Despite its well-known volatility, cryptocurrency is on fire and many investors are seeking to benefit from its white-hot surge. Many prominent digital currencies, like Bitcoin and Ethereum, go through ups & downs in value and experienced traders have been speculating on crypto for years; but what if you’re new to the market and seeking to grab a piece of the cake?
Here’s how to start Investing in cryptocurrency and what you need to look out for.
First and foremost, if you're considering investing in crypto, make sure your financial house is in order. In other words, you should have funds secured for market downs, and you should always keep your debt to a tolerable level. Besides that, it is always recommended to create a well-diversified investment portfolio. Your crypto investments may become one more aspect of your portfolio, one that helps boost your overall returns, ideally.
Pay attention to these five additional considerations while you’re beginning to invest in cryptocurrency.
Step1: Understand what you're investing
Understand specifically what you're investing in, just like any other investment. Buying stocks requires reading the prospectus and researching the business. Plan to do the same with any cryptocurrency, since there are practically dozens of them, and new ones are launched daily. Each deal requires an investment case.
Many cryptocurrencies are backed by neither physical assets nor cash flow. For Bitcoin, for example, investors depend only on someone else paying more than they did. Unlike stocks, where a firm may increase revenues and hence your returns, many crypto assets depend on the market growing more enthusiastic and positive.
Ethereum, Dogecoin, Cardano, and XRP are all popular coins. Solana has also been a huge hit. But, before investing, know the risks. Your financial investment may be worthless if it is not supported by an asset or cash flow.
Step2: The past is past
Many new investors make the error of projecting previous performance into the future. Yes, Bitcoin was once worth pennies, but not anymore. “Will that growth continue in the future, even if it isn't as rapid?”
Investors focus on the future, not the past.
Step3: Watch the volatility
Cryptocurrency values are so volatile that a rumor may vanish them in seconds. That may be fantastic for educated investors who can trade quickly and understand the market's fundamentals, trends, and potential; a quagmire for those without these talents.
High-powered Wall Street traders compete to outgun other wealthy investors in the game of volatility. Note that volatility may quickly destroy a rookie investment.
It of course scares traders, particularly newbies because volatility may assist skilled traders ‘buy low and sell high’ while unskilled investors ‘buy high and sell low.’
Step4: Reduce risk
Short-term traders need to limit their risk, particularly when dealing with volatile assets like cryptocurrencies. As a beginner trader, you must learn to manage risk and build a strategy to minimize losses. And it varies from one person to another.
Long-term risk management may be as simple as never selling, regardless of price. The long-term mindset helps the investor to hold on.
On the other hand, a short-term trader's risk management may include establishing severe restrictions for selling, such as 10% declines. The trader then rotely follows the guideline to avoid a devastating loss later.
Beginner traders should put aside money for trading and only use a fraction of it at first. In the end, you can't trade without funds. Having money in reserve ensures you always have a trading bankroll.
Risk management is critical, but it comes at a price. Selling a lost position stings, but it might save you from more losses.
Step5: Never spend more than you can lose
Finally, avoid investing the money you need in speculative assets. If you can't afford to lose it all, don't invest it in risky assets like bitcoin, or even market-based assets like equities or ETFs.
Whether it's a down payment of a home or an essential purchase, money needed in the next several years should be maintained in secure accounts. Paying off debt is the greatest alternative for a guaranteed return. Whatever interest rate you pay on your loan, you will earn (or save). You can't lose.
Finally, don't forget to check the exchange or broker's security. You may legally possess the assets, but someone must safeguard them. Some traders opt to buy a crypto wallet to store their money offline, making them unavailable to hackers or others.
While direct cryptocurrency investment is the most common method, traders have various options, some more direct than others. Included are:
Crypto futures: Futures enable you to utilize the power of leverage to make large gains on Bitcoin price movements (or losses). Futures are a turbulent market that adds to the already volatile crypto market.
Crypto funds: Some crypto funds (like the Grayscale Bitcoin Trust) enable you to bet on the price fluctuations of Bitcoin, Ethereum, and other cryptocurrencies. So this may be a simple method to acquire crypto through a fund.
Crypto-exchange or broker stocks: Buy stock in a firm that will benefit from the emergence of cryptocurrency regardless of who wins. Like Coinbase or Inveslo, both of which generate a large portion of their income from crypto trading.
Blockchain ETFs: A blockchain ETF enables you to invest in firms that may benefit from blockchain technology. The best blockchain ETFs expose you to major publicly listed firms. Because these firms frequently perform much more than just crypto-related activity, your exposure to cryptocurrency is diluted, decreasing both benefit and risk.
As with any purchase, you should know precisely what you're getting and if it meets your requirements.