Crypto 101: What you need to know before investing

Before investing in any kind of cryptocurrency, it’s important to do your own research (Getty Images/Alistair Berg)

Cryptocurrency investing has surged in recent years among both experienced investors and newcomers. If you are considering getting into it, however, the most important thing you need to know is that it’s a very complex space, says Amanallah Abbas, CPA and controller at National Digital Asset Exchange (NDAX) in Calgary.

“Remember that crypto is still a relatively young asset class, with Bitcoin being the biggest coin by market cap, having first launched just over 10 years ago. The market has evolved a great deal since then.”

By way of a simple explanation, Abbas defines cryptocurrency as a decentralized digital currency. “It’s essentially a medium of exchange which is not issued by any central bank or financial institution that can be bought and sold. The total global cryptocurrency market cap recently topped US$3 trillion, representing a tenfold increase over last year and a hundredfold increase over the past four years.” 

Today’s major crypto coin players are Bitcoin (BTC), Ethereum (ETH), Cardano and Ripple, while Tesla, MicroStrategy, Paypal and Visa count among the major crypto investors/transactors. “In recent years we’ve seen greater institutional adoption as well as more corporations come on board,” says Abbas.

If you are thinking of investing, here are some facts to consider.  

TYPES OF CRYPTO ASSETS

There are different assets for different investors. The main categories are cryptocurrencies (e.g., Bitcoin, ether), stablecoins (digital currencies that are backed by reserve assets such as fiat or gold) and altcoins. 

Altcoins are an alternative digital asset that includes smart contracts (a self-executing contract agreement between a buyer and seller that is stored on blockchain), non-fungible tokens (NFTs) and meme coins (a cryptocurrency based on a meme such as Dogecoin). 

Different options come with different risk profiles, cautions Ryan Leopold, CPA, national banking and capital markets assurance leader, PwC Canada in Toronto. “Stablecoins are relatively constant in their price, while altcoins have extremely high levels of instability.” 

Whatever the choice, says Leopold, “Investors should remain cautious and make sure they understand the risks. Not all of these investments are heavily regulated as the regulations and infrastructure are continually evolving. You have to take a buyer beware mentality depending on where you are on the risk spectrum. An adviser can help you with that.” 

PROCEED WITH CAUTION

Before investing, it’s important to do your own research, advises Abbas. “You should look at a coin’s reputation, market capitalization, recent volume and news/developments, social community and engagement, public team profiles and executive experience and backgrounds,” he says.  

Abbas adds that sites such as CoinMarketCap and CoinGecko are great places to start your research, as well as other crypto content on social platforms like YouTube and crypto news sites such as Cointelegraph or CoinDesk.

Security is also key. “Choose a platform or exchange that provides two-factor authorization for account access, requires email/mobile transaction approvals, is registered with FINTRAC, and has a solid regulatory framework that is fully compliant with both national and provincial securities commissions,” advises Abbas.  

The basics that apply to traditional investments also come into play: diversify your portfolio, choose reputable platforms and be mindful of your risk tolerance.  

“Don’t invest more than what you can afford to lose,” advises Samer Tohme, CPA and owner of Tohme Accounting in Ottawa. “The monthly variation norm with cryptocurrencies is 30 per cent. If you can’t handle that type of fluctuation, forget about it.” 

It’s also important to remember that, unlike regular investments held in stock brokerages, which are often insured up to a certain amount, many crypto exchange products (with a few exceptions) do not offer such protection. In the event of a platform/exchange bankruptcy (such as Quadriga), the investor’s money on the platforms is lost, with minimal recourse to recoup. 

TAKING INCOME TAX INTO ACCOUNT

When investing in cryptocurrency, it’s important to note that it is considered property for income tax purposes. If you sell or exchange it for something else, it is a taxable transaction.  

As the owner, you will have to determine whether the gain or loss is on account of capital or income for income tax purposes. For more information on how that determination is made and the implications, see CRA’s Guide for cryptocurrency users and tax professionals. 

Also, remember that, as with other aspects of crypto investing, things can change on the taxation front. As Leopold puts it, “You have to be prepared for possible changes in tax policy. Keep in mind that the crypto-assets market is still in its infancy to some extent.”  

EXPLORE THE WORLD OF BLOCKCHAIN AND CRYPTO

Dive deeper into the auditing and accounting implications of blockchain and crypto assets. Find out more about non-fungible tokens, and make sure not to lose the key to your digital wallet.