7 tips for managing your crypto investments
Note: This article is intended as general advice. Always seek professional advice for your individual situation.
Cryptocurrencies can take off in a short space of time but there are two sides to this unbelievable fluctuation. Some currencies may gain a lot of value in weeks whereas the value of others can even vanish in days. Managing your crypto investments will always be a challenge as long as the market remains this volatile. In addition, concerns such as hacking, legalities, and tax complications make things even tougher, especially for beginners.
However, there are approaches which can optimise your chances of making a profit from crypto while minimising the risks. Here are our top 7 tips for managing your crypto investments in 2022.
1. Be on the right side of the law
The legal standing of cryptocurrencies varies from country to country. It is now legal to use crypto payments in the US whereas this is still not allowed in many countries. Depending on your location, make sure to use the right wallet or exchange. To put it simply, check if the wallet of exchange is regulated by a credible authority that operates in your region. There are still mobile apps registering accounts in regions that have not yet permitted crypto trading, so be wary of these.
In these cases, the most you can do is use the most reliable virtual payments methods to buy or sell cryptocurrencies. Some exchanges also offer third-party facilitators who offer digital assets on the app after you transfer money to their bank accounts. Make sure that the app you are using offers buyers’ protection.
2. Watch out for taxation
Ignorance of the law is no excuse. Some people believe that crypto-assets are exempt from taxation, perhaps because blockchain is decentralised. However, you shouldn’t confuse crypto transactions with crypto trading. Crypto trading uses conventional money to buy crypto assets and if you make a profit, you will sell your crypto assets and at some point.
In this case, your crypto trading becomes a form of income, and as such many governments consider it subject to tax. If you fail to report this income you could end up in trouble with taxation authorities, so if you’re unsure, consult with a crypto tax UK expert.
3. Spread your investments
Putting all your eggs in one basket has never been a good idea. The Crypto market is extremely volatile and you could lose your entire portfolio in a single drop within a few days or even hours. With over 1000 cryptocurrencies available today, it can be hard to pick out the most promising ones. It’s wise to spread your investment over multiple currencies to improve your chances of hitting the jackpot in the future.
Which currency has the best prospects? Nobody could have written the Bitcoin script in 2010 and no one can say for sure which currency is going to be the next big thing. The only thing you could rely on is the legitimate information on currencies projects. Look for projects that are attempting to solve real-world problems.
4. Be ready for anything
The extremely volatile nature of this emerging market can be very disappointing for anyone looking for short-term gain. If you want to build a healthy crypto portfolio, learn be patient. You may have to keep crypto-assets for months or years waiting for the right time to sell. This can be tricky for anyone with a habit of making quick decisions. Many believe that long-term investment, a wait-and-see approach, and readiness to face temporary loss are the ingredients of success in this market.
5. Have an exit strategy – and stick to it!
If the value is going down, new traders are quick to sell their assets anticipating further correction. Sometimes the value recovers quickly but the worst can also happen. The problem with new traders is often the lack of an exit strategy. If a currency is performing very well, beginners tend to hold it because they feel the effect of dopamine (the feel-good hormone) more than experienced traders.
With this kind of emotional response, it is extremely hard to find the right time to exit and eventually the currency collapses. At this point, you can do little except pray for a quick recovery. However, a collapse sometimes triggers aftershocks and your crypto portfolio starts looking like a nightmare. This is why you must learn to stick to a clear exit strategy.
6. Learn to hold a failing trade
If you fail to exit before the collapse, do not panic. Hold the trade and wait for recovery even if it takes months. The worst thing you can do is sell the currency right after the collapse. You have already suffered the loss, if you sell it and the currency recovers a few months later, you will be the most disappointed person on the planet.
On the other hand, if you hold the trade, the collapse will not mean anything after the recovery. You will still be able to trade and the temporary disappointment will fade away.
7. Long term investment is still better
It could be argued that short-term crypto investments are too risky, somewhat close to gambling. On the other hand, long-term investments have the potential to bring significant profit.
Consider a short-term investor who performed 300 trades in a year, out of which over 100 ended in a loss and 200 made a profit. A long-term investor invested the same amount of money in 20 currencies. Even if 17 or 18 did not make a profit, just two or three good performers can bring a good result overall.
The benefit of passive investment is that you do not have to spend too much time reading and analysing the market. You don’t have to be a crypto expert and will enjoy much less stress!
Final thoughts
Before you enter crypto trading, it’s important to study the basics of blockchain and the crypto market. Befriend two or three crypto traders with at least a year’s experience. See how they anticipate trends and how they react to losses and gains.
