Cryptocurrency Questions
Cryptocurrencies have performed debatably in 2018, yet are continuing to attract new investors in 2021. However, most beginners have difficulties finding the best cryptocurrency to invest in 2021. We’ve all been there, so don’t worry! I understand how confusing it is when you first begin looking for new cryptocurrency investments. Get the ultimate FREE cryptocurrency quiz with show/hide answers and over 100 different questions about Bitcoin, Cryptocurrencies and Blockchain. View Cryptocurrency Questions.docx from HIST 1301 at El Paso Community College. Questions 1) In your own words, briefly describe what the fox business article states about cryptocurrency?
Last Updated: December 16, 2020
Taxes aren’t the first thing most investors consider when jumping into the world of bitcoin and cryptocurrencies. However, as the IRS continues to crack down on crypto tax compliance, it’s becoming increasingly important to learn about how cryptocurrencies are taxed.
In this guide, we discuss everything you need to know about cryptocurrency taxes. From the high level tax implications to the actual tax forms you need to fill out, you’ll learn all about what you need to stay compliant and get your taxes done properly.
This guide was created by the tax team at CryptoTrader.Tax — Today, over 50,000 crypto investors use CryptoTrader.Tax to properly report their cryptocurrency taxes. You can create a free account here.
This guide breaks down the specific crypto tax implications within the U.S. You can see other country-specific tax guides here.
The Basics of Crypto Taxes
In the U.S., cryptocurrencies like bitcoin are treated as property for tax purposes.
Just like other forms of property like stocks, bonds, and real-estate, you incur capital gains and capital losses on your cryptocurrency investments when you sell, trade, or otherwise dispose of your crypto.
For example, if you bought $10,000 worth of bitcoin in October and sold it two months later for $12,000, you would incur a $2,000 capital gain from the sale of your bitcoin (12,000 - 10,000).
Depending on what tax bracket you fall under, you will pay a certain percentage of tax on this capital gain. Tax rates fluctuate based on your personal tax bracket and whether the gain was short term or long term (more on this later).
Outside of buying, selling, and trading, if you earn cryptocurrencies—whether through a job, mining, staking, airdrop, or interest from lending activities—you are liable for income taxes on the US Dollar value of your crypto earnings.
We will walk through examples for all of these scenarios further below.
When Do You Owe Taxes On Your Crypto?
Whenever you incur a taxable eventfrom your crypto investing activity, you incur a tax reporting requirement.
A taxable event simply refers to a scenario in which you trigger or realize income. As seen in the IRS virtual currency guidance, the following are all considered taxable events for cryptocurrency:
- Trading crypto to fiat currency like the US dollar
- Trading one crypto for another cryptocurrency
- Spending crypto to purchase goods or services
- Earning crypto as income
Below, we run through practical examples to illustrate each of these taxable events.
1. Crypto ➔ Fiat (USD)
Emma buys 2 ETH from Coinbase for $1,200. A few months later, Emma sells her 2 ETH for $1,000.
Selling crypto for fiat currency is a taxable event. In this example, Emma incurs a $200 capital loss (1,000 - 1,200). This loss gets deducted and actually reduces Emma’s taxable income.
2. Crypto ➔ Crypto
John purchases 5 Litecoin for $250. After holding onto his Litecoin for a couple of months, John trades all 5 Litecoin for 0.5 ETH. At the time of the trade, 5 Litecoin is worth $400.
In this scenario, John incurs a taxable event by trading his Litecoin for Ethereum. Trading one crypto for another is treated as a disposal, and here John incurs a $150 capital gain from the trade which he would need to report on his taxes (400 - 250).
3. Crypto ➔ Goods/Services
Taylor owns 5 bitcoin, each of which she bought for $100 pre-2014. Taking advantage of her new found wealth, Taylor uses 3 bitcoin to purchase a new Tesla for $51,000. At the time of buying the car, 1 bitcoin is worth $17,000.
In this example, Taylor incurs a taxable event when she disposes of her bitcoin for the new Tesla. She incurs a $50,700 capital gain in doing so (51,000 - 300) and needs to report this capital gain on her taxes.
4. Earning Crypto
Jake runs a cryptocurrency mining operation. Every day, Jake mines 0.5 bitcoin through his crypto mining rigs.
In this example, Jake would recognize income for the USD value of 0.5 bitcoin each day. For example, if Jake mined 0.5 bitcoin today on November 30, 2020, he would recognize $9,750 of income (as bitcoin is currently trading at $19,500 per coin).
When Don’t You Owe Taxes On Your Crypto?
In certain circumstances, you will not trigger any taxable events when transacting with crypto, and you will not have to pay or report any cryptocurrency taxes.
You do not trigger a taxable event when you:
- Buy and hold crypto
- Transfer crypto from one wallet you own to another wallet you own
1. Buy and Hold
If you simply buy bitcoin or another cryptocurrency and hold it in a wallet, you do not have any sort of tax reporting requirement as you haven’t realized a gain or loss on your investment yet.
Once you sell, trade, or trigger a taxable event by disposing of the coin, this is when you realize a capital gain or loss.
2. Wallet ➔ Wallet
Sending one cryptocurrency from one wallet you own to another wallet you own is not a disposal of your crypto. You still own the crypto, and thus you do not trigger a taxable event.
How Do You Calculate Your Crypto Taxes?
To calculate your capital gains and losses from each of your crypto sells, trades, or disposals, you simply apply the formula:
Fair Market Value - Cost Basis = Capital Gain/Loss
Fair Market Value
Fair Market Value is simply the price an asset would sell for on the open market. In the case of cryptocurrency, this is typically the sale price in USD terms.
Cost Basis
Cost Basis represents how much money you put into purchasing your property (i.e. how much it cost you). Cost basis includes purchase price plus all other costs associated with purchasing your cryptocurrency (fees, etc).
From our examples above, it’s easy to see this formula in action. If you buy 1 Litecoin for $250, your cost basis is $250 per Litecoin. If you sell or trade it when it’s worth $400, that $400 is the fair market value. Applying the formula:
$400 (Fair Market Value) - $250 (Cost Basis) = $150 Gain
Fairly straightforward.
Now, let’s dive into a more complex example to see how you would calculate your gains and losses using this same formula when you have a number of transactions instead of just one or two.
Transaction History Example
Say you have the following transaction history on Coinbase:
- 1/1/20 - Buy 1 BTC for $12,000
- 2/2/20 - Buy 1 BTC for $10,000
- 3/3/20 - Buy 1 BTC for $8,000
- 4/4/20 - Trade 0.5 BTC for 8 ETH (0.5 BTC was worth $4,000 at this time)
With this transaction history, you first trigger a taxable event (and thus a capital gain/loss) when you trade 0.5 BTC for 8 ETH. To calculate the gain/loss then, you need to subtract your cost basis of 0.5 BTC from the fair market value at the time of the trade.
The question here is, what is your cost basis in the 0.5 BTC that you traded for 8 ETH? After all, you have purchased 3 different bitcoins all at different prices prior to this trade.
To answer this, you have to determine which bitcoin you are disposing of in this scenario.
To determine the order in which you sell various cryptocurrencies, accountants use specific costing methods like First-In First-Out (FIFO) or Last-In First-Out (LIFO). The standard method is First-in First-out.
These costing methods work exactly how they sound. For First-In First-Out, the asset (or cryptocurrency) that you purchased first is the one that gets sold off first. So you are essentially disposing of your crypto in the same order that you first acquired them.
If we use First-In First Out for our example above, we “sell off” that first bitcoin which was acquired at $12,000 on 1/1/20. The cost basis in this first bitcoin is $12,000, making the cost basis for 0.5 of this BTC $6,000 (0.5 * $12,000).
As denoted in the example, the fair market value at the time of 0.5 BTC at the time of trading it was $4,000.
So by applying the formula, we can see that this transaction history triggers a $2,000 capital loss (4,000 - 6,000). This loss gets reported on your taxes and reduces your taxable income.
You can learn more about how various costing methods work to calculate your gains and loss for your crypto trades in this blog post: FIFO, LIFO, and HIFO for crypto trading.
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The Challenge For Crypto Traders
As you can see throughout the examples above, to calculate your capital gains and losses from your crypto trading activity, you need to have records that keep track of your cost basis, fair market value, and USD gain or loss every time you dispose of a crypto (trade, sell, spend etc).
Without this information, you aren’t able to calculate your realized income from your trading activity, and you aren’t able to report it on your taxes.
This is extremely challenging for many cryptocurrency investors as most haven’t been keeping detailed records of their investing activity. Trying to track the cost basis and USD prices for all of their cryptos across all of their exchanges, wallets, and protocols at any given time quickly turns into a difficult, if not impossible, spreadsheet exercise.
This is the reason why hundreds of thousands of crypto traders are turning to crypto tax software like CryptoTrader.Tax to automate all of their crypto tax reporting. You can sign up for a free account here.
How Do You Report Crypto On Your Taxes?
If you’re like 90% of other cryptocurrency investors, you likely have only bought, sold, and traded crypto (i.e. capital gains investing activity) via a cryptocurrency exchange. This crypto income is considered capital gains income and is reported as such.
On the other hand, if you earned cryptocurrency—whether that's from a job, mining, staking or earning interest rewards—that earned income is generally treated as ordinary income and is reported as such.
We dive into the reporting for each of these income types below.
Capital Gains and Losses for Crypto
Your capital gains and losses from your crypto trades get reported onIRS Form 8949.
Form 8949 is the tax form that is used to report the sales and disposals of capital assets, including cryptocurrency. Other capital assets include things like stocks and bonds.
To fill out Form 8949, list all of your cryptocurrency trades, sells, and disposals onto Form 8949 (pictured below) along with the date you acquired the crypto, the date sold or traded, your proceeds (Fair Market Value), your cost basis, and your gain or loss for the trade.
Once you have each trade listed, total them up and fill in your net capital gain or loss for the year at the bottom.
For a detailed walkthrough of filling out Form 8949, checkout this blog post: How To Report Cryptocurrency to the IRS with Form 8949.
Ordinary Income
Unfortunately, ordinary income doesn’t fall nicely onto one tax form like we saw with capital gains and Form 8949.
The ordinary income you receive from mining, staking, interest accounts, or perhaps crypto you received as payment from a job get reported on different tax forms, depending on the specific situation.
Schedule C - If you earned crypto as a business entity, like receiving payments for a job or running a cryptocurrency mining operation, this is often treated as self-employment income and is reported on Schedule C.
Cryptocurrency Question 1040
Schedule B - If you earned staking income or interest rewards from lending out your crypto, this income is generally reported on Schedule B.
Schedule 1 - If you earned crypto from airdrops, forks, or other crypto wages and hobby income, this is generally reported on Schedule 1 as other income.
To make things easier for investors, CryptoTrader.Tax generates a complete income report that is included with your completed crypto tax reports. This report details the US Dollar value of all of your cryptocurrency income events that you received throughout the year: mining, staking, airdrops, and more. This income report can be used to complete your relevant ordinary income tax forms like Schedule 1, Schedule B, and Schedule C.
If you have any questions about how your crypto-related income needs to be reported, feel free to reach our live-chat customer support team via the chat widget on our homepage. We have been doing this for a long time and are happy to answer any of your questions!
For a step-by-step walkthrough of the crypto tax reporting process, checkout our explainer video below.
How Much Tax Do You Pay On Your Crypto?
Your personal income tax bracket and the holding period of your crypto assets (short term vs. long term) will determine how much tax (and what % of tax) you pay on your crypto income. This will be different for each investor.
Short Term Capital Gains
Short term capital gains apply for any crypto that was held for less than 12 months.
For example, if you bought Ethereum for $400 and sold it 5 months later for $600, your $200 gain would be a short term capital gain.
Short term capital gains don’t get any special tax treatment. They are simply treated as income on your taxes (just like income from your job), and thus you pay taxes on your short term capital gains according to your personal income tax bracket (outlined further below).
Long Term Capital Gains
Long term capital gains apply for any crypto that was held for 12 months or more.
The government wants to incentivize investors to invest for the long term, so they offer tax incentives for doing so.
Long term capital gains tax rates offer lower taxes than short term gains, and the chart below depicts these rates.
As you can see, holding onto your crypto for more than one year can provide serious tax benefits. If you are in the highest income tax bracket, your taxes on your long term capital gains will be 20% instead of 37% (the highest tax rate for short term gains).
You can use CryptoTrader.Tax to automatically detect which cryptocurrencies in your portfolio qualify for long term capital gains and to help plan for future trades. This can help save you tens of thousands of dollars in taxes in the long-run. Get started for free here.
Crypto Income
Crypto transactions that are classified as income are generally taxed at your personal income tax bracket.
This includes your short term capital gains (as mentioned above), staking rewards, airdrops, and interest earnings.
These income tax brackets are outlined in the chart below.
Example
Let’s say you made $25,000 in short term capital gains from your crypto trading, and this was the only income you had for the year. Would you simply pay 12% of tax on that $25,000?
No. You actually pay 10% on the first $9,875 and 12% on the next $15,125.
How Do DeFi Taxes Work?
Cryptocurrency lending platforms and other DeFi services like Uniswap, Maker, and Compound have exploded in popularity within the evolving crypto landscape.
Receiving interest income from crypto lending activities or liquidity pools is considered a form of taxable income and must be reported on your taxes—similar to mining and staking rewards.
The full tax implications associated with transactions common to the DeFi landscape are outside of the scope of this piece; however, we discuss them thoroughly in our blog post here: The Defi Crypto Tax Guide.
Why Crypto Exchanges Can't Provide Accurate Tax Forms
This is where a big problem exists within the crypto tax space.
Cryptocurrency exchanges like Coinbase, Binance, and others do not have the ability to provide their users with accurate capital gains and losses tax reports. This is not a fault of the cryptocurrency exchange itself, it is simply a product of the unique characteristics of cryptocurrencies—namely their transferability.
Because users are constantly transferring crypto into and out of exchanges, the exchange has no way of knowing how, when, where, or at what cost basis you originally acquired your cryptocurrencies. The exchange only sees when crypto appears in your wallet.
The second you transfer crypto into or out of an exchange, that exchange loses the ability to give you an accurate report detailing the cost basis and fair market value of your cryptocurrencies, both of which are mandatory components for tax reporting.
As you can see pictured below, Coinbase themselves explains to their users how their generated tax reports won’t be accurate if any of the below scenarios took place. This affects over two thirds of Coinbase users which amounts to millions of people.
You can read more about the “crypto tax problem” in our blog post: Why Exchanges Can’t Report Crypto Taxes.
The Crypto Tax Reporting Solution
The solution to the crypto tax problem hinges on aggregating all of your cryptocurrency data that makes up your buys, sells, trades, air drops, forks, mined coins, exchanges, swaps, and received cryptocurrencies into one platform so that you can build out an accurate tax profile containing all of your transaction data.
Once all of your transactions (buys, sells, trades, earnings) are in one spot, you’ll be able to calculate cost basis, fair market values, gains/losses, and income for all of your investing activity.
You can aggregate all of your transaction history by hand by pulling together your transactions from each of your exchanges and wallets. Or you can avoid the manual work and automate this process with the use of crypto tax software.
Crypto Tax Software
Cryptocurrency tax software like CryptoTrader.Tax was built to automate the entire crypto tax reporting process.
By integrating directly with leading exchanges, wallets, blockchains, and DeFi protocols, the CryptoTrader.Tax engine is able to auto-generate all of your necessary tax reports based on your historical data. You can test out how it works by creating an account for free.
How It Works
1. Select each of the cryptocurrency exchanges, wallets, and platforms you’ve used throughout the years.
2. Import your historical transactions by connecting your accounts via API or uploading the CSV transaction history report exported by your exchanges.
3. Finally, generate your tax reports based on this imported data with the click of a button.
Once you’ve generated your tax reports, you can send them to your tax professional or import them directly into your preferred tax filing software like TurboTax or TaxAct.
You can test out the software yourself by creating a free account here.
To make crypto tax reporting as easy as possible, the CryptoTrader.Tax team has partnered with TurboTax. This allows your tax reports to be imported directly into your TurboTax account.
How Does The IRS Know About Your Crypto?
The IRS uses a variety of tactics to detect cryptocurrency investments and unreported income. The most predominant of which is the 1099 reporting system.
Major exchanges like Coinbase, Gemini, Uphold, Kraken, and others report certain customer activity to the IRS using form 1099-K and/or other related 1099’s. These 1099’s all serve the same general purpose: to report non-employment related income to the IRS.
Both you and the IRS get sent a copy of these forms at year-end.
If the IRS receives a 1099 from your crypto exchange but sees no cryptocurrency income reported on your taxes, your account will be flagged and an automated CP2000 letterwill be sent alerting you of your non-reported income and tax liability.
You can learn more about how 1099-K works for your crypto exchange activity here.
Outside of 1099 reporting, the IRS works with blockchain analytics companies like Chainalysis to track cryptocurrency movements directly on-chain. Since 2015, the IRS has spent more than 10 million dollars on Chainalysis contracts. They use this data to identify tax fraud and money laundering.
What Happens If You Don’t Report Your Crypto Taxes?
Intentionally not reporting your cryptocurrency gains, losses, and income on your taxes is considered tax fraud by the IRS.
The IRS can enforce a number of penalties for tax fraud, including criminal prosecution, five years in prison, along with a fine of up to $250,000.
Over the past two years, the IRS has aggressively been cracking down on cryptocurrency tax compliance. The agency has sent tens of thousands of warning and action letters to Coinbase users suspected of inaccurate tax reporting. It has also updated the main US income tax form (1040) to include a question that every US taxpayer must answer under penalty of perjury:
“At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
With this much scrutiny on the cryptocurrency asset class, it’s likely that we will see audits and criminal tax prosecutions continue to increase as cryptocurrency and bitcoin adoption accelerates.
How Do Other Countries’ Handle Crypto Taxes?
Similar to the U.S., countries all over the world have started taking action and enforcing cryptocurrency-related income taxes. While the tax rules are very similar to the U.S., small differences do exist. For more detailed information, checkout our guides on various countries below:
How Do You Lower Your Crypto Taxes?
As with any other form of income, there are certain steps and actions you can take to actively minimize your cryptocurrency-related tax obligations. We discuss some of these strategies below.
Tax Loss Harvesting
Tax loss harvesting is the practice of selling a capital asset at a loss to offset a capital gains tax liability. It provides one of the best opportunities for investors to reduce their cryptocurrency gains for the year.
Example:
Amy has realized $15,000 of capital gains by selling her bitcoin at its height this year. Amy is also still holding an amount of XRP in her portfolio which she originally purchased for $12,000. Today, that amount of XRP is worth only $5,000.
In this scenario, Amy can “harvest” her losses in XRP by selling it or by trading into another cryptocurrency. This triggers a taxable event and realizes $7,000 of capital losses (12,000 - 5,000).
Amy’s $7,000 loss reduces her overall capital gains for the year to $8,000 (15,000 - 7,000).
You can use the CryptoTrader.Tax Tax Loss Harvesting Dashboard (as pictured below) to automatically detect which assets in your crypto portfolio are “underwater” and thus present the best tax loss harvesting opportunities.
Learn more about how you can tax loss harvest with cryptocurrency here.
Long Term Capital Gains
For any significant cryptocurrency gains that you plan to realize, you should see if you have the ability to lock in long term capital gains rates.
Remember, long term capital gains apply for crypto that is held for longer than 1 year, and they offer significantly lower tax rates when compared to short term gains.
Prior to selling or trading, you should review your portfolio to see which assets qualify for long term gains and which do not. This is a great strategy to help lower your cryptocurrency tax bill for the year.
What If You Forgot to Report Your Crypto Taxes?
If you’re like many other crypto investors, there’s a strong chance that you weren’t always aware of the fact that your crypto-related income needed to be reported on your taxes.
If you are in this situation, don’t stress out. You can amend a prior years tax return to include your crypto-related income with IRS Form 1040X.
Many cryptocurrency investors go through this process without issue, and it’s always better to amend your return in good faith rather than waiting for the IRS to find you.
For a detailed guide, checkout our blog post on how to amend your tax return to include your crypto.
Other Cryptocurrency Transactions and Tax Examples
Airdrops
Cryptocurrency received from an airdrop is taxed as income. This means that you are liable for income taxes on the USD value of the claimed airdrop.
The IRS is clear in its guidance regarding the income treatment of airdrops.
Example:
George receives 400 UNI tokens via the Uniswap airdrop in September 2020. At the time of receiving the tokens, UNI was trading at $3.50.
In this example, George realizes $1,400 of income (400 * 3.50) when he claims the tokens. His cost basis in UNI becomes the amount of income recognized, in this case $1,400.
If George sells his 400 UNI two months later for $2,000, this is a taxable event and he incurs a capital gain of $600 (2,000 - 1,400).
Hard Forks
If a certain cryptocurrency that you are holding goes through a hard fork which “occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger,” the new forked cryptocurrency you receive is taxed as income.
Your cost basis in the newly received cryptocurrency becomes the income you recognized.
Example:
Megan held 2.5 Bitcoin in July of 2017 and received 2.5 Bitcoin Cash as a result of the bitcoin cash hard fork.
Megan recognizes income at the fair market value of the bitcoin cash at the time it was received. If Bitcoin Cash was trading for $500/BCH that day, Megan would recognize income of $1,250 ($500 * 2.5). Megan’s cost basis in this Bitcoin Cash becomes $1,250.
Interest Earnings
Mitchell lends out his crypto and receives interest rewards for doing so. In September, Mitchell earns 0.2 ETH in interest from lending out his Ethereum. At the time of earning this reward, 0.2 ETH is worth $120.
In this scenario, Mitchell recognizes $120 of ordinary income from his ETH interest earnings.
Margin Trading
Cryptocurrency exchanges like BitMex have popularized the use of margin trading. The IRS has not yet set forth explicit guidance on how cryptocurrency margin transactions should be handled from a tax perspective, but we can infer the likely treatment based on other guidance.
A margin trade consists of borrowing funds from an exchange to carry out a trade and repaying the loan afterwards. The conservative approach is to treat the borrowed funds as your own investment and pay capital gains tax on the margin trading profit and loss.
Gifting Crypto
Gifting is tax-free up to $15,000 per friend or family member. This offers a great way to save on your taxes if you are feeling generous.
Donating Crypto
Donating your crypto is tax free and deductible as long as you are donating to a registered charity.
Donations greater than $500 have to be reported on Form 8283.
The amount of your donation that is tax deductible depends on how long you have held the assets:
- For crypto held for more than 1 year, you can deduct up to 30% of your Annual Gross Income
- For crypto held for less than a year, you can deduct up to 50% of your Annual Gross Income and the lesser of cost-basis or the fair market value of the donated crypto
Conclusion
The entire cryptocurrency ecosystem is still in its infancy. As the industry evolves, further rules and regulation will inevitably come forward.
Our team tracks every update within the world of cryptocurrency regulation, and we will continue to update this blog post with the most pertinent information as it is released. You can also follow us on Twitter for real time updates and tax savings strategies.
“Our mission is to make cryptocurrency more accessible for everyone. If we can make tax reporting seamless, the entire ecosystem will benefit.”
- David Kemmerer, Co-Founder & CEO, CryptoTrader.Tax
Cryptocurrency Survey Questions
Questions?
If you have any questions about cryptocurrency taxes or your specific situation, feel free to reach out to our live-chat customer support team from the chat widget on our homepage. We have been doing this for a long time and are happy to answer any questions you have!
The level of exposure cryptocurrency enjoys in the financial community makes it easy to forget that investing in it is a journey, one which investors can ultimately succeed or fail, but will likely face a measure of both at certain points. Before starting down this journey, however, there are certain questions to ask before investing in cryptocurrency if you want to stand a chance at succeeding.
- What is my reason for investing?
This will seem like a question with an obvious answer to most. After all, it’s rare for people these days to hear the word ‘cryptocurrency’ mentioned outside the context of wealth acquisition. The truth, however, is that not everyone invests in cryptocurrency as a way to make to become millionaires, just the majority.
- Which cryptocurrency is right for me?
There are many forms of cryptocurrency currently available to an interested investor over 1,800 in fact. Each of them has its own background, management, and potential. All of these will need to be weighed to exploit the fluctuation of multiple coins as a short term investor. A long-term investor has to be more concerned about choosing specific investments. The markets are incredibly unpredictable and are prone to sudden shifts. A few seem reliable including Bitcoin, Bitcoin Cash, Ethereum, and Ripple. However, they are less likely to display the drastic surges in value they saw in 2017. The best advice to either investor type is not to overcommit to a single cryptocurrency no matter how stable or promising it may appear (this exclude stable coins, which by their nature are created to be stable).
Related: How cryptocurrency works
- What is the best strategy for trading cryptocurrency?
Cryptocurrency Question Irs
There are numerous strategies out there that supposedly give investors the greatest possibility of making profit. In cost averaging you purchase a fixed amount of a certain coin periodically, while profit reinvesting simply involves placing profit you get investing in one cryptocurrency in a different one that shows promise. Balanced portfolio involves spreading out the risk by buying the same dollar/naira amount of multiple cryptocurrencies, but in an unbalanced portfolio you invest differing amounts in multiple cryptocurrencies based on how you think they will perform. There is no one strategy that will work for everyone, instead, each investor will have to decide which works best for them personally and financially.
Related: How to identify the next big Cryptocurrency
- What should I NOT do when investing?
There are several mistakes any investor could make that could ruin your portfolio. In fact, there are likely too many to list, but here are some of the more common mistakes people make.
- Do NOT fall for FOMO (Fear of Missing Out): The fear that if you do not buy into a drastically rising cryptocurrency, you will be the only one not realizing a profit. In these cases, if you did not buy in before the actual rise, you are likely already too late, and will you are only likely worsening your position buying late.
- Do NOT buy into a pump and dump: This is a case where a firm successfully builds up hype about their cryptocurrency before actually releasing a trustworthy product. The value of these will soar during the hype, but fall shortly after when people realize it was all smoke.
- Do NOT overcommit on any one trade: It’s normal to be tempted to pour all your earnings into one trade that you are almost entirely certain will result in a profit. Don’t fall for this, remember the cryptocurrency market is incredibly unpredictable.
- Abandon ship because of an unusual dip
As I mentioned earlier, there will certainly be dips even with the most seemingly stable cryptocurrency, but this is not enough reason to simply abandon it. Remember when in doubt HODL.
Click here to Start investing in cryptocurrency today.
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