Crypto markets don’t move in a straight line upwards. Here are two strategies Aussie crypto investors can use when the market moves down and some crypto tax information.
The first and most important question you need to ask yourself is – do I think the long-term trajectory of crypto is upwards? If the answer is yes, that gives you the confidence to top up at a range of prices (Dollar Cost Averaging). Notoriously volatile, when it comes to crypto, both traders and investors watch the charts closely to find ideal buying opportunities. Your timing is unlikely to be perfect, but there are always opportunities to buy into fear, uncertainty and doubt (it’s called FUD in the crypto community). But there are also moments when there’s solid downward momentum that favours a shorting strategy. Here’s a rundown of those two strategies Aussie crypto investors can use when the crypto market moves down as well as a bit of tax information for crypto dips.
Dollar-Cost Averaging (DCA) – Simple, Suited for the Long-Term
Dollar-Cost Averaging is a buy and hold investing strategy, where an investor buys more of an asset incrementally as prices fall.
The rationale behind this strategy is that you’re buying cheaper price points. It lowers your average buy price. So, when it does go back up in value, your percentage return will be higher. Why? You spent less per coin than someone who just waited for the market to regain positive momentum.
If you have a firm conviction in a particular crypto project like bitcoin (BTC) – it makes sense to back that conviction over a more extended period. No matter what the charts look like on a given shorter timeframe.
Bottom line, it’s not easy to time the exact bottom, hence why a good spread of entry points makes sense.
Shorting Crypto – More Complex, Suited for the Short Term
Much like traditional finance markets, you can short crypto as well. There are a variety of strategies for shorting cryptos like bitcoin [BTC]. These include margin trading (which involves leverage), futures markets, binary options trading, predictions market, or directly shorting bitcoin assets.
If you believe the market’s overall trajectory is upwards in the long term, this strategy is best suited to crypto investors and traders who have a firm grip on charting and complex macro factors.
Again, like traditional finance markets, crypto moves in cycles. FUD often comes in waves. One bit of negative news can often lead to more negative headlines. Ask yourself – is this part of a prolonged period of changed sentiment, or is this a one-off?
Leveraged crypto bets carry significant risk as well – so you should know what you are getting yourself into, what your objectives are and what your risk tolerance is.
Tax tips for Aussie crypto investors in a ‘down market.’
The main goal of investors utilising the tax code is to offset any losses during market dips against profits made over the year, otherwise known as tax-loss harvesting.
The tax guidance for crypto assets from the ATO is a rapidly evolving field and can be hard to decipher. Here’s a simplified, comprehensive rundown, where you can also gain assistance filing.
You should, however, know a few basic guidelines.
- Unlike in traditional markets, there is no current regulation regarding wash-sale rules. Wash-sale rules mean you can’t sell at a loss and buy the same asset within thirty days. With crypto, you can. Therefore, selling at the precipice of a dip only to repurchase once you’ve reached the loss aimed to offset your prior gains. You can even do this strategically year-round and not just come tax time.
- Since Australia doesn’t allow directly offsetting capital losses from income, it’s essential to know that you can defer your losses of this financial year to the next. Especially in a case of a bear market year where there isn’t a significant number of gains to offset.
- The ATO differentiates between short- and long-term investments in crypto. The percentage is 50% off for investments held over a year. HODLer’s beware of making sure to liquidate short term investments first to do any offsetting.