It can seem as though everyone is talking about cryptocurrency at the moment. In particular, there’s significant press attention to market peaks where investors have seen dramatic gains in a short space of time.
This can make crypto an attractive focus for your investment capital. However, it’s sensible to have a little caution here. After all, opportunities that look too good to be true often are. This isn’t to say cryptocurrency can’t be a solid investment choice.
But as with so many other markets, it’s vital to understand how you can engage with crypto and maintain some semblance of financial stability. When you gain some knowledge of the trends and their influencers, the crypto markets can be an agile tool for your ongoing personal finance strategy.
Let’s dig a little deeper into where cryptocurrency trends and personal finances relate to one another. What do you need to know before taking the plunge?
Reviewing Your Accounts
The press surrounding cryptocurrency has often been focused on the big wins. When Dogecoin surged in value by 11,000% in the first five months of 2021, people enthusiastically responded to the coverage with their wallets.
This doesn’t mean to say it’s necessarily smart for new investors to apply every spare dollar they have under the assumption of making a quick profit. These are serious investments, and it’s important to have a thorough knowledge of your financial position first.
In many ways, the key to investing in cryptocurrency is recognizing what you can afford to lose. There are never any guarantees here. Responsible personal accounting best practices can help maintain your financial health while empowering you to make more informed decisions.
Understanding Tax Obligations
Developing solid budgeting techniques is key for keeping your priorities in order and knowing what funds you have spare to invest.
It can also be wise to create separate accounts allocated to specific financial goals. This can help bolster confidence by giving greater control and visibility over your crypto investment capital.
One of the most important elements to be aware of when looking to incorporate crypto in your financial planning is how it may affect your tax obligations.
If you’re investing for your retirement, many traditional savings accounts have specific tax deferments or even breaks. Cryptocurrency investments don’t benefit from these.
The Internal Revenue Service (IRS) treats cryptocurrency as property. Therefore any profit you make each year is subject to capital gains taxes. It’s important to bear the impact of this alongside your other investments in mind when reviewing the potential benefits.
Considering Time Scales For Your Personal Finance Strategy
Your personal finance strategy is likely to influence your relationship with your investments. It may be the case you’re an active daily participant in your investments and favor assets you can maneuver and flip in the short term.
Alternatively, you may have a more conservative approach to your assets and prefer longer-term gains. The latter is particularly common for those investing early for retirement.
When it comes to cryptocurrency investment trends, your preferences can affect your decision-making here.
Is It A Technological Development Project?
Certain currencies are more suited to long-term investment than short-term, and vice versa. There is a range of contributing factors to this. It may be the case that a certain type of coin is connected to a technological development project.
This could mean the real growth comes later down the line when the developers’ efforts come to fruition, or they gain market attention.
There can also be instances where demand for certain coins gradually outpaces the rate developers can mine new supplies. “Hold on for dear life:” (HODL) investment approaches tend to mesh well with this situation.
This is where generally, more experienced investors consider the ebb and flow of values over time and avoid the more knee-jerk fear of missing out (FOMO) behavior.
However, investors with a preference for day trading can still make gains from currencies suited to short-term investments. These are usually more vulnerable to market fluctuations.
Meme coins can be particularly susceptible to this. It’s not an easy investment to maintain and requires frequent market research and confidence in your decisions.
Understanding the Risks
No investment is a sure thing. When you’re reviewing cryptocurrency trends as part of your personal finance strategy, it’s vital to consider the risks.
After all, though your portfolio may be robust enough to take a certain amount of loss, it can certainly throw your goals off.
Cryptocurrency markets are considered to be volatile. These are decentralized currencies and tend not to have the same stability as you’d find with more well-established stocks. Just as cryptocurrencies can rise in value, there can also be unexpected crashes.
Governments Introducing Crypto Legislation
Perhaps the biggest contributing factor to volatility risk is the presence of new media. The rise of the digital age has created an environment in which social media and other online platforms have significant influence over investments. Global connectivity both provides investors with data about crypto markets while also sometimes sparking a herd mentality.
Posts about new trends can see sales snowball. Not to mention that a single Tweet from Elon Musk has seen Bitcoin prices plummet in the past. The better you can understand how currencies can be impacted by new media, the better able you may be to assess the viability of a crypto investment.
Another risk to be aware of is potential regulation. One of the major draws of crypto is that it is decentralized. Investors tend to be attracted to the freedom from government interference this brings. However, as governments start to introduce crypto legislation, this can cause drops in coin value.
When China introduced regulations to ban mining in 2021, the crypto markets lost $250 billion in value. As such, investors need to consider how likely crypto trends, particularly in certain geographical regions, are likely to be affected by potential oncoming regulation.
Forms of Diversification
In any investment strategy, simply focusing on a single form of asset is considered to be especially risky. Therefore, one of the considerations when developing a personal finance strategy is how the crypto can offer opportunities to diversify. This is one aspect in which crypto is relatively abundant with options.
Perhaps the most obvious form of diversification here is currency choice. There are the more well-publicized coins, such as Bitcoin and Ethereum. You’ll also find a range of other altcoins on the market. This doesn’t just provide diversification in terms of varied coins.
Investors can diversify the types of projects they want to invest in through the coins they select. Developers may be based in different countries, meaning it’s possible to be geographically diverse, too.
Purchasing Equipment and Validating Stacking
One of the more common forms of diversification is in how investors earn coins. You’re not just limited to gains based on the market value fluctuations. Alongside this, you can mine coins by purchasing equipment to validate currencies that use a proof of work (PoW) system.
If you don’t want to invest in high-end equipment, you can also validate currency through staking. This is where investors stake a certain amount of currency to confirm the authenticity of a block in the blockchain. The result of this can be an additional form of passive income through interest on your stake alongside the usual potential rise in coin value.
Tracking the Trends
Investment trends in crypto can indeed be volatile and occasionally confusing. But it’s equally important to understand how your attention to these is part of being responsible for your personal finances. As such, there needs to be some consideration for how to track the trends in cryptocurrency.
We’ve already touched on one approach, which is understanding the influence of new media. Taking the time to identify a reliable range of crypto social media influencers and credible news sites can empower you here.
This helps you stay abreast of the fluctuating popularity of certain coins, where the concerns are for investors, and what changes are likely to be coming down the pipeline. This kind of networking is relatively labor-intensive, but it’s essential for making more informed choices.
Riding The Wave
Particularly where long-term investments are concerned, tracking HODL waves is an approach favored by more experienced investors. This is a technique for determining how coins are being matured and distributed in the market.
In essence, it allows you to see and, to some extent, forecast when the best times to buy and sell currency are. When the amount of younger coins being bought rises, this usually suggests more long-term investors are selling to newer investors.
This could indicate that the value of coins is rising toward its peak. Learning this technique is no guarantee of success, but it can be a useful tool to influence choices.
Cryptocurrency can be an effective part of your personal finance strategy. Nevertheless, it’s important to maintain an awareness of how your current financial status can support your investment choices.
There are also ways in which your intentions for the length of investment and diversification behavior can influence your focus. It’s wise to look into how you can navigate the various risks and keep on top of the trends.
As with any investment, solid knowledge is your most powerful tool on the road to success.