Cryptocurrencies rise to fame, and explosive price growth over the past few years will go down in the history books. In 2017 alone, bitcoins price grew over 2,000 percent, starting at $1,000 at the beginning of the year and topping out around $20,000. With cryptocurrencies becoming more and more popular, will there be another run? Keep reading this guide to discover valuable tips for new crypto investors that will get you started in the world of decentralized finance.
Basic History of Cryptocurrency
Cryptocurrencies have recently taken the world of digital finance by storm. But, they have actually been around for some time.
In fact, the idea of cryptocurrency can be traced back to the 1980s when David Chaum developed an algorithm that laid the foundation for encrypted money exchanges.
This innovation paved a path for other digital currencies, such as digicash and e-gold, before the infamous bitcoin was introduced by a creator who goes by the name “Satoshi Nakamoto.”
Bitcoin was first introduced in 2009, and others like Litecoin and Eutherium came to the market shortly after.
Some Tips for New Crypto Investors
Cryptocurrencies are incredibly volatile and can change price direction in a matter of seconds. Here are nine strategic tips to get you started trading cryptocurrencies.
1. Assess Value (Cheap vs. Expensive)
When it comes to cryptocurrencies, many first time investors find it challenging to place a value on them and determine which cryptocurrencies are cheap or expensive.
The best way to do this is by taking a look at the cryptocurrencies market capitalization. One of the most consequential mistakes a new trader can make is believing because the crypto is cheap, it is worth investing in.
Many times it is quite the opposite – it is cheap because it isn’t as valuable as some of the others such as bitcoin and ethereum. The market capitalization of a cryptocurrency is calculated by taking the current coin price and multiplying by the number of coins outstanding.
This can look deceiving to the untrained eye. Take for example, Ripple, it currently trades at a price of around $0.22, but it still has the third-highest market cap among cryptos.
How is this possible? Because of the supply of ripple coins which is currently over 99 billion.
2. Manage Risk
There is always a risk while investing, but managing the risk can help minimize losses incurred during unexpected price swings.
Managing risk consists of many factors, including:
- Size positioning
- Stop losses
- And understanding market cycles
Of course, the larger the position you initiate, the more risk you will be taking on. Timing is essential to understand where support and resistance are, and how to utilize those prices.
Stop losses are essential for cryptocurrencies because they are volatile in nature and could change prices significantly in a short period of time. With stop losses, its also consequential to keep in mind you can get stopped out fairly easily with a large sell order so make sure you are looking at technical levels on where to place stops.
3. Keep Trading Fees in Check
Many new crypto investors will mistakenly believe that trading fees are similar to the fees when trading stocks this is not always the case. Sometimes trading fees for cryptocurrency can be significant, making it hard to come away with a profit.
Luckily, there are a few options available to help you save money on fees. Etoro is a trading platform with incredibly low fees, making it a popular choice for beginners. Coinbase is widely considered one of the most popular trading platforms, that makes trading very easy with high liquidity and instant buy options.
If you are trading multiple times a day, it’s critical to go with a trading platform that can cater to your needs without you having to break the bank.
4. Beware of News Sources
Keeping up with the news can be beneficial, but you need to take what they say with a grain of salt sometimes. News sources can sometimes be misleading in their approach leading to overreactions.
According to a research report from ResearchGate, analysts observed an interesting trend in the cryptocurrency market. As prices in cryptocurrencies are going up, the reaction was minimal to good news. On the other hand, when prices were falling, responses to bad news was extreme.
The report concluded that with training, investors experienced less influence from large traders trying to influence them. Be careful about what you read in the media, learn from other traders’ mistakes, and stick to your plan.
5. Historical Prices
Cryptocurrencies are known for their volatility or rapid price changes. If you have read anything recently on the prices of bitcoin, you will have noticed many people talking about the $10,000 price level.
The reason this level is so important is because of the massive supply and demand noticed around that level referred to as a “pivot point.”
Over the past few years, cryptocurrencies, lead by bitcoin, have made impressive price gains topping out at all-time highs of around $19,700. However, since hitting all-time highs, bitcoin has struggled to rebound, hovering around $10,000.
One year ago, bitcoin was hovering just over $10,000 before dipping to around $7,500 and then climbing back to the $10,000 pivot point before falling when the pandemic hit.
Go back just five years ago, and it’s an entirely different story sitting at prices of just over $200.
6. Types of Cryptocurrency
Bitcoin is by far the most recognized cryptocurrency, but did you know there are over 1600 different cryptocurrencies?
The digital currencies are typically divided into three types:
- And Tokens
Bitcoin is relatively straightforward -being the infamous crypto. Altcoins, or alternative crypto coins, are just alternatives to bitcoin. Some of the more attractive altcoins include Litecoin, Dogecoin, Ethereum, and Ripple.
Tokens are slightly different. They are created and distributed by an initial coin offering (ICO) – which is similar to an initial public offering (IPO) with a stock.
7. Ease Into It
The thrill and excitement of trading can be overwhelming for new investors, leading some to risk more capital than they should.
By easing into positions, it can help create a favorable situation where if the price falls, you can “buy the dip” and average your position down. This is where amateur traders get caught up they think by throwing all their money into it, they will get larger returns.
Sometimes it happens, but more often than not, they will end up losing a substantial amount of money.
8. Beware of Tax Implications
Depending on your time frame and purpose for investing, it could have implications on your tax returns.
If you are trading cryptocurrencies or holding them for a short period of time (less than a year), it will be considered a short term gain and be taxed anywhere from 10 to 37 percent.
On the other hand, if you invest for the long term (over a year), your profit will be considered a long-term capital gain by the IRS and will only get taxed from zero to 20 percent, depending on your income.
Another common misconception among new crypto investors is that they will only owe taxes on trades cashed out to fiat currencies, like the American (USD) or Canadian (CAD) dollar.
However, this is not the case. You will owe taxes on all transactions, even crypto to crypto trades.
Crypto Investors, Is Bitcoin a Safe Investment?
Cryptocurrencies are a relatively new investment, and many exciting things are going on in the world that could propel them higher.
When asking “Is bitcoin a safe investment,” many factors come into play. The first is that cryptos can be a great hedge (meaning, insurance) against holding all of your cash as currency. Traditionally, government issued fiat currencies don’t tend to do well over long periods of time, especially during economic downturns and national crises.
Cryptocurrencies also have the potential to go up in the value (appreciate) over long-periods of time.
On the flipside, though, crypto prices can be quiet volatile and the act of owning cryptocurrency won’t pay you any cash flow. This means you can’t use it to produce multiple flows of income.