Why Is Financial Literacy A Must When Trading Crypto?

Most crypto experts believe that crypto trading is just like running a business. Like a business, crypto trading requires its investor to start with a capital, sell, and profit in the end. And without financial literacy, running a business is a disaster. Thus, if crypto trading is like a business, which requires financial literacy, we can say that a crypto trader must also be financially literate to succeed in his crypto trading venture. Keep reading as we enumerate three compelling reasons to acquire financial literacy when trading crypto.


Understanding Financial Literacy

But first, we need to understand financial literacy. What does it mean when we say one is financially literate? In a nutshell, it means that that person understands the words and numbers dealing with money and investing. They know the mechanics of the game.

To be specific, that means they know the difference between an asset and a liability, understand cash flow versus capital gains, comprehend debt and taxes for wealth creation, and make their own financial decisions. According to Robert Kiyosaki, a famous investor and author of the Rich Dad series of personal finance books, these are the four foundations of financial literacy.


Going back to our main question, Why is it Essential to Have Financial Literacy When Trading Crypto?

Reason 1: It Lowers the Trading Risks

With financial literacy, you understand every trading decision you make. Financially literate crypto traders do not move their assets (buy, sell, or hold) without a basis, just like a chess player carefully positioning his chess pieces. Together with sound reasoning is the anticipation of what will happen next concerning the position recently made. By being precautious and precise in our every trading move, we lower the risks of losing our hard-earned money in a highly volatile crypto market.

Furthermore, a background in financial education gives a person an idea of whether the tool he plans to use in easing his crypto trading journey is advantageous or not. For instance, if you are a beginner who wants to enter the crypto trading industry, you can effortlessly determine which one is better between the crypto exchange and crypto broker platform.

Crypto exchange is where you can directly sell your crypto to buyers and vice versa, which you can do on Coinbase, Immediate Edge, Gemini, and other popular crypto trading platforms. On the other hand, the crypto broker platform is where you can entrust your investment to various trading opportunities, including leverage positions and others, depending on the services provided by the specific broker.

Your financial literacy helps you balance several factors involved in using such platforms, like the initial investment, service fees, trading costs, ROI, sustainability, profit, etc.



Reason 2: Financial Literacy May Help You Maximise Your Potential Gains

You can maximise your potential profit in crypto trading if you know how cash flow works. And cash flow is an essential concept in financial education that only financially literate individuals know. Cash flow is the term used to describe the movement of money that comes in and goes out. Money comes out when we spend, and money comes in when we earn. Successful crypto traders enhance their ability to manage cash flow to secure that money keeps coming in rather than out.

With this concept, they understand that they can use their crypto assets to stimulate cash flow and reinvest their gains to create more assets (i.e., acquiring other cryptos). Robert Kiyosaki stresses that financially intelligent investors know how to use an asset as a weapon to turn cash flow into their favour.


Reason 3: It Helps One to Have A Stable Crypto Trading Experience

If you want to stay in the industry for the long run, you must learn how to keep things in order. And financial literacy might just help you do that. A financially literate individual does know when to start, continue, and stop. In crypto trading, that is crucial. For instance, if you keep investing in crypto that has no potential, you might keep losing money instead of gaining.

Financial literacy can help you balance several factors involved in crypto trading, such as the amount of investment, trading expenses, crypto-asset potential, and others. In effect, it may help you continue trading crypto for years.


Closing Thoughts

A good financial education teaches people to think critically and for themselves about money and investing. And these traits are necessary if you are planning to dive into the crypto world. Without it, you might fall into several pits along the way. Therefore, it is highly recommended to have financial literacy before starting crypto trading.