Despite its well-known volatility, cryptocurrency is booming, and many investors are hoping to cash in on the trend. Cryptocurrencies like Bitcoin and Ethereum ebb tend to flow for a period of time before climbing higher, as do many other prominent digital currencies. Experienced traders have been speculating on cryptocurrency for years, but what if you're new to the industry and want in?
Here's how to get started investing in cryptocurrencies and
what to avoid.
Investing in Cryptocurrency in 5 Easy Steps
First and foremost, if you want to invest in cryptocurrency,
you must have all of your financial affairs in order. That involves having an
emergency fund, a sustainable debt load, and, ideally, a well-diversified
investment portfolio. Your crypto investments can help you diversify your
portfolio and, hopefully, increase your total returns.
As you begin to invest in cryptocurrencies, keep these five
other factors in mind.
1. Know what you're getting yourself into.
Understand exactly what you're investing in, just like you
would with any other investment. When buying stocks, it's critical to read the
prospectus and extensively research the companies. Plan to do the same with
every cryptocurrency, as there are thousands of them, each of which operates
differently, and new ones are generated every day. For each trade, you must
comprehend the investment case.
Many cryptocurrencies are backed by nothing at all,
including neither physical assets nor cash flow. For example, in the case of
Bitcoin, investors rely solely on someone else paying more for the product than
they did.
To put it another way, unlike stocks, where a company's
profits can expand and drive returns for you, many crypto assets must rely on
the market becoming more enthusiastic and positive in order for you to profit.
Ethereum, Dogecoin, Cardano, and XRP are some of the most
popular coins. Solana has also proven to be a hugely successful coin. So,
before you invest, make sure you're aware of the potential gain and risk. It's
possible that your financial investment will be worthless if it's not backed by
an asset or cash flow.
2. Keep in mind that the past is no longer relevant.
Many new investors make the mistake of looking at the past
and extrapolating to the future. Bitcoin was once worth pennies, but it is now
worth a lot more. The real question is, "will that growth continue in the
future, even if it isn't at such a breakneck pace?"
Investors are interested in what an asset will do in the future, not what it has done in the past. What factors will influence future returns? Traders who acquire a cryptocurrency today need the gains of tomorrow, not the gains of yesterday.
3. Keep an eye on the volatility.
Cryptocurrency values are about as volatile as any asset can
be. They could be thrown out in a matter of seconds based on nothing more than
a rumour that turns out to be false. That can be advantageous for knowledgeable
investors who can quickly execute trades or who have a firm understanding of
the market's fundamentals, how it is trending, and where it might go. It's a
minefield for new investors who don't have these abilities – or the
high-powered algorithms that direct these trades.
Volatility is a game played by high-powered Wall Street
traders who are competing with other wealthy investors. The volatility might
quickly crush a novice investment.
This is due to the fact that volatility frightens traders, especially newbies.
4. Keep your risk under control.
You must control your risk while trading any asset on a
short-term basis, and this is especially true with volatile assets like
cryptocurrencies. As a beginner trader, you'll need to learn how to manage risk
and build a strategy to help you avoid losing money. And this procedure differs
from one person to the next:
A long-term investor's risk management may simply consist of
never selling, regardless of price. The investor's long-term mindset permits
him to continue with the investment.
A short-term trader's risk management strategy can include
establishing rigorous standards for when to sell, such as when an investment
has declined 10%. The trader then follows the rule remotely to ensure that a
little loss does not turn into a massive loss later.
New traders should consider setting aside a particular
amount of trading capital and just spending a fraction of it at first. They'll
still have money in the reserve to trade with if a position goes against them. The
bottom line is that if you don't have any money, you can't trade. Keeping some money
in reserve ensures that you'll always have a bankroll to trade with.
Risk management is necessary, but it comes at an emotional cost. Although selling a lost position is painful, it might help you avoid worse losses in the future.
5. Don't put more money into it than you can afford to lose
Finally, you should avoid investing money that you don't
need in speculative assets. If you can't afford to lose it all, you shouldn't
invest it in risky assets like bitcoin, or other market-based assets like stocks
or ETFs for that matter.
The money you'll need in the next several years, whether it's
for a down payment on a house or a major forthcoming purchase, should be stored
in safe accounts so it's there when you need it.
Finally, make sure that any exchange or broker you choose is
secure. Even if you legally control the assets, someone must secure them, and
their security must be strict. Some traders choose to invest in a crypto wallet
to keep their coins offline and out of reach of hackers and others if they
don't believe their cryptocurrency is securely secured.
There are a variety of other ways to invest in
cryptocurrencies.
While investing directly in cryptocurrencies is the most
common method, traders also have other options, some of which are more direct
than others. These are some of them:
Futures on Bitcoin: Futures are another option to bet
on price swings in Bitcoin, and futures allow you to leverage your money to
make a lot of money (or losses). Futures are a fast-moving market that
exacerbates crypto's already erratic movements.
Crypto funds: There are a few crypto funds (such as
the Grayscale Bitcoin Trust) that allow you to bet on Bitcoin, Ethereum, and a
few other cryptocurrencies' price swings.
Stocks in crypto exchanges or brokers: Investing in a
company that is prepared to profit from the rise of bitcoin regardless of the
winner could also be a good idea. And that's the possibility of an exchange
like Coinbase or a broker like Robinhood, which rely heavily on crypto trading
for revenue.
Blockchain ETFs: A blockchain ETF is a type of
exchange-traded fund that allows you to invest in firms that may benefit from
the rise of blockchain technology. The best blockchain ETFs give you exposure
to some of the most important publicly traded blockchain start-ups. However,
it's worth noting that these companies generally conduct much more than
cryptocurrency-related activity, diluting your cryptocurrency exposure and
lowering your potential gain and loss.
Each of these options has a different level of risk and exposure
to bitcoin, so make sure you know exactly what you're getting and whether it
meets your needs.
