Cryptocurrency is absolutely on fire these days and many investors are looking to profit from its rise. Well-known cryptos such as Bitcoin have risen again, and other popular digital currencies are rallying as well. Experienced traders have been speculating in crypto for years, but what if you are new to the market and looking to get in on the action?
Here’s how to start investing in cryptocurrency and what you need to watch out for.
5 steps to invest in cryptocurrency
First of all, if you are looking to invest in crypto, you need to have all of your finances in order. This means having an emergency fund in place, a manageable level of debt and ideally a diversified investment portfolio. Your crypto investments can become one more part of your portfolio, one that hopefully helps increase your total returns.
Watch out for these five other things when you start investing in cryptocurrencies.
1. Understand what you are investing in
As you would with any investment, understand exactly what you are investing in. If you are buying stocks, it is important to read the prospectus and carefully analyze the companies. Plan to do the same with all cryptocurrencies as there are literally thousands of them, they all work differently and new ones are created every day. You need to understand the investment case for each transaction.
In the case of many crypto-currencies, they are not backed by anything at all, neither by durable assets nor by cash flows. It’s the case for Bitcoin, for example, when investors rely exclusively on someone paying more for the asset than they paid for it. In other words, unlike stocks, where a company can increase their profits and generate returns for you this way, many crypto assets have to rely on the market becoming more bullish and bullish for you to profit.
Some of the most popular pieces include Ethereum, Dogecoin, Cardano and XRP. Newcomer Computer Internet recently burst onto the scene, too. So, before you invest, understand the upside and downside potential. If your financial investment isn’t backed by an asset or cash flow, it could end up being worthless.
2. Remember the past is past
A mistake many new investors make is to look to the past and extrapolate to the future. Yes, Bitcoin was once worth pennies, but now it’s worth a lot more. The key question, however, is: “Will this growth continue into the future, even if not at such a rapid pace?” “
Investors look to the future, not to what an asset has done in the past. What will drive future returns? Traders who buy cryptocurrency today need the gains of tomorrow, not yesterday.
3. Watch for this volatility
Cryptocurrency prices are about as volatile as an asset can be. They could quickly stumble upon nothing more than a rumor in seconds that turns out to be baseless. This can be ideal for sophisticated investors who can execute trades quickly or who have a solid understanding of market fundamentals, market trend and direction. For new investors without these skills – or the powerful algorithms that drive these transactions – it’s a minefield.
Volatility is a game for powerful Wall Street traders, each of which tries to outdo other investors with deep pockets. A new investor can easily be overwhelmed by volatility.
This is because volatility is shaking up traders, especially newbies, who are scared. Meanwhile, other traders can step in and buy low. In short, volatility can help sophisticated traders “buy low and sell high” while inexperienced investors “buy high and sell low”.
4. Manage your risk
If you are trading a short-term asset, you must manage your risk, and this can be especially true with volatile assets such as cryptocurrency. So, as a new trader, you will need to understand how to best manage risk and develop a process that helps you mitigate losses. And this process can vary from individual to individual:
- Risk management for a long-term investor may simply never sell, no matter what the price. The long term mindset allows the investor to stick with the position.
- Risk management for a short-term trader, however, can impose strict rules on when to sell, such as when an investment has fallen by 10%. The trader then follows the rule by heart so that a relatively small drop does not turn into a crushing loss later.
New traders should consider setting aside a certain amount of trading money and then only using a portion of it, at least initially. If a position evolves against them, they will still have money in reserve to trade later. The ultimate point is that you can’t trade if you don’t have money. So, keeping money in reserve means that you will always have a bankroll to fund your trading.
Managing risk is important, but it will come at an emotional cost. Selling a losing position hurts, but you will have to do it every now and then to avoid much worse losses later.
5. Don’t invest more than you can afford to lose
Finally, it is important to avoid putting the money you need in speculative assets. If you can’t afford to lose it all, you can’t afford to put it in risky assets like cryptocurrency, or other market-based assets like stocks or ETFs, elsewhere.
Whether it is a down payment for a house or an upcoming large purchase, the money you need over the next few years should be kept in secure accounts so it’s there when you need it. And if you are looking for an absolutely secure return, your best option is to pay off your debts. You are guaranteed to earn (or save) whatever interest rate you pay on debt. You can’t lose there.
Finally, do not neglect the security of the exchanges or brokers you use. You can own the assets legally, but someone still has to secure them and their security has to be strict. If they think their cryptocurrency is not properly secured, some traders choose to invest in a crypto wallet to keep their coins offline so that they are inaccessible to hackers or others.
At the end of the line
Cryptocurrency is a highly speculative area of the market, and many smart investors have decided to put their money elsewhere. For beginners who want to get started in crypto trading, the best advice is to start small and only use the money you can afford to lose.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past performance of investment products is not a guarantee of future price appreciation.