Many people have made a lot of money in cryptocurrencies. Unfortunately, a lot of people have lost a lot of money as well. Some of the losses during crypto winter were so bad that many investors have turned their backs on Bitcoin and the rest forever, or at least until the next impressive rally. If you are going to stay invested in this sector, you need to learn how to avoid crypto losses. How you do this will depend to a great degree on what you are doing in cryptocurrencies to begin with.
Why Are You In Crypto?
The original idea behind Bitcoin was to have an efficient way to send money via the internet. Decentralized finance businesses work in this space sending money as well as making loans, and connecting people who want to do business. Prior to crypto winter there was a mindset that crypto was volatile but would always go up in price. Unfortunately, this led to a lot of people and businesses relying on a flawed business model. Pay dollars to buy crypto. Do business in crypto. Exchange the now-more-valuable crypto for dollars and make profits in crypto and in the exchange rate. The crypto plunged in value and many crypto businesses were wiped out. But not all of them went under. Folks who kept their crypto assets in stablecoins backed by hard currencies survived. If you are in crypto to do business and not speculate on crypto prices, how to avoid crypto losses is to keep your crypto assets in a stablecoin like Tether or USD Coin.
Are You Investing in Crypto for the Long Term?
Over time currencies like the US dollar tend to lose purchasing power. Inflation eats away at their value. Governments spend too much and this ends up devaluing their currencies. Bitcoin, on the other hand, has its eventual number of token programmed into the system. In other words, nobody is going to triple the number of Bitcoin to pay national debts or buy votes! Thus you can make a case for putting some of your money in Bitcoin or another cryptocurrency with a hard limit and holding on. If you are going to do this you do not need to “reinvent the wheel.” Investors in stocks discovered years ago that a dollar cost averaging approach to investing works quite well. An investor sets aside a fixed amount to invest every month, quarter, or year. They invest that amount no matter if the stock (or Bitcoin) is up or down in price. This way they do not spend too much when the market is up and they get a bargain when the market is down. This is a good way not to get sucked into buying at the crypto peaks and to buy at a discount when the market is bottoming out.
Are You Speculating in Bitcoin?
The first thing that a person needs to ask themselves if they want to trade Bitcoin or other cryptocurrencies is what do they know about wash trading. Wash trading is a form of market manipulation. A trader, pair of traders, or a trader working with a broker sells and then immediately buys crypto tokens (or stocks). The point of doing this is to give the impression that an asset like Bitcoin or Ether is being traded in high volume. When trading volume picks up for a stock or crypto asset without there being market manipulation it means people are buying or selling at a higher rate than usual. This commonly precedes a rise (or fall) in the price of the underlying asset. Folks who trade Bitcoin, Ether and other cryptocurrencies are always at risk of being tricked into buying or selling and then losing as the market is being manipulated by wash trading.
Is There a Safe Way to Trade Bitcoin?
A day trading strategy that profits from tiny movements in a market is called scalping. A trader watches market ups and downs and buys or sells repeatedly throughout the day. Because they only remain in a position for minutes they can typically avoid big losses when the market is being manipulated and can often profit from movement caused by market manipulation. Because a scalper does not remain in positions very long they do not make much of a profit on any given trade and need to do this repeatedly during the day to make the effort worthwhile. If you are going to stay in your positions and wait for a better profit you need to set trading stop losses to protect against big market movements.
SlideShare Version – How to Avoid Crypto Losses