantage without explaining how to get them, and have a community that is mostly focused on getting rich quick. Perhaps the worst cryptocurrencies are the MLM coins, for example Bitconnect. We'll talk a little more about Bitconnect in a little more. However, what are some of the more obvious signs of fraud?

# 1 The team

It really goes without saying that the success of a project is directly related to the credibility of the team. Let's put it this way: if you were investing your money in a company, wouldn't you want to know that the company is in good hands and that your money is valued significantly?

Let's look at one of the most successful projects of all time, OmiSego. Not only do they have an incredible team, they also have advisors like Vitalik Buterin and Lightning Network Creator Joseph Poon. So it's no wonder they haven't had any trouble getting their funds and their investors are now enjoying healthy returns too.

Compare that to this garbage.

Image credit: Reddit

Take a good look at the photo of this “incredible team”.

Yeah ... your eyes don't fool you, that's Ryan Gosling's photo on the team page.

Obviously, most of the time it won't be that obvious to know if the team is actually trash or not. In such cases, you should adopt a more hand-on approach.

First, search for the names of the team members on Google. Most of the time, they should have a LinkedIn profile. Do a quick search and find out more about the team members. Ask yourself the following questions:

Have you ever been involved in a successful ICO company?

Have you been involved in a reputable company (Google, Deloitte, etc.)?

Have you been recommended or endorsed by known people?

It doesn't matter if you come across as stalker. You need to do this work so that you don't waste your time and resources later.

Second, you should search for the team members' pictures on google. The reasons for this are again twofold.

First, you want to make sure that you don't get "catfished". That said, they don't post photos of random celebrities or stock photos on their team page.

Second, the person might use the same photo on different websites and projects. So it will give you a good idea of ​​whether or not the person actually exists and, if they are doing, what they are involved in.

# 2 pyramid scheme similarity

According to Wikipedia, “A pyramid scheme (commonly known as pyramid scams) is a business model that recruits members through a promise of payments or services to join the system instead of providing investments or selling products or services. As recruitment increases, recruitment quickly becomes impossible and most members are unable to profit. Therefore pyramid schemes are not sustainable and often illegal. "

An ICO that promises "guaranteed returns" on your investment is a scam. Any crypto investor worth their salt will tell you that there are no guarantees in the crypto world.

One of the most notorious examples of this is Bitconnect. Let's take a look at their website and promises.

If you see anything like this on a website then don't bother taking any of their bounties. Just because.

You don't want to end up with tokens like this:

# 3 Inactive GitHub repository

An active GitHub repository is a good indicator to show how serious the development has been in the project. Let's show you a good example of an active GitHub repository:

1,014 commits. This shows that developers are definitely giving the project their all.

Now compare that to Savedroid, who pulled off a stupid marketing stunt and alienated all of their investors.

Yup ... not good.

Buy Bitcoin ... without buying it

While buying cryptocurrencies was a real odyssey a few years ago, today you have a full spectrum of options.

Let's start by buying Bitcoin. That's the easiest part. Some people want to invest in Bitcoin without the hassle of storing it.

You can use investment vehicles like the XBT-Tracker (available on Swedish and German exchanges), the Bitcoin Investment Trust on Second Markets (USA), the Bitcoin ETI (Gibraltar and Germany) and some more. When Bitcoin goes up, more and more brokers and exchanges try to set up a Bitcoin-based financial product.

All of these investment products have in common that they allow investors to bet on the price of Bitcoin without actually buying Bitcoin. While most cryptocurrency fans think this takes away all of the fun and purpose, for many it is the easiest way to invest in Bitcoin's success. You can use the investment channels you are already used to and if something goes wrong you have your certificate and someone to take to court.

There is currently no such investment product that covers more cryptocurrencies. But there are some underway, both in the US and in Europe.

Buying Cryptocurrencies: The Two Types of Exchanges

The exchange serves one of the most critical functions in the crypto ecosystem. It basically acts as a portal between the fiat world and the crypto world. There are usually two types of exchanges:

Fiat to Crypto.

Crypto to Crypto.

Fiat to Crypto

Fiat to Crypto Exchanges helps you buy cryptocurrencies in exchange for fiat money. Coinbase is a perfect example of this type of exchange. Coinbase helps you buy BTC, BCH, LTC and ETH in exchange for fiat currency.

Crypto to Crypto