Cryptocurrency is here to stay and it’s only a matter of time before it attains credibility on par with traditional securities such as forex, stocks, commodities, and bonds. In the last two years, cryptocurrencies have delivered an impressive performance that outpaced stocks, forex, and all other commodities combined. Of course, in the year-to-date period, the cryptocurrency market has mostly been in a downtrend, but traders would still managed to make some gains off cryptocurrencies due to the inherent volatility of the market.
If you are interested in trading cryptocurrencies, below are 5 rules that you must diligently follow to avoid pitfalls that could result in trading losses.
- Don’t invest more than you are prepared to lose
When the cryptocurrency market is in a bull run, it tends to deliver exponential returns; hence, the amount of money you’ll make is often dependent on the size of your portfolio. The lure to go all in with your entire net worth will be strong, but the unspoken reality is that cryptocurrency losses are often quick and steep. You should consider any funds you want to put into cryptocurrencies lost because a single government policy could wipe out much of the crypto valuation overnight. It is financial prudence not buy cryptocurrencies with loans, mortgages, credit card, or funds from the liquidation of all your assets.
- When Bitcoin sneezes, the market catches a cold
Bitcoin is still the biggest cryptocurrency in the market and its performance determines how the other coins fare. Practically all the altcoins in the market are pegged to Bitcoin. When the price of Bitcoin soars, altcoins tend to tank because many investors want to ride the profitable wave of a credible cryptocurrency. When the price of Bitcoin nosedives, altcoins also tend to trash because many investors want to sell their altcoins so that they can seek relative stability in Bitcoin or fiat. You’ll most likely get the best out of altcoins when the price of Bitcoin is stagnant or when it is rising/falling organically.
- When not trading, don’t keep your funds on an exchange
Nobody trades 24/7/365. Most people conduct their trading activities in short bursts over several days each week. In fact, day traders who supposedly trade round the clock don’t leave their positions open overnight while they go to bed. If you won’t be trading for any considerable period, it’s in your best interests to move your funds away from the exchange into cryptocurrency wallets that you hold the private keys. There different options available in terms of wallets, you can do cold storage or hot storage, the most important thing is not to keep your coins in a exchange when you are not trading – you’ll minimize the risk of losing your coins to an heist or hack.
- Diversification is in your best interest in the long term
Cryptocurrencies are still young, and many people believe that the market has not even begin to scratch the surface of the potential value in crypto. The market cap of the entire cryptocurrency market is currently about $219B and Bitcoin controls about $114B to mark a 52% market share. If the market cap of the entire cryptocurrency market will double or triple; it is highly unlikely that the growth will be driven by a single coin. The odds are high that the actualization of the true worth of cryptocurrencies will be driven by consistent growth in multiple coins over the long term.
- No one ever lost money taking a profit
Lastly, avoid the temptation to be greedy especially when trades are going in your favour and you are feeling invincible. If you’ve set your trading goals to exit a trade with 30% or 40% profits, no law prevents you from taking some profits off the table at 20%. The worst part however is reaching your 40% profit goal and still staying in the trade in the hopes of reaching a 60% profit. If you wait too long in the hopes of getting a bigger profit, you might find yourself losing the profit that you had previously earned. In fact, a winning trade can easily turn into a losing trade of a sharp reversal begins. Learn to late your profits at decent highs and then make a re-entry on the dip.
