You’ve heard about cryptocurrency for years, but have you taken the plunge into the world of investing?
There are thousands of cryptocurrencies in existence, so it can be overwhelming to know where to begin One of the biggest challenges investors face when it comes to cryptocurrencies is not getting caught up in the hype. Digital currencies have quickly risen to prominence in the portfolios of many retail and institutional investors. At the same time, analysts have continued to caution investors about the volatile nature and unpredictability of cryptocurrencies.
What is Cryptocurrency Trading?
Crypto trading is the act of buying and selling cryptocurrencies with the end goal of making a profit from the difference in the purchase and sale of the assets.
It's like the high-tech version of the stock market, but with digital currencies. Think of it as the playground of the future for those looking to make their mark in the financial world.
CRYPTOCURRENCY TIPS FOR BEGINNERS
Recent data reveals a staggering surge in crypto trading, But here lies the conundrum - how does a beginner navigate these choppy waters? If you’ve decided to invest in the cryptocurrency market, it’s important, as with any other investment, to do your research. This guide will demystify the complexities of crypto trading for beginners. Below, we’ll explore what you should know before you invest.
Starting your journey in crypto trading can be like stepping into a new world. It's exciting but can be a bit overwhelming, right? Let's break it down into easy-to-digest bites, starting with the basics.
1. Consider Why You Are Investing in Cryptocurrency
Before investing in cryptocurrency, gain a personal understanding of what you hope to achieve as this will help set the course for your actions.
The most fundamental question you should ask yourself before making a cryptocurrency investment is why you’re doing it. There are myriad investment vehicles available, many of which offer greater stability and less risk than digital currencies.
Are you interested simply because of cryptocurrency’s trendiness? Or is there a more compelling reason for an investment in one or more specific digital tokens? Of course, different investors have various personal investment goals, and exploring the cryptocurrency space may make more sense for some individuals than for others.
Begin by taking a comprehensive approach to evaluate your personal risk appetite, investment goals, and portfolio diversification. You may be interested in cryptocurrency as an alternative asset to what you already hold. You may also be interested in potentially higher returns with the understanding that this reward comes with potentially higher risks.
2. DYOR - Do Your Own Research
The number 1 rule of all crypto trading is to do your research. Each cryptocurrency has its features and use cases (some don’t even technically have a real use case!), so you should always consider why you believe the price of that crypto will rise in the future. Have a read of their whitepaper and understand the project and the Founder's goals, or have a read of what other investors have to say about the token before you invest!
3. Have a Strategy for Crypto Trading
It isn’t easy to separate genuine cryptocurrency recommendations from scams; there are lots of sharks out there waiting to take investor’s money. when investors are confronted with a lot of information about a cryptocurrency, they should take a step back from the hype.
Try to look critically at the project or platform. How many users does it have? What problem does it solve? Avoid coins that promise the Earth but haven’t delivered anything tangible.
4. Perform Test Transactions
Cryptocurrency is unlike banks in many aspects. One of the most vital reasons to understand this is should you accidentally send money to the wrong place, it may be impossible (literally) to recover. In some cases, you may lose your money forever.
As you join the cryptocurrency world, understand the importance of test transactions. Test transactions are an essential step when sending cryptocurrency because they allow you to confirm that the transaction will be successful before sending a significant amount of funds. Though they result in higher fees, they very well may be worth preventing a large error.
Test transactions involve sending a small amount of cryptocurrency to a test address. It is meant to simulate a real transaction without actually sending funds to another party. This allows you to test the sending and receiving process, confirm that your wallet is working correctly, and ensure that you have the correct address for the recipient. Once the test transaction has successfully been performed, you can copy the same transaction information for larger exchanges.
5. Do Your Homework Before You Invest
After diligent research, you have likely developed a feel for the cryptocurrency industry and may have determined one or more projects in which to invest. The next step is to time your investment. The digital currency world moves quickly and is known for being highly volatile.
Remember that digital currencies are highly speculative. For every overnight Bitcoin millionaire, many other investors have poured money into the virtual token realm only to see that money disappear. Investing in this space means taking a risk. By doing your homework before you invest, you help give yourself the best chance of success.
6. Only Invest What You Can Afford to Lose
Ultimately, all crypto trading is a risk since there are no guarantees in life. And although the volatile nature of crypto means that you could win big, it can also lose people a lot of money. So don’t invest all your life savings, particularly if you’re new.
7.Consider Volatility
There are few assets as volatile as cryptocurrency. In the same way that their value can rise within seconds, the same can be said about how quickly their value can decline. Experienced investors might be able to use volatility to their advantage, but if you’re not aware of the market’s fundamentals, you can quickly get in over your head. Make sure you understand how volatility can cause inexperienced investors to “buy high and sell low” while it can also encourage knowledgeable traders to “buy low and sell high.”
8. Manage risk
Managing risk and understanding how to avoid crypto tax mistakes is a huge part of being successful with your cryptocurrency assets. New traders need to do a bit of research on how to manage risk and develop processes that reduce risk along the way. This can help mitigate losses. Risk management, however, depends on whether you’re a short-term trader or a long-term investor. As a starting point, our crypto tax accountant recommends putting aside a fixed amount of money to trade and only using a portion of it. This helps provide a safety net if needed.
9. Diversify Crypto Portfolios
It may not pay to have too much invested in one single cryptocurrency. Or as they say: don’t put all your eggs in one basket.
As with stocks and shares, spread money out among different digital currencies.
This means less risk of being over-exposed should one of them plummet in value – especially as the market prices of these investments are highly volatile.
There are thousands to choose from, so investors should do research.
10. Understand the Order Book
By understanding an order book, you’ll understand how crypto trades are structured. In any trade, there is a winner and a loser, and you’ll want to buy low and sell high.
When there are more buy orders for an asset than sell orders, the price generally increases since there’s more demand for the crypto. In contrast, when more people sell than buy, the price decreases. On many exchange interfaces such as Wirex’s, you can see whether there are more sales or purchases overall in the market by a red or green color on the graph. This can help you gauge whether it might be the right time to buy or sell.
11. Undertake Technical and Fundamental Analysis
Technical and fundamental analysis are the two main trading analysis methods used to help understand crypto behavior. Fundamental analysis looks at the current economic and financial factors that might influence the price of the token, such as news events like the government announcing a hike in inflation rates. Alternatively, technical analysis looks at the entire price history of the token.
12. Learn Different Trading Strategies
There are many different trading methods out there beyond just buying and selling crypto when you see fit. This includes day trading, margin trading, and swing trading, to name a few, and it’s important to understand what works for you and the benefits of each before you use it as your strategy.
Bonus Tip: Work With a Professional Accountant
If you’re feeling hesitant but you still are interested in cryptocurrency, why not turn to an expert? There are plenty of professional accountants such as our team at Filing Taxes who can assist you with various aspects of your cryptocurrency investments.
We have deep industry knowledge of both cryptocurrency accounting and taxation. and take advantage of our free consultations feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.