Investors are increasingly drawn to the world of cryptocurrency, with recent events like Trump's reelection adding to the allure. However, it's crucial to approach this asset class with caution. Robert Cannon of Experity Wealth shares valuable insights on the common pitfalls that beginner crypto investors should avoid.

Secure Your Crypto Investments with These Tips

Overallocating to Crypto

In the past decade, crypto has gained significant mainstream acceptance, but that doesn't make it a safe asset. As Robert Cannon warns, one common mistake is being overly bullish and allocating too much of one's portfolio to crypto. It depends on individual factors like age, financial needs, and risk tolerance. Generally, Cannon recommends allocating between 1% and 10% of the portfolio to crypto. This helps mitigate the risk of losing everything if the market takes a downturn.Another aspect to consider is the potential for emotional biases. When crypto prices are soaring, it's easy to get carried away and invest more than planned. However, a disciplined approach is essential. By setting clear allocation limits and sticking to them, investors can avoid the pitfall of overcommitting to crypto.

Not Having an Exit Strategy

In Cannon's experience, some investors hold onto their crypto assets for too long without a clear exit strategy. They believe that the price of bitcoin will continue to rise indefinitely and miss out on taking profits at the right time. Having an exit strategy is crucial when dealing with a risky asset like crypto.Investors should have a rough idea of how much money they want to make or are willing to lose and set an investment time period. For example, they might decide to exit a position once they double their initial investment or set up a stop-loss to automatically close out if the asset falls below a certain price. This way, they can protect their profits and minimize losses.

Buying Highly Speculative Coins

The cryptocurrency market is filled with a wide variety of coins, but not all are created equal. Cannon advises beginners to start with the basics and invest in bitcoin. Other cryptocurrencies can be highly speculative and can lead to significant losses in a short period.For example, some new or niche cryptocurrencies may have little to no underlying value and are driven mainly by speculation. By focusing on bitcoin, which has a more established market and a track record, investors can gain stability and reduce the risk of losing all their money.Investors can purchase bitcoin through popular exchanges like Coinbase or Robinhood. Some also prefer self-custody wallets for more control over their assets. Additionally, there are alternative ways to invest in crypto, such as buying a bitcoin ETF, which is less risky than buying cryptocurrency outright.

Not Thinking about Cryptocurrency Tax Implications

Similar to stocks, crypto transactions are subject to capital gains taxes. However, due to the nascent nature of the crypto market, certain tax laws are still evolving.When purchasing crypto on an exchange, investors may receive a cryptocurrency Form 1099. But there are no explicit rules requiring exchanges to provide these documents. This means that investors may need to be proactive in reporting their gains to the IRS.New legislation starting in 2025 will require crypto exchanges to issue Form 1099-DA to track digital asset transactions. Meanwhile, President-elect Trump has suggested eliminating capital gains taxes on crypto, which could have a significant impact on the tax landscape. Buying bitcoin through an ETF simplifies tax reporting as the security is treated like any other stock.By being aware of these tax implications and taking appropriate measures, investors can avoid potential tax headaches and make more informed decisions.