Bitcoin and other cryptocurrencies are known to be volatile, with a drastic fluctuation possible after only one day of trading. The volatility is part of the appeal for day traders since it can mean higher profits, but the trader needs to have a tolerance for the risk.
In this market, as opposed to stocks, traders need to familiarize themselves more with cryptocurrencies in order to do well. Before becoming a trader, a priority is to have disposable income to invest and all other finances well managed. Click to learn what you should know before investing in Bitcoin or cryptocurrencies.
Tips On Investing or Trading Bitcoin and Other Cryptos
More investors are choosing Bitcoin to diversify the holdings in their portfolios. With elevated prices, it appears to be a more accepted albeit speculative and incredibly volatile asset, with the value-based entirely on its appeal for investors. If this shifts, investors can see incredible losses.
That means you not only need to have a high tolerance for risk but also need to be financially secure enough to trade responsibly. A few rules to get started as a beginner in Bitcoin trading include the following.
Financial security
Unlike other investments, Bitcoin and crypto don’t have an underlying asset to back them, such as business performance. Their value is simply based on investor sentiment and what they’re willing to pay. Several factors influence the price such as the demand, the economy, accessibility, and on.
Risky assets like these aren’t for everyone, as some won’t have the tolerance for the risks involved. If interest rates are reasonable, it could encourage a greater appetite for the risks associated with Bitcoin or crypto overall.
As an investor, however, it’s wise to use only disposable funds and otherwise have your finances intact due to the potential for prices to drop significantly and suddenly, resulting in the potential for massive losses.
Choose wisely
When choosing cryptocurrency as an asset, the objective is to select the most popular options such as Bitcoin, those with the greatest market cap. The most popular digital currency staves off the risk and offers more stability, fewer fluctuations, due to a larger following.
Coins like Bitcoin have deeper liquidity; they are well-known and are more likely to have regulatory acceptance and be apt to have greater security measures.
When adding digital currency to an investment portfolio, the holdings should be broad and diverse to accommodate a long-term wealth strategy; avoid putting all your funds into this one asset.
Long-term holdings
Due to the intense volatility, beginners to Bitcoin investment may do better to buy and hold until they become more seasoned in the market. This allows you to follow rising prices or spikes without the stress of knowing when the right time to sell is. This offers a more tolerable risk.
While still volatile, the pressure of selling and then the price rising won’t be a factor. Visit How to sell Bitcoin – Bitcoin Magazine – Bitcoin News, Articles and Expert Insights – for tips on selling Bitcoin.
Commission-free trading
Unlike stocks with commissions that can plummet close to zero, crypto trades will rarely be free. While a couple of popular brokers offer commission-free trading they also establish a spread mark-up where the buy price is greater than the market and the sale price will be less.
In this scenario, the broker makes a profit; however, their advertising claims them to be commission-free. Many brokers are less transparent about their mark-up price, while some take great strides to hide it from clients.
Some traders could see as great as a 1 percent fee on all sides, which can add up fast when making numerous day trades per week. Regardless of whether you gain, 1 percent will be attached to the trade. Reputable brokers often offer ways to get around the fees.
Taxed profits
When learning how to trade Bitcoin in Canada, many prospective traders are under the misperception that cryptocurrency trades can’t be taxed due to semi-anonymous ownership.
The IRS – Internal Revenue Service doesn’t see it that way and will charge capital gains tax. These are typically assessed higher than ordinary rates for short-term trading.
Exchanges and brokers must report any losses or gains via the 1099 Form. While they don’t always do that, you’re still responsible for those taxes. As is true with stocks, winning trades can be offset by losses. You can decrease the tax burden at the end of the year by selling the less profitable.
ETFs as an option
For investors who prefer trading but want the least cost, using ETFs – exchange-traded funds are a viable option for trading Bitcoin or another popular cryptocurrency. ETFs offer numerous benefits over direct trading:
- A traditional broker will have a proven track record for secure and legitimate dealing. Crypto exchanges are fraught with fraud and enlist minimal security measures.
- Brokers impose no transaction fees when purchasing ETFs, where exchanges can sometimes be costly.
- You don’t have to worry about safeguarding or securely storing digital currency; ETF managers handle this aspect.
Final Thought
Volatility can make day trading difficult, especially for those new to the investment. A priority, however, is to participate only when you’re financially secure and pay attention to the costs. It may take some time, but these can gradually consume your capital.