4 Moves Every Cryptocurrency Investor Should Make in 2022
KEY POINTS
- A cryptocurrency investment plan is a good way to ensure crypto doesn't overshadow your other financial priorities.
- It's wise to balance your crypto portfolio in terms of overall risk and individual crypto sectors.
Crypto should help -- not hinder -- your efforts to build long-term wealth.
The start of a new year is a great time to take stock and make sure you are on track with your financial goals. As a crypto investor, it's good to consider how crypto fits into your broader financial picture. For example, you should know how much you can afford to put into crypto each month without overstretching yourself financially.
Whether you're a seasoned crypto investor or someone who dipped their toes into the crypto waters for the first time last year, here are four steps to take in 2022.
1. Make a 2022 crypto plan
There's no right and wrong crypto plan for the year ahead. A lot depends on your financial situation, your wider goals, and your tolerance for risk. But it is worth having a clear idea about what you want to achieve. Here are some principles that might help guide your thinking:
- Ensure cryptocurrency makes up only a small percentage of your overall portfolio. Given the high risk nature of crypto, it's a good idea to limit crypto investing to a small proportion of your wider portfolio. Try to balance your crypto investments with lower risk options like stocks, cash savings, or real estate.
- Consider dollar cost averaging. Dollar cost averaging is an investment strategy that involves investing a set amount of money at regular intervals. It can be a helpful way to manage the volatile nature of crypto investing. For example, perhaps you want to invest $1,200 into crypto in 2022. Rather than trying to time the market and spend a lump sum at the absolute low, you might buy $100 worth of crypto on a fixed day each month.
- Top up your retirement contributions. You might decide to put a small amount of your retirement money into crypto, but it needs to be part of a bigger plan. For starters, if your company will match your retirement contributions, make sure you max out this benefit.
- Prioritize your emergency fund over your crypto investments. Ideally an emergency fund should have enough money in it to cover three to six months’ worth of living expenses -- enough to tide you through in the event you lose your job or face another financial crisis. If something goes wrong, you don't want to have to sell your crypto investments at a loss or take on debt. Instead, try putting aside a small amount each month to get your emergency savings to the level you need.
2. Evaluate your crypto portfolio
Cryptocurrency is a high-risk investment, but some cryptos are riskier than others. For example, Bitcoin (BTC) is by far the biggest cryptocurrency by market cap and has a much better chance of surviving a serious market crash. That's why some experts advise Bitcoin should make up as much as 60% of your crypto portfolio, especially when you're starting out.
Every crypto investor has a different tolerance for risk. Some investors see Bitcoin as a form of digital gold they want to hold for the long term. Others want relatively well-established cryptos that are in the top 100 by market cap that could outperform Bitcoin. Others chase even smaller cryptocurrencies in the hope of getting in early and receiving bigger rewards.
What's important is that you understand how much risk you are comfortable with and ensure this is reflected in your portfolio. Perhaps you originally planned to keep 50% of your crypto holdings in Bitcoin and Ethereum (ETH), but got excited and bought into other projects. If those projects now represent the majority of your portfolio, it might be a good time to check in and rebalance things.
In addition to individual coins, it's also a good idea to consider what crypto sectors make up your portfolio. There are several different categories of cryptocurrencies, including smart contract cryptos, decentralized finance cryptos, metaverse tokens, and more. As the cryptocurrency market evolves, what's starting to happen is that individual sub sectors rise and fall in a different pattern from the rest of the market.
3. Research what sectors might be popular in 2022
As we saw in 2021, when a sector -- like metaverse tokens -- attracts investor attention, those cryptos can produce extraordinary gains in a matter of months. Nobody has a crystal ball, so it's impossible to know what the year might bring. But it is worth researching which categories of crypto might come to the fore. It isn't just about 2022, think about the ways cryptocurrencies could impact our lives in the long term.
For example, there's a lot of talk about Web 3 and how it could represent the next generation of the internet. It's early days and there's not that much consensus yet around what exactly Web 3 is and what shape it might take. But this sector could be worth putting on your watchlist.
4. Understand crypto tax implications
Cryptocurrency taxes are a hot topic right now as the IRS steps up its efforts to collect money owed on crypto gains. When you sell, trade, spend, or otherwise realize profits from crypto, it’s a taxable event. It's important to understand what taxes you might owe and the difference between short- and long-term gains from a tax point of view.
You'll need to keep track of all your cryptocurrency transactions so you can accurately report any gains or losses. Some cryptocurrency exchanges can help with this, but it can be challenging -- especially if you use more than one platform and earn interest on your tokens through decentralized finance apps.
Bottom line
Cryptocurrency investing can be exciting and rewarding. But it's important to take a step back from time to time. These four steps will help ensure your cryptocurrency investments are part of a balanced investment strategy that will build long-term wealth.
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