For those seeking a new way to make money, there's a trendy tool that's swiftly gaining traction. It's cryptocurrency, and anyone considering investing in digital money should be aware of its dangerous, wildly fluctuating, and contentious character. Bitcoin, Stablecoins, and NFTs are seen as a step forward for investors, a form of "Money 2.0" that will democratize finance and fuel the metaverse, according to some. To some, cryptocurrency is just a new, digital version of an old deception set up to defraud and defraud. Others see the project as a waste of time that will eventually burst.

Simply said, cryptocurrency is a digital token whose ownership is recorded on a blockchain, a distributed software ledger that no one controls; this, in theory, makes it more secure. Although bitcoin and Ethereum are the two most well-known cryptocurrencies, there are over 18,000 tokens that are traded under various names (dogecoin is one famous example).

Despite fluctuating pricing and a lack of regulation, bitcoin is becoming the next big thing in finance. President Joe Biden's intention to investigate a digital US currency, as well as multimillion-dollar Super Bowl advertising, highlight a growing desire from powerful government and business institutions to fast legalize crypto in the same manner that equities and bonds have been legitimized.

Is cryptocurrency, however, a good investment for you?

"Cryptocurrency is one of those categories of investing that doesn't have the standard investor protections," said Gerri Walsh, the Financial Industry Regulatory Authority's senior vice president of Investor Education. "They don't fall under the category of securities dealing. In terms of regulations, it's a tumultuous environment."

Professionals warn that investors should not invest more money than they can afford to lose in cryptocurrency, which has few safeguards, many hazards, and a shaky track record. If you're considering adding cryptocurrency to your portfolio, here are five things to think about before you start.

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What is the best way for me to begin investing in cryptocurrency?

Buying a cryptocurrency with US dollars on a prominent exchange like Coinbase, Binance, or FTX is the simplest way to get your feet wet with crypto investments. A few well-known payment programs, such as Venmo, PayPal, and Cash App, allow you to purchase and sell cryptocurrencies, however, their functionality is limited and their costs are higher.

Regardless of whether you use Coinbase, Binance, Venmo, or PayPal, you'll have to supply some sensitive personal and financial information, as well as an official form of identity. (So much for bitcoin's reputation as a secure method of payment.)

What percentage of my portfolio should be in crypto?

Once your account is set up, transferring money from your bank to it is a breeze. And the entry hurdle is quite low: On Coinbase, the minimum trading amount is $2, while on Binance, it is $15.

According to Cesare Fracassi, director of the University of Texas at Austin's Blockchain Initiative, there isn't enough data currently to determine how much of your portfolio "should" be in cryptocurrencies.

"To determine whether a given asset is beneficial in a portfolio, we need decades of returns," Fracassi said. "We know that stocks return around 6% more on average than bonds. This is because we've had 60 to 100 years to observe average stock and bond returns."

How much you put into crypto, like any other investment, will be determined by your risk tolerance. However, even those who are all-in on the technology should keep their exposure limited, according to investing pros. Clients should invest no more than 3% of their portfolio in cryptocurrency, according to Anjali Jariwala, a licenced financial advisor and founder of Fit Advisors.

What are the risks of investing in crypto?

Before you invest in cryptocurrency, you should be aware that there is absolutely no protection available to crypto investors. That's an issue since this virtual money is incredibly volatile and driven by excitement. It's easy to get caught up in tweets, TikToks, and YouTube videos praising the latest cryptocurrency, but the exhilaration of a market surge can be quickly wiped away by a catastrophic drop.

Before you invest in cryptocurrency, you should be aware that there is absolutely no protection available to crypto investors. That's an issue since this virtual money is incredibly volatile and driven by excitement. It's easy to get caught up in tweets, TikToks, and YouTube videos praising the latest cryptocurrency, but the exhilaration of a market surge can be quickly wiped away by a catastrophic drop.

Crypto frauds should be avoided at all costs. A pump and dump scheme is one of the most common scams, in which scammers push consumers to buy a certain token, causing its value to rise. When this happens, the con artists sell out, lowering the price for everyone else. These scams are well-known, and they have taken in more than $2.8 billion in cryptocurrency.

From the standpoint of current US government policy, you're on your own. Unlike bank accounts, crypto does not currently have deposit protection from the government. Following Biden's executive order in March, which instructed government departments to explore the risks and possible benefits of digital assets, this could change.

Only one firm, as far as we can tell, sells crypto-insurance: Breach Insurance, whose Crypto Shield claims to protect your accounts from hacking. Other firms, such as Coin cover, offer theft protection, which notifies you if your account has been compromised.

If Coincover's technology fails, it will reimburse you up to the amount you're entitled to, which is determined by the level of security provided by the wallet you're using.

Despite the market's hype, scams, and risks, Fracassi believes cryptocurrency has a bright future ahead of it.

"I believe crypto holds the potential to solve some of the traditional financial sector's challenges," Fracassi remarked. "The existing financial system is not inclusive, it is slow and expensive, and incumbents, such as huge banks and financial institutions, have a lot of power. Crypto, in my opinion, is a means of genuinely breaking the system."

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If I make money on crypto trades, do I have to pay taxes?

Yes. The IRS wants to know if you're buying, selling, or exchanging cryptocurrency. Your tax burden is determined by your specific circumstances, but crypto assets are taxed similarly to other investments such as equities and bonds.

If you didn't sell or trade your crypto for another sort of crypto, you don't have to mention it on your tax return. It's also not necessary to record buying and holding. However, if you sold or exchanged cryptocurrency, you'll need to record any profits or losses, just like you would with stocks and bonds.