Before anything else, if you’re looking to invest in crypto, you should ensure your finances are in order.
This means putting in place an emergency fund, a diversified portfolio of investment, and a manageable level of debt.
Your crypto investment could become part of your investment portfolio, hopefully, one that helps to boost your total returns.
You should also pay attention to the following things as you start investing in cryptocurrencies.
1. Know what you are investing in
Just as with any other investment, you want to understand what you are buying. For instance, when buying stocks, you often have to understand what the company does, read the prospectus, and analyze the business thoroughly.
You will have to do the same when investing in any cryptocurrencies, as there are thousands of them, with each functioning differently and new ones being minted every day. As such, you want to understand the purpose of the coin and have an investment case for every trade.
Many cryptocurrencies are backed by nothing at all, neither cash flow nor hard assets. For example, this is the case for Bitcoin, where investors have to rely exclusively on someone else paying a bit more for the asset than they paid for.
In other words, unlike stocks where companies can grow their profits and drive returns for you that way, most crypto assets have to rely on the market becoming optimistic and bullish to generate profit.
Some of the most popular cryptocurrencies include Dogecoin, Ethereum, XRP, and Cardano. Newcomer Internet Computer recently came into the scene too.
So, before you place a trade, be sure to understand the potential downside and upside. In case the financial instrument is not backed by the cash flow of an asset, it could end up being worth nothing.
2. The Past is the past
A mistake a lot of new investors make is checking the past performance and extrapolating it into the future. Yes, there was a time Bitcoin was worth pennies, but now it’s worth a lot more. However, the key question is whether that kind of growth will continue in the future, even if it’s not at such a meteoric rate.
Investors should ideally look into the future, not how an asset has performed in the past. What should help drive future returns?
If you are buying a cryptocurrency today, you should look at tomorrow’s gains, not yesterday’s.
3. Watch for Volatility
The prices of cryptocurrencies are very volatile – they are as volatile as any financial instrument can get. The price can rapidly drop in seconds on nothing more than a simple rumor that could even end up proving baseless.
While this can be a good thing for the sophisticated Wall Street traders who can rapidly execute trades or have a solid understanding of the market’s fundamentals, the underlying trends, and upcoming significant events, it can be detrimental to newbie investors without these skills.
Volatility is a game for the high-powered traders on Wall Street, as each of them will be in the game to outdo other investors with deep pockets. But for a new investor without the necessary skills and tools, navigating such levels of volatility will feel like walking in a minefield, and it’s easy to get crushed.
This is because volatility shakes out traders, particularly the beginners who easily get scared. Other experienced traders may step in and buy at cheap prices. In other words, volatility can help a sophisticated trader “buy low and sell high” and a newbie trader to “buy high and sell low”.
4. Manage risk
If you’re trading on a short-term basis, you have to manage your risk, especially when dealing with assets as volatile as cryptocurrency. Download the Bitcoinstormapp to help you manage your investments.
As a newer trader, you have to understand how you can manage risk and come up with a process that helps you mitigate losses when they come. This process will vary from individual to individual.
For long-term investors, risk management might entail never selling, no matter the price. Such a long-term mentality allows for the investor to stick with the position regardless of short-term performance.
However, for a short-term investor, there might be strict rules on when to sell, such as if the investment falls 10%. The investor will strictly follow their trading rule to avoid small declines snowballing into a crushing loss.
Newer traders are better off setting aside a certain amount of trading money and only using a portion of it, at least when starting. This way, if a position moves against them, they will still have money reserved to open new positions.
The point here is that you can’t trade without any money – having money in the reserve ensures that you will always have some bankroll to fund new positions.
While it’s important to manage risk, it often comes with some level of emotional cost. Selling a position at a loss will hurt, but you will need to do it occasionally to avoid bigger losses later.
5. Only trade with money you can afford to lose
Avoid putting the money you need in speculative assets. If you can’t afford to lose the money – all of it – don’t put it into risky assets like crypto or other market-based assets like ETFs, stocks, etc.
Money that you need in the next few years, whether it’s a down payment for a house or an upcoming major purchase should be kept in safe accounts such that it’s available when you need it.
And if you want a sure return, your best option is to pay off your debt. You will be guaranteed to save or earn, whatever the interest rate might be when you pay off debt.
Finally, never overlook the security of the brokerage or exchange you work with. You might legally own the assets, but someone will have to secure them, and this security has to be tight.
If you think your cryptocurrency isn’t stored securely, consider getting a good crypto wallet that can hold your coins offline to ensure they aren’t accessible to hackers and other malicious users.