Did you know that about one in every 12 Americans invests in cryptocurrency? Thanks to rapid digitalization, cryptocurrencies have quickly risen up the ranks as a potential investment option.
So, what is cryptocurrency?
It’s a virtual currency that’s an excellent avenue for investment. However, it’s also one of the most volatile asset classes, which means that it has large price swings. Because it’s still fairly early days for cryptocurrency, it’s hard to predict the future. Having said that, it’s quite likely that we will soon reach a point where crypto usage will be part of our everyday lives.
Ever since it was introduced, one thing has been clear – cryptocurrencies have been very volatile, but this can also create opportunities to gain profits if you want to trade digital assets. As with all investments, there are significant risks you need to consider and your finances have to be in order. This involves having an emergency fund, a well-diversified portfolio of investments, and a manageable debt level.
Curious to learn about investing in cryptocurrency? Here’s how:
- Select the cryptocurrency exchange you want to use. Make sure to go for a reputable exchange that has an extensive selection of currencies.
- Set up an account with the cryptocurrency exchange.
- Fund your account with fiat money (a type of currency that is not backed by a physical commodity such as gold or silver, and is government-issued).
- Decide what cryptocurrency you want to invest in.
- Place a buy order for the cryptocurrency you have chosen.
- Once the purchase is done, store your cryptocurrency in a digital wallet.
Here are some factors you need to pay attention to when you start investing in cryptocurrency:
What Are You Investing In?
You can’t walk in with a blank state of knowledge when investing. Rather, you need to have a thorough understanding of how cryptocurrencies work. Given the fact that there are thousands of cryptocurrencies, each with its unique functions, you have to know the investment case for every trade and carefully analyze the investment risks involved.
You also need to remember that cryptos work differently from stocks, where a company can drive its profits and returns for you. However, most crypto assets rely on the market booming for you to profit. This is why you need to understand the pros and cons before investing. If your investment isn’t backed by cash flow or an asset, then it would end up being unworthy.
Look Beyond Data and History
Sure, taking lessons from the past is wise, but this shouldn’t be the only data taken into consideration, especially for new investors. This is because cryptocurrency’s current value is not always linked to its past performances. You simply cannot afford to look at the past and hope to project that into the future. Remember, as a trader buying cryptocurrency, you need tomorrow’s gains, not yesterday’s lessons.
Keep Track of Market Volatility
Cryptos and volatility go hand in hand. Cryptocurrency values can drop in a matter of seconds based on a rumor that ends up being untrue. For well-seasoned investors, this can be a bonus because it means they can execute trades quickly and latch onto market trends. On the flip side, new investors will find this very challenging because it’s like battling through a proverbial minefield. The volatility of cryptos will intimidate beginners, whereas sharp traders can buy low and sell high.
Know How to Manage Risk
Asset trading on a short-term basis requires knowledge of how to manage your risk and follow a process that will allow you to mitigate any loss. This varies according to each individual, where risk management for a long-term investor would be to not sell, irrespective of the price. This approach will allow the investor to hold on to the position. On the other hand, for a short-term trader, risk management involves placing stringent rules on when to sell and following through with it so that a small decline doesn’t end up being a detrimental loss.
Moreover, new traders should also allocate a sum of trading money and use only a portion of it initially. This way, if a position turns against them, they can then use the money saved to trade later.
Don’t Invest More Than You Can Afford to Lose
As discussed above, cryptos are high-risk investments. So, similar to how there is great potential for higher-than-expected returns, there is also the risk of losing everything. This is why you need to have a more diversified portfolio, as this lowers your chance of losing everything. In simpler terms, you don’t want to put all your eggs in one basket. A good rule is to invest less than 10% of your total investment portfolio in investments that are of high-risk value.
With the rate of advancements in technology in today’s world, we can safely assume that how we can invest in cryptocurrencies will only increase. While there is no denying the fact that cryptos are some of the best-yielding commodities in the market, there are potential pitfalls one should watch out for. This is why investing in cryptocurrencies requires diligent research so you can be confident about making your investment!