Ambiguous regulations in the cryptocurrency space allow for massive room for new crypto outlets to thrive unchecked.
Everyone around you seems to be trading in cryptocurrency and discussions around ethereum and bitcoin seem to be commonplace these days, right? If you’re also surrounded by the crypto frenzy and want to dabble in the newest asset class in town, here are some tips for you.
Delhi-based Shivam Srivastava, a trading mentor and a day-trader himself, stresses the importance of risk management and domain understanding before anything else. “While trading advice remains mostly the same across all asset classes, cryptocurrency trading needs additional emphasis on risk management strategies, since the leverage involved is super high,” he said.
Here are a few points you should stick to, so that you’re able to trade sensibly and profitably, without incurring massive losses in your trades.
Bitcoin hit its all-time high of $64,863 in April 2021. But if you trace its 52-week trend, you’ll find that the alternative currency was also valued at $8,900 within this year. It's no surprise that bitcoin has a mouth-watering ROI (Return on Investment) of almost 24,000 percent since its inception.
Considered to be fundamentally stronger, ethereum, which has an ROI of almost 68,000 percent since its launch, did not fare much differently. Over the last three months, its prices have dipped as much as $1,600 and risen to almost $4,300. Its 52-week trend is on the same lines as bitcoin, trading at just $219 to rising sharply to $4,362.
These numbers can be tempting, but remember to start small and invest only what you are willing to lose, despite a voracious risk appetite when you are starting out. The cryptocurrency market is extremely volatile and overnight crashes are entirely within the scene.
Currently trading at $32,000, bitcoin registered a fall of 15.95 percent over the last 7 days. Inching closer, ethereum is trading at $1,900, down almost 21 percent since last week. Such dips and rises are common and experts recommend not allocating more than 2 percent of your entire portfolio to cryptocurrency. Getting familiar with market volatility and dynamics is important before you dive all in!
Bitcoin and Ethereum for the go
Every investor, irrespective of their risk-taking capabilities, makes specific portfolio allocations for blue-chip companies in the market- stable, large, and well-known companies that are known to deliver good returns consistently.
In the cryptocurrency world, bitcoin and ethereum are somewhat of blue chips. Sure, it is tempting to buy relatively unknown cryptocurrencies that become an overnight sensation at low prices and benefit from their dips and rises, but since bitcoin and ethereum dominate the cryptocurrency market, there are fewer chances of them being rigged and manipulated, unlike other currencies in the league.Trustworthy platforms
Ambiguous regulations in the cryptocurrency space allow for massive room for new crypto outlets to thrive unchecked. But with this rise, there has also been a sharp ascent in the number of scams and investor fraud. The recent case of the Cajee brothers, who vanished, along with Bitcoin worth $3.6 billion from their cryptocurrency investment platform in South Africa, brings this to light.
Recently, FTC (Federal Trade Commission) also reported that around 7,000 US consumers lost more than $80 million on various cryptocurrency scams between October 2020 and March 2021, with an average of $1,900 per transaction.
Srivastava recommends trading via trusted platforms that have a solid market reputation, along with having a cryptocurrency wallet. This wallet, which can either be a device or a program, will protect your crucial information like storing public and private keys of your cryptocurrency transactions.
“If you’re looking to invest in cryptocurrency from a long-term perspective and do not plan to engage in frequent transactions, having a hardware wallet is a must since they are very secure. Otherwise, platforms like Binance and WazirX also provide such wallet services. If you’re a frequent trader, a software wallet would serve your purpose well,” he said.Monitor developments globally and at home
Elon Musk tweeting about bitcoin, China cracking down on cryptocurrency mining, El Salvador legalising bitcoin, the RBI clarifying its stand and support with the Supreme Court circular that permitted cryptocurrency trading- all of these are key developments that dramatically affected the market movement. Be sure to stay abreast with all decisions, both in India and globally, that affect the price of these alternative currencies.
Also remember to disclose your income from cryptocurrency trading, since the current IT rules, despite having no clear provisions for cryptocurrency, do not exempt income earned from this source. Sources have also notified that the government may categorise them as capital assets and not as currency, which would mean that they will be subject to different tax treatment.
Saurabh Salgaonkar, a day trader and trading mentor, singles out patience while trading in cryptocurrency. “Not investing in cryptocurrency is not a great idea, but also at the same time expecting quick gains from crypto is very foolish. It has an upside of infinite but the downside is like whatever you invest, it can go down to zero. So, acquainting yourself with the market is important,” he elaborates.