As an intelligent crypto trader, whether a beginner or a veteran, it is always best to know your risk threshold when investing. What amount of loss can I conveniently take? Will the ROI on this crypto investment be worth it? These are some questions you might ask yourself. Hence, one of the biggest questions traders tend to ask is, what will happen if my crypto ever goes negative? This article is a comprehensive answer to that question.
Cryptocurrency is what you call a digital asset, and although it faces a lot of adoption and regulation issues, it works just like other assets such as real estate; it cannot go negative.
But what does it mean for crypto to go negative? Simply put, when you lose all the money you invest in a cryptocurrency and then lose even more, such that you are in debt, that is going negative. This begs the question:
Is It Possible To Lose All My Crypto Investment?
The key to answering this question lies in understanding how people make money in crypto. There are several ways to earn this digital asset depending on the type of blockchain mechanism the developers used to build it. For instance, apart from trading, people earn bitcoins through a complex computation process called mining, where miners answer complex questions and get rewarded with Bitcoins. Each coin then gets locked into a data block that cannot be erased, altered, or tampered with.
Another coin that operates through mining is Ethereum, although it is shifting its operation method to another type which is staking this September in an event called The Merge. Regardless of the way they are earned, however, all coins start at $0.00, be it DOGE, Litecoin, and the myriads of cryptocurrencies on the market. All except stablecoins which are mostly pegged to and backed by a real-world currency like the US dollar, The Euro, or the Mexican Peso.
What is important to note is that cryptos gain value based on market demand. When most investors and traders express interest and invest in a crypto, it gains in value. When too many people lose interest, it begins to crash.
Why the market may lose interest in a crypto
The loss of interest can be traced back to numerous reasons, including:
- Its lack of utility
- An overabundance of its supply that cheapens its price
- A flaw in its software or operating system
- Loss of trust etc.
Now, cryptocurrencies have been known to crash to almost zero and not recover. Take, for example, the algorithmic stablecoin UST of the Terra ecosystem. It crashed in a black swan event that dropped its value by 99.9% in May this year. Some holders of the coin kept hoping it would rally until the last minute, and it cost them all the money they had invested.
So, the short answer is yes, it is possible to lose all your investment in crypto if you do not invest wisely with a proper strategy. Cryptocurrency is a highly volatile investment class; hence no coin is ultimately above a crash, although some are more prone than others.
Ways In Which You Can lose Your Investments in Crypto
Like all investment assets, crypto has its own fair share of risks associated with it. So if you are not careful and knowledgeable, you can lose your investment and profits while trading. Here are some of the ways to lose money in crypto.
This one is majorly on newbie traders, although no one is above mistakes. Some of these trading mistakes include:
- Buying crypto when it is high because of the fear of missing out (FOMO): Most newbies hurriedly invest in assets when they are still on the high side because the masses are doing it. Unfortunately, these inexperienced traders end up losing money when they sell because, often, the prices eventually drop, and they have to sell their crypto for less than they bought it.
- Fumbling your position by panic-selling: This one is the opposite of buying high. Here you sell your crypto too early when the market is rising, thereby losing the profit you would have made had you waited a little more.
Trading cryptocurrency without a sound strategy for your investment
Expert traders know that one doesn’t just randomly invest in certain stocks. You must have a plan that includes whether you want to take a long position or a short one. It would be best if you also did adequate research on the health of any crypto you choose to invest in with your hard-earned money. Some tokens can be profitable for short-term investments, while others will pay better in the long run. An example of a good strategy is not lumping all your assets at once. Doing this can result in loss due to market volatility. A good market strategy ensures that you know when to exit a position and when to take on a new one. Without it, losing your investment is inevitable.
If the blockchain gets hacked
Although most blockchains boast of security, and some actually are secure, no blockchain is entirely immune to being compromised. In such cases, hackers can steal crypto from hot wallets during exploits. It is always safer to store your crypto in cold offline storage to avoid falling victim. For savvy traders who wish to do this, Margex trading is your go-to platform. Margex is a bitcoin-based trading platform (derivatives exchange) that stores 100% of its assets in cold offline storage. Interestingly, Margex is by far one of the most user-friendly trading platforms out there. This platform also allows you to earn more while trading by leveraging up to 100x. Multiple collateral options and over 12 exchange liquidity providers are some more of the benefits of trading on Margex offers. The platform is a breeze for beginners and still complex enough to satisfy the pros.
Losing Your Security Keys
Security keys are just like real keys in the sense that they prove you are the owner of your private wallet and the funds in it. Whenever you need to make a transaction involving the tokens in your wallet, whether it is a trade or a purchase, you will be required to authorize the transaction using that key. Hence if you lose the key (Forget it), you lose your tokens. Usually, you get a limited amount of trials to get the correct key, but if you keep guessing wrong, your wallet will be encrypted, and you will lose access to your funds. That is another way you can lose your investment.
Exiting A Position Too Late Or Not At All
As explained earlier, a crypto’s price might drop to zero due to many reasons. Therefore, you must always be alert to news concerning a crypto you hold, or you might lose your money if it crashes unexpectedly and you do not exit on time. A good investor or trader knows when to cut their losses and move on – and when to sit tight and wait for a crypto they are holding to rally. Either way, all investments have their risks, and we can only do so much to protect our assets.
Can I lose More Than What I invested In a Crypto in Margin Trading?
Technically, it is possible to lose more than your investment in margin trading. Since margin trading involves leveraging more than your actual investment to trade, it might be possible to lose more than you invest and run into negative crypto. However, your broker will usually prevent that. Leveraging allows you to keep trading as long as your position keeps increasing in value. Once you start losing money and it exceeds the lowest margin requirements, your broker would liquidate investments and put a pause to them so that you do not drop below your investment and incur a negative balance.
How Do I Guard Against Losing My Crypto Investments?
- Have a sound investment strategy
- Stay on top of news related to any crypto you hold
- Be more strategic and less emotional in making decisions while trading. Avoid FOMO buying and Panic-selling
- Store your crypto in cold offline storage
- Use a platform that you understand. Margex is your best bet here, with its user-friendly interface suitable for both experts and beginner traders.
Is it Possible to Use Crypto Losses to Write off Tax
The IRS recognizes cryptocurrency as property which can incur capital gains and losses. So, yes, you can write off tax using your crypto loss. How does this work? For instance, if you held Bitcoin and sold it for a profit at $8000. But you sell another asset, maybe LTC, for a loss of $9000. You can write off your $8000 capital gain plus personal income of the extra $1000 loss. Your crypto losses can write off up to $3000 of personal income but not more than that. However, this does not apply to crypto that has not been disposed of in one way or another. In other words, to offset your crypto loss, you must have disposed of it in a crypto to fiat swap, a crypto to crypto exchange, or in purchasing goods and services using crypto.
Can cryptocurrency become negative?
No, the value of a crypto can only drop to zero, after which it becomes useless. Crypto cannot go below zero into a negative balance since Blockchain is resistant to overdrafts and fraudulent altering of data already locked into the blocks.
Can you lose more than you invest in Crypto?
No, the highest amount of funds you can lose from investing in a cryptocurrency is the total amount you invested. Once the value of a crypto hits zero, it can go no further. Even leveraging exchanges do not allow you to exceed your minimum margin requirement.
If a crypto crashes to zero, does it mean you owe money?
If a crypto you own crashes to zero while you still hold it. The worst that can happen is that you lose all your money unless it manages to rally again. However, you cannot owe money to a crypto that has crashed.
How does cryptocurrency lose value?
Cryptocurrencies’ values depend on the rule of demand and supply. The more popular a coin becomes, the higher its value rises. Tokens like BTC rely on scarcity to maintain and even increase in value. If for some reason, people lose faith in a crypto coin and begin to sell, it causes the crypto to nose dive.
How can Margex help prevent me from losing money when I invest?
There are multiple ways Margex can help you here:
- Margex has a Unique MP shield that helps prevent price manipulation and protects your investments from unfair liquidations
- It has more than ten collateral options for traders, which you can use to trade any pair without the need for exchanges and their pesky fees. Margex’s deposit options include USDT, ETH, erc20, USDT trc20, BTC, USDC, USDP, Tron, DAI, etc.
- The platform also does not charge hidden commission fees – plus, you can easily track your progress on one screen as you trade.