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One of the most appealing aspects of investing in crypto is the potential of this asset to yield significant returns. However, without using objectivity or having a clear exit strategy in place, you may end up being at the mercy of unexpected market fluctuations. And, keep in mind that, unlike other types of safer markets, cryptocurrency isn’t backed by physical assets—this means that your investments can drop in value significantly and in a matter of hours!
Fortunately, there are some things you can do to reduce the risk- diversifying certainly helps—but don’t overlook the importance of making an exit strategy part of your overall investment approach. Let’s learn more below!
The Importance of Crypto Liquidity
Firstly, let’s cover the importance of understanding crypto liquidity. Simply put, crypto liquidity refers to how easy it will be for you to buy or sell an asset–in this case an amount of coins—without causing drastic changes in its price.
Different assets have different levels of liquidity. For instance, real estate and land are non-liquid assets, while the most liquid investment options are cash and bank accounts.
But why is this important? Low liquidity can result in price differences and higher costs when trying to cash out large investments! Fortunately, thanks to certain transaction approaches, like OTC (Over-The-Counter) trading, you can optimize the liquidity of your crypto!
Define Goals and Targets
Your goals and targets should be clear from the get-go, from the moment you decide to begin investing in crypto or other assets. Are you investing for short-term gains, or do you have a long-term vision? Being clear on your goals will guide important investment decisions.
Additionally, you may also decide on specific price targets. Once your crypto reaches it, you’ll be selling, so that you can cash in profits without the risk associated with a sudden drop in value. This is important because, when you define your ‘sell’ point, you’ll avoid making decisions out of fear or excitement.
Managing Risks
The golden rules of investing? Diversify your portfolio, stick to reputable assets, and only invest what you can afford to lose. These rules are even more important when investing in crypto.
In fact, the crypto market is highly volatile. Prices can swing dramatically within hours. Here, knowing exactly what to do as the market changes can help you better manage risks and protect your profits. This strategy could include using stop-loss orders, which automatically sell an asset when it falls to a certain price.
Planning Ahead for Tax Implications
It is important to understand that your crypto profits are subjected to taxation. These taxes largely depend on the region you operate in and current regulations. However, for instance, in the US, short-term capital gains are taxed 10-37% and long-term rates are 0-20%.
Keeping these in mind and getting informed about how your profits will be taxed can help you better plan for long-term investments, meet compliance, and protect your profits from significant cuts.
Don’t Overlook Diversification!
If you have followed the most important rule of investing—diversification—the chances are that your portfolio now includes several different types of crypto. When crafting your exit strategy, be sure to account for the different ones!
Last Updated on by Icy Tales Team