The crypto market experiences extreme levels and patterns of volatility relative to other exchange markets in the world. For example, Bitcoin ($BTC) saw its price increase by 125% in 2016 but saw it skyrocket by more than 2000% in 2017. Fast-forward to 2021, Bitcoin has seen its price be nearly halved since early May. Crypto undoubtedly comes with a much greater inherent risk than a stock or a bond would. Before you jump into the crypto market, there are 8 principles you must understand.
Principle #1: Research Thoroughly
In 2021, market accessibility has been revolutionized by brokerages and exchanges like Robinhood and Coinbase. Even though this seems like a good thing for the growing population of young investors, it has really hurt them overall. The new generation of investors entering the market doesn’t like to perform the adequate research necessary to make an informed investing decision. In all markets, but especially the crypto market, thorough research must be a priority. With Invezo, you have access to crypto data for 200+ different cryptocurrencies. Use this data to guide your crypto investments and read the articles associated with the given coin.
Principle #2: Resist FOMO
Investors are too often intrigued by their friends who introduce them to a stock/crypto that they’ve already profited nearly 5-10x from. Before this wave ends, an investor will feel the urge buy in and hope to replicate the same gains. However, this almost always ends poorly.
Maintaining your discipline when the hits a high or a low is very hard. When the market hits a high and you’re seeing daily returns of 10%+, it’s hard to resist the urge of holding onto the investment for too long. On the other hand, when the market hits a low, fear and anxiety set in, and you feel the impulse to sell. It’s important in both situations to remain objective and think about if FOMO is taking over your investing tactics. If you feel like you’re about to impulsively buy or sell a crypto, it’s probably good to take a step back or seek advice form a trusted friend who knows what they’re doing. Trading based on your gut will likely lead to unfavorable results.
Principle #3: Verify the Information You Hear
This is the biggest piece of advice I have to offer. Generally, the average crypto investor who scouts all the discord channels will claim that their crypto trading strategies are superior to everyone else. They claim they have this specific edge over the rest of the market in their trading strategies. However, more often than not, they’re straight up lying to you. Many of these people are frauds trying to get you to buy some shrewd coin that has no value in the long run.
To avoid falling into this trap, verify the information you hear from friends, TikTok, or people in discord groups. Invezo is a great resource to use for crypto research and can give you all the data and news articles you need.
Principle #4: Don’t Judge a Book by its Cover
Not all coins are created equally. Each crypto is created to serve a different purpose. The people who design the thousands of cryptos available around the world write their own rules for how they should work. This is an important feature of the crypto market because it demonstrates the purpose of blockchain, a decentralized network to manage all transactions performed across the network. Using blockchain, people can perform transactions without clearing a central authority, freeing the virtual currency from government regulation.
Principle #5: You Can Buy Fractions
When purchasing crypto, you don’t need to purchase full coins. You are allowed to purchase 0.1 coins, 0.7 coins or even 0.000001 coins. Even if you throw just $20 or $30 into Bitcoin or Ethereum, you can play around with it and see what happens. Knowing this will prevent you from accruing massive losses in the crypto market.
Principle #6: Understand Tax Laws
Think of your crypto holdings as property, not currency. The IRS treats virtual currency in this way. This means that if your theoretical investment in Bitcoin doubles in value and you decide to spend the earnings on any purchasable product (no matter how small), you’re required by the IRS to report it as a capital gain and pay tax on it.
With this in mind, it’s important to understand the difference between short-term and long-term capital gains. Short-term capital gains result from selling capital assets owned for 1 year or less. The short-term capital gains tax fee corresponds to the ordinary income tax brackets (10%, 12%, 22%, 24%, 32%, 35%, or 37%). Alternatively, long-term capital gains result from selling capital assets owned for more than 1 year. The long-term capital gains tax fee is 0%, 15%, or 20% depending on your taxable income. Clearly, it’s preferable to hold a crypto or stock for longer than 1 year to avoid the short-term capital gains tax.
Principle #7: Don’t Put in More Than You Can Afford
You hear stories about this all time. Crypto is unregulated so there’s no FDIC insurance for your investment. This means that if the country turned upside down and a bank run occurs, where the whole country races to withdraw their money from the banks, you could completely lose your investment. The only thing that’s promised when you purchase a crypto is the volatility and stress it will give you.
Principle #8: Don’t Stress!
Like I said earlier, volatility is a given in the crypto market. I can guarantee your investments are going to fluctuate in price constantly and will likely induce some stress and anxiety. Don’t let this happen to you! This is only natural. Imagine yourself 5 years down the road holding the same amount of the investment that you purchased. I promise it will have likely increase 2x in that 5-year stretch if you just remain patient.