Cryptocurrencies have been very volatile since their birth, but this volatility can create profitable opportunities if you want to trade these digital assets. Cryptocurrencies like Bitcoin and Ethereum have risen strongly since their birth, but like other popular digital currencies, they have fallen significantly from their highs.
Here we explain how to start investing in cryptocurrency and the main risks to consider.
5 steps of investing in cryptocurrencies
This means reserves, manageable levels of debt, and ideally a diversified investment portfolio. Investment in crypto assets will form another part of the portfolio and is expected to increase overall profitability.
There are 5 more things to keep in mind when starting to investing in cryptocurrency.
Understand what you are investing in
When buying stocks, it is important to do a thorough analysis of the company by reading the SEC annual reports and other filings. There are literally thousands of cryptocurrencies out there, all with different mechanics and new creations every day, so plan the same for any cryptocurrency.
For many cryptocurrencies, there is no backing, such as hard assets or cash flow. This is the case for Bitcoin, for example. Investors simply rely on those who pay more than they pay for their assets. In other words, unlike stocks where companies can increase profits and increase your returns, many crypto assets rely on the market becoming more bullish and optimistic to make a profit. There it is.
Therefore, understand the potential advantages and disadvantages before investing in cryptocurrency. If a financial investment is not backed by assets or cash flow, it may have no value.
Remember the past is the past
The mistake many new investors make is looking back and projecting it into the future. Sure, Bitcoin was worth a penny, but now it’s more than that. But the key question is whether this increase, if not accelerating, will continue into the future.
Investors focus on the future, not what the property has done in the past. What will contribute to future profits? Traders buying cryptocurrencies today want tomorrow’s profits, not tomorrow’s profits.
Be aware of volatility
Cryptocurrency prices are very volatile. It’s just a baseless rumor, so they quickly give up in a few seconds. This is useful for experienced investors who can trade quickly or who have a good understanding of market fundamentals, trends and direction. This is a minefield for new investors who do not have the skills or the powerful algorithms that drive their trading.
Trading is a game for the powerful traders of Wall Street, each trying to beat the other wealthy investor. New investors are easily fooled.
Therefore, volatility scares traders, especially newbies. Meanwhile, other traders can step in and buy cheaper. In other words, volatility helps experienced traders “buy low and sell high” and inexperienced investors “buy high and sell low”.
Risk must be managed when trading assets on a short-term basis, and this is particularly true for volatile assets such as cryptocurrencies. Therefore, as a novice trader, you should understand how to manage your risk and develop a process that minimizes your losses:
- For long-term investors, risk management can never sell regardless of price. Thinking long-term allows investors to stick to their position.
- However, risk management for a short-term trader can involve setting strict rules for when to sell, such as when an investment drops by 10%. Traders follow the rules strictly so that relatively small drops do not result in big losses.
New traders should consider setting aside a certain amount of trading capital and using only a portion of it, at least initially. Even if the stance is against them, they have money left over to trade later. After all, you cannot trade without money. So having some reserves means you always have a bankroll to fund your trades.
Managing risk is important, but it comes at an emotional price. Selling a losing position can be painful, but can help you avoid big losses later.
Only allocate what you’re comfortable parting with
Finally, it is important to avoid investing in essential assets. We cannot invest in risky assets like cryptocurrencies or other speculative assets if we cannot afford to lose them.
Whether it’s a down payment on a home or an upcoming purchase, the funds you need for the next few years should be held in a safe account so that they are readily available when needed. And if you’re looking for an absolutely guaranteed return, your best bet is to pay off your debt. A guarantee to receive (or save) interest paid on a loan. Don’t get lost there.
Finally, don’t forget about the security of the exchanges and brokers you use. You can legally own an asset, but someone still needs to protect it, and that protection must be trustworthy. If they are not confident that their cryptocurrencies are properly protected, some merchants choose to invest in cryptocurrency wallets to store their coins offline so they cannot be accessed by hackers and others.
Other ways to invest in cryptocurrencies
Directly investing in cryptocurrency is probably the most popular way, but there are other ways for traders to get into the cryptocurrency game, some of which are more straightforward. These include:
- Cryptocurrency Futures: Futures are another way to bet on Bitcoin price movements and allow you to make huge profits (or losses) using the power of leverage. Futures are a rapidly growing market that adds to the already volatile movement of cryptocurrencies.
- Cryptocurrency exchanges or stock brokerages: Buying shares in a company poised to benefit from the cryptocurrency growth can also be an interesting option, regardless of the winner. And perhaps most of the revenue from cryptocurrency trading comes from exchanges like Coinbase or brokers like Robinhood.
- Blockchain ETFs: Blockchain ETFs allow you to invest in companies that will benefit from the rise of blockchain technology. The best blockchain ETFs give you access to some of the most important public companies in the space. However, note that these companies often do more than cryptocurrency-related businesses, which means that exposure to cryptocurrencies is eliminated, reducing potential profits and losses.