Trading is arguably the most exciting money-making activity one can do sitting at the comfort of their home. Add the flavour of cryptos to it, and you’re set for a ride on the emotional roller-coaster. It’s like dipping a ghost pepper in tabasco sauce, when you add the volatility of cryptos to the already volatility-struck activity of trading. So it’s no rocket science that you’d need some checks in place that would act as soothing milk when the pepper hits. And that’s what this article is about: The 7 crucial things you MUST know when trading in cryptocurrencies. Here’s what they are:
1. Yourself
As weird as it sounds, knowing yourself is perhaps the first step to starting your crypto trading journey. The whole idea here would be to follow the principles of trading psychology. Identify your ability to take risk, trading horizon, capital limits, preferred habitats, and most importantly the rules you’d stick by when stuck in an unfavorable situation. Also, don’t get confused between your ‘willingness’ and ‘ability’ to take risk. Knowing these would help you cut your losses earlier and avoid the phenomenon where a trader turns into an investor.
2. Your Strategy
The whole idea behind trading is to win more than you lose, and if your strategy checks this requirement, the only barrier between you and profits would be your discipline. That being said, a reliable strategy with even 60% of accuracy can lead you to be profitable if you’re disciplined enough to follow it religiously. If you have a potential strategy in mind but are not aware of its accuracy, try paper trading or back testing it before entering the actual cryptocurrency market.
3. The Market
The idea of cryptocurrencies is only more than a decade old currently, which is relatively young compared to the traditional stock and bond markets. This adds to its volatility as younger assets are less-trusted and face the fire first when any negative news emerges. So getting into crypto trading, stay aware that the assets you’d be trading are prone to extreme levels of volatility, with some moving more than 75% up/down on a daily basis.
4. The Exchange
Just like many other assets, cryptocurrencies also trade on certain exchanges. But there’s a small catch. For stocks, the exchange facilitates trading while the depository guarantees the trades, but for cryptos, the exchange is the facilitator and guarantor who holds the assets. So if the exchange you rely on goes bankrupt, all of your holdings go down with it too. This makes choosing the exchange you trade on a very important consideration.
5. Taxability
With supernormal profits come supernormal taxes. In almost all jurisdictions where crypto trading is legal, the governments have placed discouraging taxation requirements, and not abiding by them can lead to serious consequences. So let’s say your strategy did work out and you managed to make thousands of dollars in profits, a significant portion of the same is then to be paid in taxes, and not doing so can lead to penalties that can be higher than your profits.
6. Capital
The golden rule for crypto trading is: “Risk only what you’re ready to lose.” And that’s really quite self-explanatory. Your entire capital can multiply 10 times or go bust within a blink of an eye, and this isn’t even an exaggeration. The best precaution you can take against this is trading with only the sum that you can afford losing. But how do you measure this amount? Think of it as the sum you can lose without losing your sleep and peace of mind.
7. Purpose
Lastly, understand and absorb in your mind the actual purpose of trading. Many people see it as a ‘get-rich-quick’ scheme, something that couldn’t be farther from the actual truth. Try to look at it as a business. Protect your capital like you would in a business and exploit the opportunities for which the profit is almost certain. If you don’t do this, your idea of trading would be no better than gambling and the market you trade in would be no different than a digital casino.
With these seven checks in place, you’d be ready to step into the crypto trading world and even enjoy the process of it. Just make sure to act as an informed trader and not the one who gives in to their emotions or bets on someone else’s belief. We wish you a profitable journey ahead. Happy trading!
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