You’ve heard about cryptocurrency for years, but have you taken the plunge into the world of investing? Throughout its history, cryptocurrencies have been incredibly volatile and have created opportunities to make a profit. Bitcoin and Ethereum might seem intimidating if you aren’t sure where to begin. If you’re not currently involved in the crypto market, our crypto tax accountant team has outlined some basics for you to keep in mind.
#1: Understand your investment
Similar to any financial investment that you’re making, you’ll want to understand where your money is going and why. As there are thousands of cryptocurrencies on the market, you’ll want to have a basic understanding of the functionality of the specific investments that you’re making. Before putting your money behind popular coins such as Cardano, Dogecoin, or Ethereum, you’ll want to understand how you’ll be able to gain a return on your investment.
#2: 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.”
#3: Leave mistakes behind you
While you’ll want to take the lessons you’ve learned with you along the process, make sure you don’t extrapolate past scenarios into the future. There’s no way to exactly predict how the market will ebb and flow, so you’ll want to continue to make decisions on the current market. Even if a cryptocurrency has performed one way in the past, don’t let this be the basis for your present decisions.
#4: Manage your 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.
#5: Only invest what you can afford to lose
There’s an inherent risk with investments, and this is especially true with cryptocurrency. Don’t put money toward it if you aren’t able to lose all of it.
Bonus Tip: Work With a Professional
If you’re feeling hesitant but you still are interested in cryptocurrency, why not turn to an expert? There are plenty of professionals such as our team at Founder’s CPA who can assist you with various aspects of your cryptocurrency investments.