Managing Crypto Investment Risks When Trading
Risk is an inherent part of any investment portfolio. But, as with any financial venture, we should endeavor to minimize this risk. There are strategies we can employ to aid us when working this out. Here we present our guide to managing investment risk when trading in crypto.
All Investments can Decrease or Disappear
How we can expect a return on any investment is that we are capitalizing on the risk. Essentially, we are making a bet on the value of a commodity. In the case of crypto, the commodity is the virtual currency. We need to be aware of what makes a cryptocurrency rise and fall in value? There's no secret as it's the same as any other tradable item, supply, and demand. The more people want it, the higher it will sell for. Also, the difficulty of mining may lead to miners charging more for a new coin.
Fraudulent Transactions
Although we know crypto to be one of the most resilient types of currency, it is not risk-free from fraud. The risk is in choosing a disreputable coin exchange. A coin exchange is where you buy virtual currencies unless you have the time and knowledge to mine them yourselves. Research the exchange, and ensure they have a good track record of happy customers. New websites or those with high numbers of negative reviews should be avoided.
Choosing the Best Crypto
A recurrent criticism of all cryptocurrencies is that their value tends to be more volatile than traditional currencies and investments. A good strategy for successful trading is to be monitoring prices and buy or sell accordingly. To be profitable with this strategy, you need to jump on opportunities quickly. You can easily convert XRP to BTC or any other cryptocurrency.
No Guarantees
One of the defining features of cryptocurrency is that they are unregulated, unlike traditional currency, which is issued and regulated by a central bank. Secrecy is often one of the attractions to various groups, who can trade or earn without scrutiny. Lack of regulation can also be a downside, as if there is an issue or dispute there is no central authority to turn to. You can still pursue civil court action against another party, however, be aware that cryptocurrencies are often considered property rather than currency in the eyes of the law. This means it will be an exchange rather than a purchase, technically.
Undeclared Income
Often people trade in crypto because since it is easier to keep transactions secret. You can make a huge profit without anything ever showing up in your regular bank account. But just because you don't see any dollars, euros, or pounds in the bank doesn't mean it's not income. The issue may become clear, as we mentioned earlier, Bitcoin is not currency, so you may not be liable for tax when you buy or trade it, but the second you convert it back to real cash, it could be considered profit. Other taxation attempts by the authorities involve treating the coins as Capital Assets and looking for Capital gains Tax.
This article has been contributed on behalf of Paxful. However, the information provided herein is not and is not intended to be, investment, financial, or other advice.
