cryptocurrencies Despite its notorious volatility, the cryptocurrency is burning, and many investors are looking to capitalize on its blistering rise. Cryptos like Bitcoin and Ethereum fall for a while, rise, and so do many other popular digital currencies. Seasoned traders have been speculating on cryptocurrencies for years, but what if you are new to the market and want to get a piece of the action?
Here’s how to start investing in cryptocurrencies and what to look out for.
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Five steps to investing in cryptocurrencies
First, if you want to invest in crypto, you need to have all your finances in order. That means having an emergency fund, manageable debt, and a diversified investment portfolio. Your crypto investments can become just another part of your portfolio that will hopefully help increase your overall returns.
Pay attention to these other five things when you start investing in cryptocurrencies.
1. Understand what you are investing in
As with any investment, you should understand exactly what you are investing in. When buying stocks, it’s important to read the prospectus and thoroughly analyze the companies. You need to understand the investment case for each trade. Plan the same with any cryptocurrency as there are literally thousands of them, they all work differently and new ones are created daily.
With many cryptocurrencies, they are not backed by anything, either physical assets or cash flows. That’s the case with Bitcoin, for example, where investors rely solely on someone paying more for the asset than they paid for it. In other words, unlike stocks, where a company can grow its profits and thus generate returns for you, many crypto assets have to rely on the market, becoming more optimistic and bullish for you to make profits.
The most popular coins are Ethereum, Dogecoin, Cardano, and XRP. Solana was also another blockbuster coin. It could be worthless if an asset or cash flow doesn’t back your financial investment. So before investing, understand the potential pros and cons.
2. Remember, the past is the past
A mistake many new investors make is looking to the past and extrapolating it into the future. Yes, bitcoin used to be worth pennies, but now it’s worth a lot more. But the key question is, “Will this growth continue, albeit not at such a meteoric pace?”
Investors look to the future, not what an asset has done in the past. What will drive future returns? Traders buying cryptocurrency today need tomorrow’s profits, not yesterday’s.
3. Keep an eye on that volatility
Cryptocurrency prices are about as volatile as an asset can get. You could fall for nothing in seconds but a rumour that turns out to be unfounded. This can be great for experienced investors who can execute trades quickly or who have a solid understanding of market fundamentals, how the market is doing and where it might be going. For new investors without these skills or the powerful algorithms that execute these trades, it’s a minefield.
Volatility is a game for high-profile Wall Street traders, each trying to outperform other well-funded investors. A new investor can easily become overwhelmed by volatility.
That’s because volatility shakes up traders, especially beginners, who freak out. In the meantime, other retailers can step in and shop cheaply. In short, volatility can help experienced traders “buy low and sell high” while inexperienced investors “buy high and sell low”.
4. Manage your risk
When short trading an asset, you need to manage your risk, especially with volatile assets like cryptocurrencies. So, as a new trader, you need to understand how best to manage risk and develop a process to help you mitigate losses. And this process can vary from person to person:
Risk management for a long-term investor might consist of never selling, regardless of the price. The long-term mentality allows the investor to stay in the position.
However, risk management for a short-term trader can set strict rules for selling, e.g. B. if an investment has fallen by 10 per cent. The trader then follows the rule so that a relatively small drop doesn’t become a crushing loss later.
Newer traders should consider setting aside a certain amount of trading money and then using only a portion of it initially. If a position moves against them, they still have money in the reserve to trade later. So if you keep some money in reserve, you always have funds to fund your operations. The bottom line is that if you don’t have money, you can’t trade.
Risk management is important, but it will have an emotional cost. Selling a losing position hurts, but it can help you avoid worse losses down the road.
5. Don’t invest more than you can afford to lose
Finally, it is important not to invest the required money in speculative investments. If you can’t afford to lose it all, you can’t afford to invest it in risky assets like cryptocurrency or other market-based assets like stocks or ETFs.
Whether a down payment on a house or an upcoming major purchase, the money you need for years should be kept in secure accounts, ready when you need it, and if you are looking for a completely safe return, paying off debt is the best option. You’re guaranteed to earn (or save) the interest rate you pay on the debt. You can’t lose there.
Finally, don’t forget about the security of the exchange or broker you are using. You can legally own the assets, but someone still has to protect them, and your security has to be strict. Suppose they don’t feel their cryptocurrency is adequately protected. In that case, some traders choose to invest in a crypto wallet to keep their coins offline, making them inaccessible to hackers or others.
Other ways to invest in cryptocurrencies
While investing directly in cryptocurrency may be the most popular route, traders have other ways of getting into the crypto game, some more directly than others. These include:
Crypto Futures – Futures are another way to bet on Bitcoin price changes, and futures allow you to harness the power of leverage to make massive gains (or losses). Futures are a fast-moving market and add to the already volatile movements of cryptocurrencies.
Crypto Funds – Some crypto funds (like Grayscale Bitcoin Trust) allow you to bet on price changes in Bitcoin, Ethereum, and some other altcoins. Therefore, they can be an easy way to buy crypto through a fund-like product.
A cryptocurrency exchange or stock broker: Buying shares in a company willing to profit from the rise of cryptocurrencies regardless of the winner could also be an interesting option. And that’s the potential of exchange like Coinbase or a broker like Robinhood, which derives a large portion of their revenue from cryptocurrency trading.
Blockchain ETF – A blockchain ETF allows you to invest in companies that will benefit from the rise of blockchain technology. Top blockchain ETFs expose you to some of the largest publicly traded companies in the industry. However, it is important to note that these companies often do much more than cryptocurrency-related business, which dilutes their exposure to cryptocurrencies, reducing their potential upsides and downsides.
Each method differs in risk and exposure to cryptocurrencies, so you should understand exactly what you are buying and whether it suits your needs.