Hi all, a few traders asked me to put this together, this is very much aimed at beginners. Crypto is booming but with great opportunity comes multiple hazards. This short guide is written really as a brain dump of what I wish someone had told me when I first started, with a view of helping you not to repeat the mistakes I made in 2017 (the last bull run). Below I outline some major lessons learnt as well as some general dos and don’ts.
A great crypto project can still be a bad investment. Check price action over on something like CoinMarketCap. Has the coin price rocketed over the past day, 7 days or even 30 days? If so yes it can continue to moon, but what goes up always comes down. It’s very likely that existing owners in the short term will look to take profit, which would leave you holding the bag until the next pump.
If a YouTube influencer is starting to talk about a coin, it’s probably already too late to get in on the rise and again you run the risk of being left as the bagholder. Influencers get early access to projects at low prices so (sadly) it’s in their interest to pump coins as high as they can.
Do your own research. Study potential crypto investments, read white papers, learn about good tokenomics and look for your own reasonable entry price.
Passive or Active?
Do you want to be a passive investor in crypto? If so you can use Coinbase to set up a small weekly or monthly purchase of a coin to dollar cost average in. Really you only want to do this for Bitcoin (possibly Ethereum) as other assets are too unstable to set and forget. Even for Bitcoin (BTC), the price moves can be volatile. However if you zoom out and look at growth over 3 years you will note it’s up 536% so set and forget can be a good option. Passive investing is usually less stressful but your potential returns are significantly reduced. It does however also have tax benefits which I will explain in a later section.
For those looking to be more active, well chances are you have been seduced by the potential crazy returns that can come when looking at altcoins instead of Bitcoin. Yes, the rewards can be insane, but the risk is significantly higher. Some ‘blue chip’ coins have only just reached their all-time highs from Jan 2018, others will likely never hit the same heights again. Let’s have a look at Litecoin which was (and is still) billed as ‘digital silver’ to bitcoins ‘digital gold’ (the coins that pump the hardest usually have a very short and powerful sales pitch, ‘it’s the Chinese Ethereum’ etc).
For those looking to be more active, I would still suggest devoting the majority of your portfolio to non-alts. The concentration of altcoins in your portfolio should really be no more than 30% (though admittedly this is tough and I break this limit occasionally). To clarify I personally do not consider Ethereum (ETH) to be an altcoin, BTC and ETH stand alone in that regard and I believe it’s wise to hold (‘hodl’) both.
When investing in alts, really the goal here is to not increase the dollar value of your portfolio but rather the Bitcoin value. Stacking gains in alts to turbocharge portfolio value can be far more profitable than simply holding Bitcoin and waiting for that to increase in dollar value. Remember though that altcoins are inherently much riskier than Bitcoin, and the smaller the altcoin is (by market cap) the more volatile the price is likely to be. That said, this is where the explosive gains are made. Always diversify your alt portfolio and keep plenty held back in ETH and BTC.
Look for coins that do not just have the potential to perform against the dollar, but also against Bitcoin. If a coin is trending down against BTC you should really think about whether you should still be holding it.
I could write a whole article on this in itself, but if you remember one thing, remember this – you can make a loss on cryptocurrency trading and still be left with a large tax liability. Yes, you read that right. Taxation occurs on a trade by trade basis. Not only does this include exchanging crypto assets for money, but it also includes exchanging for another type of crypto asset, using crypto assets to pay for goods or services or gifting the holdings. All of these actions create a taxable event. The first £12,300 of annual capital gains is tax-free (assuming you have not used up all or some of your CGT allowance elsewhere). After that, you will pay 10% on all profits as a basic rate taxpayer and 20% as a higher rate taxpayer. Taxscouts has a calculator you can play with to see the potential tax liabilities you could be looking at.
So how best to manage your tax liability? Well, if you are a passive investor and you plan to purely hold then you will only be taxed on disposal. This means you can compound your BTC in the meantime by just holding and placing it in a lending platform to earn interest on your cryptocurrency (only interest is taxable not your investment itself). Some in the crypto community plan to never sell their bitcoin and instead use their cryptocurrencies as collateral towards a cryptocurrency backed loan (not financial advice, just an observation).
For those more active, it’s still better to reduce the number of transactions you generate. More transactions mean more taxable events which can very well eat away at your investments. I look to hold alts anywhere from a few days to a few months. The other bit of tax-related advice I would give is…..
Don’t forget to take profits!
Gains like this can’t be seen anywhere else and so it comes with major risks. Yes, the profits could be potentially life-changing but the risks can also ruin you if you’re greedy. Always take profits on the way up (and also on the way down) as you will never ever time the top of the market. Taking partial profits along the way and setting aside means your tax liability is taken care of and you can start to enjoy the rest. My profit taking strategy approach is perhaps a bit more extreme than most, so I won’t be sharing here. The key here is to develop your own and always stick to it, when price hits x, take y% out and so on. This is very very important, we are in a bull market but it won’t always be this way, it may only be a matter of weeks or months until it is over. If you don’t have a sell strategy for alts, you have a very high chance of being poorer in 12 months time. Look at the LiteCoin chart above again. Bear markets can last years in crypto, you don’t want to be bag holding when this happens. The best time to sell is when every part of your being is saying to keep holding and keep riding the wave up, because with alts prices take the staircase up and the elevator down.
“I will tell you my secret if you wish. It is this: I never buy at the bottom and I always sell too soon.” – Baron Rothschild
I mentioned this earlier, but you can compound many coins via high-interest rates available at various sites. My personal recommendation is Celsius which offers up to 14% APR interest on coins. It’s very easy to use and has a wide variety of coins on offer. You can get higher than the advertised APR by holding some of their distributed coins to become a VIP and boost your interest rates further. Make your investments work harder for you, capital appreciation and high interest is a beautiful combo.
Not all exchanges are created equal. Coinbase is great for passive investing and is very easy to navigate for the newbie, but the fees are a little higher and the spreads are wider. Personally, I generally use two exchanges
- BTC, ETH and high/mid-market cap alts – Binance.
Binance offers reasonably low fees, good liquidity (which means tight spreads) and a very nice app means which means its my #1 place for trading. Also, they offer insanely good earning programmes (short term high yielding investment opps). Currently, I have a particular coin earning daily interest at the equivalent of over 40% APR. You have to be quick on these programmes as they sell out quickly.
2. Mid-market cap alts – Kucoin
Coins usually hit this exchange (or FTX) before Binance, good exchange for leverage trading as well, though not something I would ever advise when first starting out – trading spot is plenty to deal with when getting started.
Spread your money across multiple exchanges and wallets to reduce potential losses from hacking. Always use 2FA (2 Factor Authentication) for all wallets and exchanges (mobile authentication is not as secure). For all coins you intend to hold and not trade, keep in an offline cold wallet storage device. I personally use the Ledger Nano X. If buying the ledger, only buy direct from the manufacturer.
Probably some of the above might seem a little daunting, but it’s really just a case of familiarisation. Admittedly yes it is a little awkward to invest in crypto, but the flip side is it’s because you are still early to market. Acting outside the comfort zone of most other investors creates part of the edge. When it is easy to invest, a lot of the current gains to be made will no longer be possible. So putting a little effort to learn now can mean huge rewards in the short to mid-term.
Avoid FOMO trades and do your own research. Instead, buy the dips, learn technical analysis (another blog for another time maybe) and be disciplined when making both buys and sells. All of which will stand you in good stead when learning to trade crypto successfully.
Resources/ Sign up offers
CELSIUS – Earn interest on your crypto and earn $30 in BTC on your first $200 transfer
SWISSBORG – Earn interest, exchange coins and earn up to $100 in free BTC on your first deposit
CRYPTO.COM – Earn interest, exchange coins and earn up to $25
BINANCE – Trade BTC and alts. Get 10 % off trading fees
COINBASE – Trade BTC and blue-chip alts. Get $10 in free BTC when buying or selling your first $100 of crypto
KUCOIN – Trade alts. Money off trading fees