7 Mistakes to Avoid When Trading Cryptocurrency
Crypto trading is experiencing a heavy tumble, with Bitcoin losing as much as 50% of its value and most cryptos doing the same. If you have some investments right now, you likely fumbled severely, but don’t fret! Recovering from our mistakes is part of trading cryptocurrency.
Are you a new trader looking to take advantage of crypto’s all-time lows? Or a veteran investor looking to gain some lost momentum? There are details you need to remember to get consistent wins. These are 7 mistakes to avoid when trading cryptocurrency to prevent losing everything through your investments.
- Buying Crypto Simply Because It’s Low
You need to remember that low numbers are not everything in both crypto and stock markets. Just because the value of the investment is at an all-time low, it means that it’s worth putting money into. You want to look at what’s causing the value drop for the crypto.
Low prices could be because of many different catalysts out there, depending on the state of the world. For example, Bitcoin’s price crashed in January 2022 due to several reasons, including national regulation from countries like Russia and China, who are looking for an outright ban to stop it from competing with their legal tender.
There are also periods where crypto bubbles can crash, especially once investors take too much leverage and the crypto has too little liquidity. It’s vital to do your research before you buy. Always consider both volume and catalyst to ensure that you have something viable that you can earn money with.
- Forgetting About Crypto Tax
You need to remember that cryptocurrency is taxed and regulated like property if you’re a beginner crypto trader. This means your crypto is subject to several taxes, most importantly capital gains tax. Sure, you can pay your crypto in full, but there are also ways to slash your cryptocurrency tax.
For starters, you can hold off short-term gains for long-term gains. As crypto is treated as capital gains, short-term gains mean higher taxation, up to 37%. Long-term gains, meaning holding onto the crypto for more than a year, can cut down what you owe to the government.
You can also perform tax-loss harvesting with crypto, which offsets your capital gains with your capital losses. You can then offset your losses through your taxes by selling off crypto at a loss. What’s fantastic is crypto is exempt from the wash-sale rule for stocks, which means you can buy the same crypto for less and still harvest your initial loss.
- Investing In A Single Cryptocurrency
While cryptocurrency is decentralized, you don’t need to put all your eggs in one basket. When you invest in a single cryptocurrency, you risk having your investments crash if a single crypto crashes.
Instead, diversify your investments. Consider putting some of your money in altcoins or cryptocurrencies that aren’t Bitcoin and Etherium. They may not be as popular, but altcoins generally have less volatility and can provide higher returns over your investment horizon.
You should continuously diversify your assets to reduce the risk. Diversifying your portfolio means having cryptos in different markets, so if one market crashes, you still have some cryptos in other markets that are booming.
- Investing In ICOs
ICOs are another bad mistake to avoid when trading cryptocurrency. ICOs or Initial Coin Offerings are crowdfunding for startups looking to build their crypto products. These ICOs are similar to IPOs, except that ICOs are unregulated.
ICOs are not free money, though. These ICOs require that you have some money to invest, and you risk losing your money. This is especially true for ICOs where developers are short on money to build and launch their projects.
While ICOs are great for early investors, there are risks. ICO price volatility is one of the most significant risks, as ICOs are prone to crashing when crowdsale investors sell their tokens. This, in turn, can cause the price of the ICO to crash.
- Buying Large Amounts Of Cryptocurrency
It’s easy to get lured in by big gains, but you want to avoid using large amounts of money when trading cryptocurrency. While investing in cryptocurrency can be scary, remember that cryptos are not the only investments out there.
Investments like stocks and bonds have built-in limits on how much you can invest, and these limits are usually way lower than what you can invest in cryptocurrency. Investing a large amount of money can have disastrous results, especially if your crypto is volatile. Investing in crypto requires a certain level of risk, but you don’t have to get reckless with your money.
One crucial mantra that veteran crypto investors follow is only putting disposable income towards cryptocurrency. If you’re looking to build your crypto assets, reinvest gains into more coins and ensure your needs are adequately paid for.
- Not Having A Plan
While crypto is not regulated like stocks, you still need a strategic plan to be successful. Having a plan means having a goal and a strategy to achieve that goal.
For example, if you want to build a trading plan, you’ll need to consider how many coins you need to purchase. If you’re looking to make a quick buck, you can invest smaller amounts, say $100,000. However, if you want long-term gains, you may want to invest $5 million, or even $10 million.
You also need to consider your exit strategy, which is when you’ll sell your coins. You can sell your coins if the goal is short-term, but if you’re aiming for long-term gains, you may want to hold on to your crypto. Ensure you have all the tools you need for crypto trading, including trading bots to automate and initiate safety nets like stop-loss positions.
- Lack Of Proper Cybersecurity
Hacking and phishing are two of the most common forms of cybercrime today. They’re also the most likely forms of cybercrime you’ll face when trading cryptocurrency. Hackers and phishers use phishing emails to steal personal data and credentials. They can also use malware to compromise your PC and steal your information.
If you’re trading from your PC, use antivirus and anti-malware software. However, keep in mind that these tools may not be able to stop all attacks, so make sure you’re installing a reputable antivirus and anti-malware software.
If you’re trading on an exchange, make sure they use two-factor authentication. Two-factor authentication is an extra step, but it’s one of the best ways to protect yourself against crypto scams.
The Bottom Line
It’s tempting to get excited and rush in when investing, but you need to be smart about it. Cryptocurrency has incredible potential, but there are risks as well. Make sure you don’t rush in and invest in crypto without proper research.
The next time you invest in crypto, make sure you avoid these mistakes. Crypto trading has its share of risks, but there are also ways you can reduce it. By avoiding these mistakes, you can reduce your losses and increase your wins.