Supposedly the secret to building wealth is to buy Assets and avoid Liabilities.
As I am now wealthy I can not say if this is true or not, but it sounds good.
With using this outlook on life, I want to look at collecting crypto currency, there seems to be two ways I can go about this.
Either buy and hold the crypto because over the long term it is going to increase in value, more so than the money sitting elsewhere. The other option is to look at buying and selling signals (technical analysis) to try and guess when it is profitable to buy and sell.
Holding
It is said that time in the market beats timing the market.
With holding we want to acquire as much crypto that we hold for as long as possible, it might be buying as you get capital or dollar cost averaging so you do not spend all your capital as you acquire it but at regular intervals.
This is because if you just buy when you get money you could be buying at the top or the bottom of the trading range. With buying at regular intervals it is trying to average out these peaks and valleys to give a more safe value, something in between.
This strategy is based on the belief that the asset over time will rise higher than if you used that capital elsewhere.
It is very simple and as long as the asset keeps going up in value over a long time, it will work very well.
The other major benefit is that you only pay tax when you sell and most likely pay it as a capital gain, which here in Australia has a 50% discount if you held the asset for over 12 months.
If you had a loss in a different area you can write off the gain vs the loss, so you can control when you have to pay tax on the profit.
Trading
This is where you look at the patterns of the prices and use what has happened previously to try and create an educated guess of what is going to happen based on this information to guess at what is going to happen.
While things will never exactly repeat themselves they often are similar which gives the ability to try and guess what is going to happen and position yourself to take advantage of it.
The aim is to try and buy low and sell high and while it is not possible to predict the exact top or bottom, looking at signals to try and determine where the cycle is and to predict what will happen.
It is often said “buy the dip”. This is where the price has dropped and yes it could drop further most of the time, people buying it low give the signal that the price is increasing so you get a rally and the price goes back up.
So while it sounds good to benefit off the volatility of the price instead of waiting years for it to go high, there are some negatives as well.
The first is often you will be having to pay commision off each trade, so with the holding you only paying that once on acquiring it, if you buying and selling the same crypto multiple times then you having to keep having to pay the commision, this adds up.
Also how it is taxed is different too, the profit or loss you get is treated as income so instead of paying capital gains off the profit it is added to your salary and you will be paying tax based off your current tax rate, each year with your tax return. Not at a time that is beneficial for you.
Another downside is it is easy to let emotions affect your decisions, if it is pumping and everyone is talking about it can feel like you should get in, or you might miss out.
The reverse is also true when the market is falling and there is a huge negative sentiment, then you can feel like you should be getting out because you do not want to lose the money you already have invested.
So you have to also be fighting your emotions.