What to know about investing in crypto exchanges

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With investors more optimistic than ever about cryptocurrency, interest in decentralized virtual currency continues to grow. For those who are relatively new to investing, crypto can seem intimidating, if not downright scary.

Cryptocurrency is a decentralized digital or virtual currency, secured by cryptography, making it practically forgery-proof. Its supply is limited, which helps to add crypto value and makes counterfeiting or double-spending almost impossible.

While legitimate cryptocurrencies can offer solid returns, cryptocurrency fraud nearly doubled during the pandemic. In a preliminary report for Q3’21, the FTC found that fraudulent cryptocurrency payments cost victims a total of $ 200.8 million.

Today, most cryptocurrency buying and selling is done through a cryptocurrency exchange, much like a stock exchange. An exchange is an intermediary between a buyer and a seller of Bitcoin, the most well-known, or any other type of cryptocurrency.

To help remove some of the mystery surrounding cryptocurrencies as an investment, Investopedia spoke with Ethan Vera, co-founder of Luxor and Viridi Funds as well as a member of the Financial Review Board of Investopedia. Ethan’s expertise in cryptocurrency and crypto mining stems from his immense experience in space. Investopedia spoke with Ethan about crypto in general and how to access cryptocurrency as an investment. Our edited conversation follows.

“Interesting these days, Bitcoin is seen as a great hedge against inflation. “- Ethan Véra

Reasons to invest in crypto

Investopedia: First, what makes cryptocurrency a good investment?

Vera: Let’s start with an example. In terms of investment, among cryptocurrencies, Bitcoin is the most stable and least volatile digital currency. It should be viewed in the same way as a long-term equity investment, not as fixed income. In this regard, Bitcoin is similar to a large cap stock. Of interest these days, Bitcoin is seen as an excellent inflation hedge. As a commodity, Bitcoin is the most regulated and least risky cryptocurrency, because Bitcoin’s protocols limit risk.

Investopedia: Besides Bitcoin, what are the other cryptocurrencies and what makes them worth considering?

Vera: The Ethereum blockchain network and its cryptocurrency, Ether, are popular because applications are built on it. Uniswap and Solana are other exchanges and protocols that are growing in volume. Many altcoins, that is, cryptocurrencies other than Bitcoin, function more like a tech game. Their innovations are really interesting, however, this sometimes comes at the expense of decentralized governance.

The danger of a 51% attack

Investopedia: What do you mean by disruption?

Vera: A guy is a hypothetical disturbance, for now, known as the 51% attack. A 51% attack occurs when a group of miners controlling more than 50% of the hash rate or computing power of a network could prevent new transactions, reverse transactions, and duplicate coins. While it does not destroy the system, it could cause a lot of damage.

Obviously, the best way to prevent a 51% attack is to make sure no one is controlling more than 50%. In Bitcoin mining, the cost and difficulty of sourcing materials and energy make this highly unlikely. The network is very resistant to this type of attack.

The role of an exchange

Investopedia: Can you briefly tell us the story of the birth of exchanges?

Vera: Of course. At the beginning, there were no exchanges. The general public didn’t even know about Bitcoin. The only way to get Bitcoin was to mine it yourself or through a peer-to-peer transfer with someone else. Then came over-the-counter (OTC) trading, first unregulated and then increasingly regulated over time. In 2015, the Coinbase exchange was born. Today, Coinbase is one of dozens of exchanges operating in the United States and around the world.

Investopedia: What Should Investors Know About Stock Exchanges?

Vera: First of all, the major centralized exchanges, like Coinbase, Kraken, and others, are heavily regulated. The first thing to know before choosing an investor exchange is to check if it can legally operate in your jurisdiction. Even with well-regulated legal exchanges, don’t put all of your investment in one exchange at once. In other words, spread out your investments and keep as much as possible in a cold room. There are many bad players in crypto and the best way to avoid them is to deal with well-known regulated exchanges, your own wallets, and trusted custodians.

Cryptocurrency, by its nature, attempts to be a decentralized type of currency, meaning that it is not a government or corporate controlled currency, but a peer type of money. -to-peer. Exchanges can be centralized or decentralized in the way cryptocurrencies are managed and traded.

Centralized vs decentralized

Investopedia: Can you explain the difference between centralized and decentralized crypto exchanges?

Vera: Centralized exchanges, like Coinbase, are regulated, easy to use, reliable, and allow the trading of digital currencies for fiat currencies (i.e. dollars). However, they do require you to trust your counterpart. Decentralized exchanges are controlled by the users, sometimes to the detriment of the user experience.

Newcomers to crypto should start with centralized exchanges, due to the ease of use, and then experiment with decentralized exchanges. There are many options out there, including trading cryptocurrencies, ETFs, and investing in mining companies, including mining ETFs. The RIGZ mining ETF in Viridi is one example.

Level of involvement

Investopedia: What questions should investors ask themselves before selecting a stock exchange?

Vera: First, what percentage of my wallet do I want to allocate to cryptocurrency? There should be, but certainly not an overwhelming amount. The best answer is “no more than what you can afford to lose”.

Many experts suggest that no more than 2-3% of your wallet should be allocated to cryptocurrency.

In terms of cryptocurrency, remember Bitcoin is the most secure, so I would definitely suggest Bitcoin until you have a better understanding of this type of investment. Keep in mind that this part of your portfolio is likely long term just like other stocks at 10, 20, or 30 years. Ask yourself, how much do I want to be involved? Relaxed, moderate, deep diving? This has an impact on the type of investment you want to make. Mining, for example, is more complicated than buying cryptocurrency or an ETF.

Where to get help

Investopedia: What about support and information? Where do investors go to avoid these bad actors?

Vera: Most of the big exchanges offer very good investor support, including advice. Any reputable exchange has a good support network and can help even the most novice investors. It is important to do the research on your own and not pay to consult unknown sources.

Information and advice is available free on the Internet. One example is www.lopp.net, run by Jameson Lopp, a self-proclaimed “professional cyberpunk” whose primary interest is Bitcoin security and who makes it easier for people to “take custody of their bitcoin and manage their private keys. “.

Closing thoughts

Investopedia: What Else Should Potential Crypto Investors Know?

Vera: Keep in mind that, like any type of investment, with crypto, the higher the potential reward, the riskier the investment. This is the reason why your investment in crypto remains manageable, stick with trusted exchanges and get as much education as possible, regardless of your level of involvement.

Another major concern is taxes. You need to know your cryptocurrency tax obligations, especially when working with a well-regulated centralized exchange. It is important that you report all realized capital gains as you would any type of investment.

What is the difference between a centralized and decentralized crypto exchange?

Centralized exchanges, like Coinbase, are regulated, easy to use, reliable, and allow the exchange of digital currencies for fiat currencies (i.e. dollars), according to crypto expert Ethan Vera. Decentralized exchanges are anonymous and less prone to hacking, but they don’t allow you to trade for fiat and are complicated.

What percentage of my wallet should be in crypto?

Expert, says Ethan Vera, the best answer is “no more than what you can afford to lose.” Beyond that, most experts suggest it should be less than 5%, in the range of 2-3%.

What is a 51% attack?

A 51% attack in the crypto world is a hypothetical type of disruption in which a group of miners control more than 50% of the hash rate or computing power of a network. In such scenario, they could prevent new trades, reverse trades, and duplicate coins. While it does not destroy the system, it could cause a lot of damage.

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