Crypto-traders? — it’s time to improve your returns
BloxTax provides a platform for calculating and reporting bitcoin and other cryptocurrency taxes. Recently we celebrated two years to our founding, and during this period, we were able to serve many users: holders (mostly bitcoin), investors who joined the market when it was at its peak, professional investors, gamblers and hedge funds. We create tax reports regarding their cryptocurrency activities, providing fillings and reports to the Israeli IRS.
As part of the reporting process for the IRS, we calculate the trading fees, losses, and profits of our users. To this end, we collect data from all areas and all traders, and along the way, learn what works and what doesn’t in trading and investing, where it’s expensive to trade and where it’s cheap and what should never ever be done. So, our clients’ personal data is completely classified, and we cannot talk about specific trading strategies, but we do have a unique point of view on the market, and we have the best teachers, the best users and the lessons they’ve learned from the world of cryptocurrencies. It’s worth sharing.
Leverage trading — for pros only
Leverage trading, or in it’s common name “Margin Trading” (other names such as futures trading, long, short selling) is trading that uses leverage, loans, to increase our profits — this because our personally invested capital in the transaction is low. It doesn’t matter if we can see a loan has been taken (like in Poloniex and BitFinex) or the loan isn’t visible to us (like in BitMex or Kraken), all have some form of a loan. The loan is our leverage for the position— it allows us, for example, to trade on the value of 10 Bitcoins even though we only have 1 Bitcoin deposited in the exchange (A leverage of x10).
One way of leverage trading is the option of short, short selling. In this method, one gambles that the cryptocurrency being traded, for example, Bitcoin, will go down. How is it done? The trader took a 10 Bitcoin loan, trade them on the market for another cryptocurrency — UDST for example, and later buys back the 10 Bitcoin and returns the loan. If the price of Bitcoin against the UDST went down, then after buying back the Bitcoin, the investor is left with a surplus of UDST and has made a profit. If he was wrong and the value of the Bitcoin rose, he will have to add more UDST to buy 10 Bitcoin, and every extra UDST he adds is his loss.
The risk of leverage trading is great. If someone takes leverage of x4 for the capital he puts into the transaction, then his risk grows by a factor of 16, not 4 (even though his profits will only rise by x4 if he makes a profit). Many investors find themselves erasing large amounts of their portfolios due to high leverage, bad bets on the trends of the market and “unfair” exchanges with problematic pricing quotes.
The exchanges aren’t on your side
Additionally, one needs to take into consideration that the trading fees for leverage trading are very high and take a very big bite out of the profits left in your hands at the end of the day. Exchanges like Kraken, Poloniex, and BitFinex charge a lot of trading fees for leverage trading.
Many users lose most of their investment in BitMex. The reason: the way it works and the quotes it provides does not help, to put it lightly, your chances of turning a profit.
Performing many small transactions leaving the portfolio only with DUST
A large number of small transactions on a wide variety of cryptocurrencies is a surefire way to lose and erode the investment value of your cryptocurrency portfolio.
Why does this happen?
When you perform a lot of transactions, they’re accompanied by a large number of trading fees. When this is done with a large variety of different currencies, the trading fees are charged on different cryptocurrencies — this erosion can have you losing cryptocurrencies, reducing the amount of cryptocurrency you hold below the minimum level required to perform a certain transaction (such as selling/converting Bitcoin).
For example, there are many exchanges that require a minimum amount to perform a trade — converting altcoins to Bitcoin. If you’re holding a small amount of a specific alt, due to its value dropping or from the erosion and the trading fees, you will not be able to convert it back to Bitcoin. I many cases you will also not be able to withdraw it back to the wallet and you’re, in essence, stuck with something with a value so low you cannot even withdraw it from the exchange. This nothing is called DUST — and it’s stuck in the exchange without being able to do anything (Binance offers a process to deal with “Dust” and convert it to BNB).
Therefore, it is recommended to focus on a smaller number of cryptocurrencies in your regular trading. Perform significant trades, don’t be frantic and you’ll be able to save money in trading fees and, even more importantly, it will be much easier to focus on what you’re trading — to plan a proper investment strategy and learn from moves that worked, and from those that didn’t.
Realize your losses towards the end of the year
BloxTax performs tax calculations, and one of the things we encounter is investors that are sure they’ve made losses (and believe they will be able to receive tax returns) but forget that for tax purposes — only realized losses count. At the end of every year, one can offset losses in cryptocurrencies with profits from transactions from other cryptocurrencies or profits from other assets such as real estate or stocks.
Thus, it is important to efficiently manage your investment strategy, while utilizing all the benefits that the IRS provides, and doing things the right way and realizing losses towards the end of the year can increase your profits over time significantly.
Serious traders? — ask for a discount on your trading fees
We see that many of our users paying thousands or even tens of thousands of dollars a year in trading fees. Sometimes the trading fees reach insane rates accounting for as much as a third of our users’ profits. Make an effort to lower the trading fees you pay on the exchange.
It is important to remember that the competition in the exchange market is fierce: there are many exchanges and many cryptocurrencies being traded. Exchanges like Kraken, BitFinex, COINEX and more are willing to offer traders significant discounts to use their specific services. It does, however, require a simple procedure: you need to contact them to receive a discount (if you do trade in large sums you will probably be contracted from them), but sending an email to the customer service department of an exchange, showing interest and mention that you would like to focus you activity on this specific exchange in return for a discount in fees– can pay off big and help you increase your profits significantly. Yet, given all of this, it is still important not to perform unnecessary transactions in your portfolio, even if their cost is low.
Save trading fees paid in native exchange assets
It is also recommended to check for exchanges that give holders the option of a discount if they hold a particular cryptocurrency and pay the trading fees with it: Binance with BNB, and BitFinex and COINEX have similar arrangements.
You don’t have a private key?
Perhaps the most disturbing thing we’ve seen has nothing to do with trading. It concerns the manner in which people operate with their crypto with the various exchanges.
Over the last few years, we’ve seen exchanges that closed without any notice, getting hacked without any warning and removing cryptocurrency from trading without prior notice to their users. The oversight of the exchanges is still in its infancy and not all of them operate responsibly. Thus, the final responsibility is on you.
If you use exchanges as a place to store your cryptocurrency (instead of your wallet) it means you also don’t have a private key, and if you don’t have a private key, you have no bitcoin.