Cryptocurrency Trading: Managing Risks For A Better Experience
The world of cryptocurrency trading can be a confusing thing for many people, with lots of jargon to wade through as well as having to get a good understanding of how these newer markets work. As an investor, you’ll likely be able to pick it up and adapt fairly quickly to this different environment, but as a beginner, this whole topic can be overwhelming.
The biggest thing to put potential investors off of getting involved in the cryptocurrency market is the constantly flaunted risks of putting your money into these crypto coins. But what are the main risks of doing this? And how does one invest while minimising these risks for a better trading experience?
The Basics Of Cryptocurrency
Let’s start with the basics. First of all, cryptocurrency is a decentralised currency, meaning it lacks any form of regulatory body compared to government-issued currencies. These currencies are based on blockchain technology, a secure and traceable system, in which every cryptocurrency exchange can be verified reducing the risk of these currencies becoming destabilised. It also requires no trust between trading parties. Everyone involved in the blockchain has an exact copy of the cryptocurrency data, and if a member’s data doesn’t match the majority of others in the network, it cannot be used to trade, as this could be a sign of tampered or corrupted data.
Is Cryptocurrency Still A Good Investment?
As this is still a fairly new marketplace, it’s important to keep learning as much as possible. It can be said with a level of certainty that investing in things like Bitcoin and Ether aren’t going to be bad investments if you’re cautious and understand what you’re doing. Theoretically, any investment can be a bad one, and some of the best advice is to spread out your investments across multiple currencies and markets to reduce your losses if things should happen to take a bad turn on one particular investment. And likewise, the wider your net is cast, the better chance you have of hitting a good investment too. One of the features of the crypto market that is spoken about at length, actually boasts opportunity as well as risk, and that is the volatility of the market.
A Volatile Marketplace
You may have seen this word used time and time again in regard to cryptocurrency and for good reason. The unpredictability of the cryptocurrency market is one of the things that wards away many potential investors, but it’s also the thing that has made some people unfathomable amounts of profit. The success stories of early Bitcoin investors are almost entirely a result of the chaotic fluctuations and the huge rises in the value of this currency. When getting into investing in cryptocurrency today, it’s important to be prepared for unexpected drops as well as rises in value, and in fact, compared to traditional markets which have become fairly stable over the years, people have become quite accepting of the crypto market’s volatility. There is understandably much less panic when the crypto market experiences great swings, unlike if the same happened on the stock market, but it’s still essential for you to remain vigilant, and avoid letting yourself be driven by fear or greed.
Paying Your Taxes
Recently, HMRC has been figuring out who is eligible to pay taxes on their crypto gains and losses, especially now that investment in this marketplace has become much more frequent. The concern here is that people are able to make extortionate amounts of income without paying anything back in taxes. As a crypto trader, it is important for you to regulate yourself and be prepared to pay capital gains tax (CGT) on your crypto trades. If you don’t put this money aside for these tax payments, you could be in for a nasty surprise. It’s worthwhile to gain the advice and guidance of an expert legal team such as Hodge Bakshi who are knowledgeable of the process of trading cryptocurrency as well as having a solid understanding of crypto tax in the UK and compliance in this area. Don’t take any risks when it comes to taxes. It’s not worth it and you could get into some serious trouble if you do.
Consider Risk Versus Reward
In any market, the riskier the investment, the higher the potential profit. This of course requires a level of understanding on top of the willingness to risk a higher investment. While risk may be high, there is research you can be doing to ensure a higher chance of success on a particular investment. Research the currency you’re putting money into, including the history of that cryptocurrency, its usability, the popularity of it currently, as well as any possible competitors gaining traction. These are all going to be factors in whether the price will go up or down and could give you some better indicators as to whether it’s the right time to invest or not.
Stop Loss Orders
Many traders operate using automated systems as this can allow them to get on with other important trades and their general lives without needing to watch their accounts 24/7. There are some very useful automated orders that traders can utilise to reduce their risk of losing money on these investments. The most common of these are the stop loss and take profit orders. The former of the two is where you assign a specific value that, if the price of the stock or currency in question drops to that particular value, your open position for trading will be automatically closed, preventing anyone from buying from you. This is beneficial as it prevents you from selling at a loss, and even though the value of your cryptocurrency or stock may be dropping further than that value, you’re able to ride out the storm in the hopes that the value will rise again. On the flip side, a take profit order registers when your assets reach a particular price and automatically liquidates those open orders, allowing you to make a profit before the price drops again.
The crypto market is also at risk of fraud and one of the most common causes of this is fake currency exchanges. A number of investors have been scammed out of their money and crypto coins via fake exchange sites. It’s so important that you avoid any suspicious sites like this and assume that if something seems too good to be true, it probably is. Only visit popular, reputable exchanges for trading your cryptocurrency. The best way to do this is to research every site before you visit them or make an account, and also gather advice from other traders who can direct you towards these reputable sites. Of course, make sure you know and trust these traders first.
Scams And Cybertheft
The world of tech is always at risk of cyberattacks, and that also goes for your cryptocurrency. Hacks and scams have seen investors losing substantial amounts of money, and tracing stolen cryptocurrency is no easy feat, although there are some that have become much more talented at tracking these criminals down, causing thieves to think twice. In spite of this, however, it’s imperative that you remain vigilant against thieves, and recognise the telltale signs of scams. Only trade via reputable platforms and ensure you are using the most secure crypto wallet possible.