Trading bitcoin is not for every investor. Bitcoin trading has been very profitable for some investors and very rough for others. If you are considering bitcoin trading, there are a few factors you should carefully weigh.
Some telltale signs indicate you are ready to make this leap. If you check all the boxes below, there is a good chance you are ready to jump into the wild world of bitcoin trading. If not, this form of investment may not be for you or, you may need to put in a little more work before you really dive in. Here is how to tell if it’s time for you to start trading bitcoin.
You understand cryptocurrency and how it works
As with any investment you should understand exactly what you are investing in and the general principles of how it works and how it can make you money before adding your own money to the mix. Whether it is the stock market, real estate, a business venture, or bitcoin, knowing the mechanics of your investment vehicle is incredibly important.
With bitcoin, you should have a basic understanding of what bitcoin is, how cryptocurrency works in general, and about the blockchain technology on which this digital currency is based. If you grasp these basic concepts, that is one good sign that you may be ready to start trading bitcoin.
If you start to read up on Bitcoin, cryptocurrency, and blockchain and it all sounds like Greek to you, this is a pretty solid sign that trading bitcoin is not for you right now. Bitcoin trading requires serious homework and a fair amount of data interpretation. If you aren’t sure about the basics of the product, it will be difficult for you to effectively trade it.
You have a clear understanding of your financial goals and risk tolerance
For those who already have or are acquiring the basic knowledge they need about bitcoin to start trading it, the next step is evaluating and understanding your own situation. Before you begin trading, you need to have a clear understanding of your financial goals and know your risk tolerance.
The second part may be the most important because the Bitcoin market, like most cryptocurrency markets, is incredibly volatile. It is not uncommon for the price of Bitcoin to precipitously rise or fall over the course of a single day. When Bitcoin hit its all-time high in 2017 it was under $8,000 on November 17, 2017, and at almost $20,000 by December 17. By February 17, 2018, it was back down around $8,000. When the pandemic hit in 2020, the price went from $10,000 in February to dip under $4,000 in March, losing 50% of its value in a 2-day span.
This is why understanding your personal risk tolerance is so important. If you are a young investor or one with a good amount of disposable capital, you may feel more comfortable taking this kind of risk with your money. If you are risk-averse or a more experienced investor who likes more predictable investments, this type of risk may not be palatable to you. Personal preference and understanding your risk tolerance is the best way to establish whether such a volatile investment is for you.
Knowing your financial goals is important, too. If you have a nice nest egg and are getting close to retirement, this type of gamble may not be attractive. If you are trying to build wealth and have investment money to risk, this may sound great. Knowing your goals will also help you put a profit target and stop-loss on your bitcoin trading. As with any good trade, putting these mechanisms in place will help you avoid losing it all or allow you to get out when you are happy with your return. Being able to take these actions is key when trading Bitcoin.
You’ve been paying attention to the Bitcoin Market
If you understand what Bitcoin is and how it works and you have a good idea about your risk tolerance and financial goals,, the next signal that you are ready to start trading Bitcoin is that you have been watching the Bitcoin market. Before you pull the trigger and make your first trade, good Bitcoin traders will watch the market to understand how it operates.
Trading Bitcoin in general, and especially day trading Bitcoin, takes a high level of attention and focus. You need to be aware of what the market is doing and what is driving these movements. You need to quickly analyze data and look for trends. When you spot these trends, that is when you can capitalize on market volatility and make good money trading bitcoin.
Even if you meet all the other criteria here and are an investor who probably could be investing in Bitcoin, based on where the Bitcoin market is at a given time, it may or may not be a good time for you to start trading. You want to start your investment journey at the right time. One that makes good sense, not just when you think you’re mentally and financially ready. This article from Cove Markets is a good research base for some of the considerations to weigh when evaluating whether or not now is a good time to actually make a Bitcoin trade or purchase.
When you have evaluated how you stand in all these categories, you should have a better idea of whether it is time for you to start trading bitcoin. If it is time, that’s great. There is a seemingly endless world of opportunity in the Bitcoin market and millions to be made. Good luck! If it’s not time, that’s OK, too. Bitcoin trading is definitely not for everyone and realizing that you are one of those people will probably save you quite a bit of time, money and worry in the long-run.
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