Cryptocurrency is an ever-growing industry that has turned many investors into millionaires, but it has also erased the savings of many more. Before you venture into the world of crypto, there are a few essential tips you must know or else you may find yourself in terrible disappointment and financial loss. Some of these tips apply to most fields while others are peculiar to the crypto niche.
Take Time To Engage With The Crypto World
This should go without saying, but too many people don’t do enough homework when they invest in cryptocurrencies. Don’t just buy any currencies that are hot, take the time to find out how a cryptocurrency stands out from a crowd and what value it brings to the table. This thought process will lead to better judgment as to which project is legitimate and which is false hype.
Secondly, if you don’t closely follow crypto discussions, you may not understand them at all. There are many peculiar terms and lingos specific to the crypto industry that can be challenging for newcomers. These terminologies keep growing as well due to new technology being developed.
Moreover, the crypto world encompasses more than just Bitcoin, Litecoin, Ethereum and Tether. When you’re active in crypto communities such as r/Cryptocurrency on Reddit, as well as following famous crypto voices on Twitter, it would be easier to keep up with new and promising prospects. Also, you can find opportunities, ask people’s opinion on a project and learn from others’ methods.
Obviously, don’t take ‘doing homework’ too literally. There are aspects of blockchain technology that are too technical to grasp even for those with a background in computer science. So don’t be too hard on yourself.
Expect High Risk
Cryptocurrency is one of the most volatile markets: prices change quickly and dramatically. If you want to invest in crypto, you have to prepare mentally for a rollercoaster ride. Your coins’ value can blow up overnight then dissipate just as fast—most people don’t realize how big a toll it takes on their mental health. Therefore, always expect high risk and learn to stay calm in the storm.
Trust The White Papers More Than Word of Mouth
When it comes to researching a new project to make an investment decision, some people struggle to make up an opinion. The media can be extremely divisive with conflicting opinions and the same goes for people. If you want to be a legitimate investor, you eventually have to learn to rely on your own judgement.
The best and most unbiased source of information is always the cryptocurrency’s white paper. It will tell you what the developers want to do with this project as well as an overview and specific data about it. If the white paper is sophisticated, transparent, and it makes sense and resonates with you, that’s a good sign to invest.
However, if the white paper is vague, lazy and suspicious, you should stay away from it despite the hype. You would be appalled at the volume of scams and exploits there is in the crypto and decentralized finance space (DeFi).
Start Small
Don’t think of cryptocurrencies as lottery tickets to overnight success. Think of it as a journey full of mistakes to be made and lessons to be learned.
In the beginning, don’t throw all your money in because you’re likely to make bad decisions anyway. Instead, start small then slowly upping the stakes when you feel more confident and have more knowledge.
Furthermore, there is no protection regulation for crypto in the US like with the stock market, such as Securities Investor Protection Corporation (SPIC) or Federal Deposit Insurance Corporation (FDIC). With cryptocurrency, once the money is gone, there is no compensation.
Keep In Mind Transaction Fees And Taxes
Even though they are small, transaction fees do add up, especially since many crypto investors love to make multiple transactions per day just because they see the price changes.
If you live in the US or Canada, there is capital gains tax on crypto investment. If it is short-term gains, the rate is 10-37% and for long-term gains it is 0-20%. Factors affecting tax rates are income, holding period, marriage status… So remember to account for taxes when calculating your profit.
Invest In Multiple Coins
This tip is present in most forms of investment, “don’t put all your eggs in one basket” as they say. Diversifying your investments means that when one of them goes horribly wrong, you still have back-up assets to fall back on.
In a speculative market such as cryptocurrency, it’s always a good idea to invest in well-established coins such as Bitcoin, Ethereum, Binance, Tether… But you shouldn’t ignore the newer, more obscure currencies. After all, every big currency started out as a new, unknown one. Plus, these smaller coins are cheaper and they can grow at a crazy rate—they’re extremely good for netting quick profit.
Set A Profit Target
One of the hardest things to master about cryptocurrency investing is knowing when to sell. As you’re probably aware, the crypto market is just about as volatile as anything you’ve ever witnessed. Once the price skyrockets you may experience a desperate urge to sell for fear it may plummet the next day; but a part of you wonders what if it’ll go even higher? And so the dilemma begins.
Setting a profit and loss target helps you to logically make decisions regarding selling. Sell when the profit or loss target is reached: if the price keeps going up, at least you’ve got what you came for. When the price drops, you’ve saved yourself from taking any more unnecessary damages.
Consider Automating Purchases
Most cryptocurrency exchanges let you set up automatic buys. For example, the exchange can buy for you $100 worth of ETH monthly. This method is suitable for those investing in a lot of coins and don’t want to stress over timing the market for each one.
However, if you manage to time the market successfully, you can buy at the lowest price to ensure maximum profit. But with how unpredictable the market is, timing it right for every currency you own is quite challenging to say the least.
The Bottom Line
This is a guest article from Jack Spade. “Jack Spade is a crypto enthusiast who loves sharing his knowledge with others. Besides, he’s an aspiring novelist and has a Medium account where he posts all kinds of interesting things.”
