How to Protect Your Bitcoin Investments From Loss

People are becoming more interested in bitcoin, and they naturally want to know how to make this currency work in their favor. All investments come with risks, but there are ways to minimize loss.

Invest Slowly and Carefully

Whether people are seasoned investors or completely new to it, excitement and adrenaline can cause them to make snap decisions. That may mean they invest too much in bitcoin too soon and deal with substantial, sudden losses. That possibility is not just a hypothetical. In one instance, a trader lost the equivalent of $11 million bitcoin in a day.

A good rule of thumb is for people only to invest what they can afford to lose. They should consider how their lives would change if they experienced a loss as tremendous as the one above. If such a scenario would cause a profoundly life-altering consequence, that’s a sign the person invested too much. Taking it slow and thinking things through are two wise tips to prevent catastrophes.

Consider Investing Beyond Bitcoin

Bitcoin was the first cryptocurrency, but it is not always the one with the least risk. Even if people initially focus on bitcoin, it’s smart to investigate other opportunities, both related and unrelated to cryptocurrencies. 

For example, people might look into initial coin offerings (ICOs) or learn about another kind of cryptocurrency that deserves their investment efforts. They could also invest in an exchange-traded fund (ETF) portfolio. Many of those feature transparent and repeatable frameworks created to achieve specific performance goals. Having a broad perspective about investment choices is an ideal way to keep from fixating on bitcoin alone when it’s often smarter to diversify.

Take the Time to Learn About the Technologies

Anyone wishing to invest in bitcoin or any other digital currencies should first put aside time to understand the technologies behind them — as well as the blockchain. Doing that will make them better equipped to decide how much to invest and how soon. Ric Edelman, the founder of Edelman Financial Engines, advised, “Don’t consider investing unless you understand the technology. Otherwise, you’re not investing; you’re spending.” He also recommended allocating 1% of a portfolio to bitcoin. 

People who are completely unfamiliar with the technological foundations of bitcoin and the blockchain will find a wealth of educational information on the internet. There are also online courses they can take that go much more in-depth. Even once people know the basics, they should take the time to remain updated on new developments. 

Recognize the Risks Associated With Bitcoin Wallets and Exchanges

As people get ready to invest in bitcoin, they may not think of all risks. For example, there is indeed the possibility that bitcoin’s value could plunge overnight, and an investor could experience losses that way. However, other issues are not always as apparent. For example, a person could lose access to their cryptocurrency wallet, such as by putting the access code in a “safe place,” but forget its location.

Risks also arise from cryptocurrency exchanges getting hacked or shutting down without warning. Potential investors should always thoroughly research exchanges before choosing one. When it comes to selecting a type of wallet and keeping it safe, they must go with a method that protects the contents from unauthorized access but does not lock them out. 

Learn Stipulations for Reporting Losses to the IRS

Doing all the right things while investing does not totally remove the possibility of loss. That’s why investors should become familiar with the specifics for reporting and claiming them while doing tax returns. 

People can ordinarily deduct up to $3,000 in such losses, although other situations may allow greater deductions. Tax specifics can prove extremely complicated for people who are not accounting professionals. Thus, those who suspect they may suffer bitcoin losses in a given year or who have already experienced them should consider hiring the services of a professional that understands the ins and outs of cryptocurrency tax guidelines. 

Get Equipped to Minimize Risk

The essential takeaway is that it’s impossible to get rid of all risks associated with investing. However, the tips here will make disasters less likely to occur while encouraging people to make smart decisions to protect their investments rather than leave them exposed. 

In addition to the suggestions here, people should devote time to studying the investment marketplace trends and seeing how they change. The knowledge gained will make them more aware of typical versus abnormal behaviors and may shape their decisions.

Image courtesy of Utoday