Many of the assets that currently trade have lengthy and illustrious histories. The usage of gold in the trade may be traced back to the ancient Kingdom of Lydia around 560 BC. The first modern stock market was established in Amsterdam nearly 400 years ago. Even ETFs have been traded for more than a quarter-century.
But crypto has only been around for a little over a decade. Bitcoin, the first decentralized cryptocurrency, was mined in January 2009. While the technology is significant in many respects, the industry is still in its early stages, and the regulatory structure is continually growing. As a result, the market is facing significant volatility, which has been sparked by a variety of causes such as crypto exchange bankruptcy and high-profile attacks.
However, entering the cryptocurrency market without a good plan may be unsafe and confusing. If you’re thinking about buying cryptocurrency, there are a few things you should know to make educated decisions and avoid typical mistakes.
Let’s go through the main topics to think about before investing in cryptocurrencies, so you may easily negotiate the ever-changing crypto world.
1. Educate Yourself
When you hear about someone buying cryptocurrency, it may sound like a single item, such as a stock or a bond. It isn’t. “Crypto” refers to a wide range of investments with varying purposes, such as Bitcoin, Ethereum, and over 19,000 other cryptocurrencies, many of which are untested and unlikely to survive.
Before you go in, educate yourself on the ins and outs of this rapidly expanding industry. For example, you should be able to explain the value of blockchain technology and decentralization to friends and family. If you’re interested in Bitcoin, you should understand why concepts such as cryptographic hashes and mining are critical to its operation.
Aside from the basics, keep up with the latest crypto news. It’s a hectic market with fresh advancements almost every day. Government regulations are also changing, and each new judgment has the potential to affect how crypto is viewed legally.
Once you understand how technology and economics work, be honest with yourself.
Do you honestly believe crypto will have long-term value?
Well, this is an essential question since stormy markets may put your faith to the test.
2. Prepare for Volatility
There is no doubt about it: Cryptocurrency prices are currently volatile. Before entering the market, you should consider whether you are comfortable with chaos.
Consider Bitcoin, the oldest and most valuable cryptocurrency in terms of market capitalization. Bitcoin’s price frequently fluctuates between double-digit dips and double-digit rallies, sometimes within the same week. If you purchased a single bitcoin at $7,000 at the outset of the coronavirus pandemic in March 2020, it would have increased to $69,000 in November 2021, representing a gain of more than 850%. However, by June 2022, it would have dropped to $17,500, a price drop of more than 70% from its November highs.
Ethereum has also experienced volatility. It is expected to be around $120 in March 2020. It then increased by more than 3,900% to $4,867 by November 2021. By June 2022, it had fallen back to $880.
Despite these two crypto giants, volatility can reach new heights. Consider the LUNA token on the Terra network. LUNA, formerly a popular cryptocurrency, saw its value collapse from roughly $120 to effectively zero in May 2022 after its financial basis failed. The price history of Dogecoin includes some even more spectacular fluctuations, like a rise of almost 42,000% from March 2020 to November 2021. By June 2022, it had dropped by more than 90% from its all-time high.
Despite the 2022 bear market, people that entered the crypto market in 2020 or earlier with a buy-and-hold mindset may still have profits. However, many investors have lost money or will lose money in the future. The passage of time will reveal whether bitcoin prices grow less volatile. Yet, expect more volatility in the years to come.
3. Control Risks
With the uncertain nature and volatility of cryptocurrency trading, it is best to think cautiously. While there can be a lot of potential, keep in mind that the negative can be abrupt and severe. Also, cryptocurrency has a bigger possibility of crashing to zero than many other assets. Knowing this, you may want to limit your investment to a sum that you can lose.
Due to its volatility, crypto may not be a viable vehicle for diversifying your portfolio or saving for a specific goal (especially a short-term objective).
Consider switching at least some of your winnings to more stable asset classes if you earn gains that make crypto a larger percentage of your portfolio than you expected. This may assist to smooth out some of the volatility in your overall holdings.
4. Get Security Knowledge
One of the most critical components of purchasing cryptocurrency is keeping it secure. Those who aren’t interested in studying the depths of crypto cybersecurity may find it easier to keep their coins with a reputable custody provider that employs strong and audited security protocols. These platforms typically include security processes that are more appropriate for beginners.
Those seeking a more involved strategy, on the other hand, may choose to custody and secure the asset themselves. Usually, this entails purchasing cryptocurrency on a cryptocurrency trading platform and then moving holdings to a private digital wallet or physical cold wallet (a USB-like device for crypto storage).
It’s worth noting that, while this method provides you more freedom in how you utilize your crypto, it also lacks a customer service team for individuals who manage their security. If your private or exchange accounts are hacked or phished, your crypto trading platform goes insolvent or you transfer your coins to the incorrect wallet address, you may lose access to them forever.
5. Don’t forget about Taxes
On its surface, cryptocurrency is now taxed similarly to equities. Holdings sold for a profit are subject to capital gains tax, whilst those sold for a loss may be eligible for deductions.
Yet there are some more details to consider. Paying for products and services with cryptocurrency, for example, may result in capital gains or losses. There are also changing tax restrictions for cryptocurrency obtained through mining or staking or as part of an airdrop or hard fork. Because the business is so new, tax regulations can shift quickly. Before you buy, go over the fundamentals of crypto taxation. While many tax preparation software programs incorporate crypto computations into their platforms, you should always speak with a tax professional to verify that your returns are accurate.
Currently, crypto is an exciting but uncertain asset with immense volatility. To prepare for the dangers make sure you checked out its long-term potential before purchasing. You should also think about restricting your allocation to an amount you can afford to lose.
Before purchasing, make sure to investigate all of your security choices. When it comes to protecting your assets, choosing between holding your coins with a reliable custody provider and a crypto trading platform might make a major difference, especially if you don’t have the time to research crypto cybersecurity protocols.
Finally, maintain risk management at the center of any crypto trading approach. This may help you in reducing stress in both the short and long term.