Despite its well-known volatility, cryptocurrency is on the rise, and many investors are hoping to profit from the trend. Cryptocurrencies such as Bitcoin and Ethereum, as well as many other prominent cryptocurrencies, consolidate for a period before rising higher. For years, experienced traders have been speculating on cryptocurrency, but what if you're new to the industry and want to get involved?
Here's how to get started with cryptocurrency investing and what to avoid.
5 steps for investing in cryptocurrency
To begin with, if you intend to invest in cryptocurrency, you must have all of your financial affairs in order. Having an emergency fund, a manageable debt load, and, ideally, a well-diversified investment portfolio are all part of it. Your crypto investments can assist you in diversifying your portfolio and, hopefully, increasing your total returns.
Here are the 5 steps to bear in mind before investing in crypto.
Know what you're investing in
Understand what you're investing in as thoroughly as you would any other investment. When purchasing stocks, it is critical to thoroughly research the companies and read the prospectus. Plan to do the same with each cryptocurrency, as there are thousands of them, each of which operates differently, and new ones are created on a daily basis. You must understand the investment case for each trade.
Many cryptocurrencies are not backed by anything, including physical assets or cash flow. In the case of Bitcoin, for example, investors rely solely on someone else paying more for the product than they did. To put it another way, unlike stocks, where a company's profits can grow and drive returns for you, many crypto assets require the market to become more enthusiastic and positive in order for you to profit.
Some of the most popular coins are Ethereum, Dogecoin, Cardano, and XRP. Solana has also proven to be a highly profitable coin. So, before you invest, make sure you understand the potential profit and risk. If your financial investment is not backed by an asset or cash flow, it may be worthless.
Don’t put all of your eggs in one basket
Before you put your money into any investment, one of the most crucial initial actions you can take is to figure out how much of your portfolio that asset will make up.
The need for correct allocation stems from the fact that cryptocurrencies can be quite volatile. You limit your exposure to the danger of one of your assets losing value by spreading your investments over numerous different types of assets. Consider your portfolio to be an airplane, If a plane has only one engine and that engine fails, the plane will crash. If one of your aircraft's four engines fails, you'll still have three more engines to keep you flying.
Keep the following points in mind:
- Make your crypto portfolio allocation minimal initially, especially if you're just getting started. Because many cryptos are so pricey, you'll want to start with tiny quantities while you're initially getting started.
- Cryptocurrencies resemble commodities rather than stocks. Unlike stocks, which reflect company ownership and may offer income in the form of dividend payments, cryptocurrencies act more like gold and oil as investments.
- Cryptocurrencies were never intended to be used as investments. cryptocurrencies were created to supplement or replace modern fiat currency as a medium of exchange. The primary distinction is that, unlike paper currency, central banks and governments do not regulate the value of cryptocurrencies.
- Until now, cryptocurrency's principal function has been as a trading asset with limited real-world applications. Cryptocurrency is still in its infancy. It is adapting as a means of exchange at a far slower rate than first expected. When needed, you can rapidly swap bitcoins for local money.
Watch that volatility
Cryptocurrency prices are about as volatile as any other asset. They could be thrown out in a matter of seconds based on nothing more than a false rumor. This can be advantageous for knowledgeable investors who can execute trades quickly or have a solid understanding of the market's fundamentals, how it is trending, and where it may go. It's a minefield for inexperienced investors who lack these skills – or the high-powered algorithms that guide these trades.
Volatility is a game that high-powered Wall Street traders play against other wealthy investors. Volatility can quickly demolish a new investment. This is because volatility frightens traders, particularly newcomers. Meanwhile, other traders may take advantage of the situation and purchase at a discount. To put it another way, whereas professional traders can "buy low and sell high," inexperienced investors may "buy high and sell low."
Manage your risk
You must control your risk while trading any asset on a short-term basis, and this is especially true with volatile assets like cryptocurrencies. As a beginner trader, you'll need to learn how to manage risk and build a strategy to help you avoid losing money. And this procedure differs from one person to the next:
- A long-term investor's risk management may simply consist of never selling, regardless of price. The investor's long-term mindset permits him to continue with the investment.
- A short-term trader's risk management strategy can include establishing rigorous standards for when to sell, such as when an investment has declined 15%. The trader should follow the guideline, ensuring that a minor loss does not turn into a crippling loss later.
New traders should set aside a specific amount of trading capital and only spend a portion of it at first. If a position goes against them, they'll still have money in the reserve to trade with. The bottom line is that you cannot trade if you do not have any money. Keeping some money in reserve ensures that you'll always have a trading bankroll.
Risk management is necessary, but it comes at a cost in terms of emotion. Although selling a lost position is unpleasant, it may help you avoid further losses in the future.
Your cryptocurrency platform will serve as your home base — your dashboard – for buying, selling, trading, and managing your bitcoin investment.
If you wanted to acquire cryptocurrency through your bank, you should be aware that most financial institutions do not allow cryptocurrency trading on their platforms. There are a variety of reasons for this - legislative restrictions, security concerns, and general apathy – but the bottom line is that you'll almost certainly have to start over on a different platform.
The good news is that in the ten years or so since cryptocurrency began trading online, a slew of exchanges has sprung up to facilitate secure transactions. Plus, with so much competition for new investors, these platforms have had to constantly innovate and raise their game in terms of promotions, features, and security.
Basic Cryptocurrency FAQs that you should know!
1. What is cryptocurrency?
Cryptocurrency is a type of decentralized digital money that is commonly used on the internet. In contrast to a central banking authority, cryptocurrency uses a decentralized form of governance and control. Cryptocurrency is powered by blockchain, a distributed ledger technology. Bitcoin was the first cryptocurrency, and it gained popularity in 2008. There are numerous other cryptocurrencies available today, including Ethereum, Tether, Solana, and Cardano.
2. How many cryptocurrencies exist, and how much are they worth?
There are now over 16,000 cryptocurrencies, according to CoinMarketCap. They range in price. Bitcoin has a market capitalization of nearly $900 billion because it is by far the largest cryptocurrency. Ethereum, the second-largest cryptocurrency, has a market capitalization of less than $500 billion. It is difficult to estimate the total market size of all cryptocurrencies because, unlike public equities markets, no official data source exists. According to some estimates, the total size of the cryptocurrency markets is around $3 trillion. Each cryptocurrency may have different technical features in addition to facilitating the transfer of value.
3. Why are cryptocurrencies so popular?
Cryptocurrencies enable parties to send money online without the need for a central counterparty, such as a bank. Cryptocurrencies also allow for quick global value transfers 24 hours a day, seven days a week. Some argue that cryptocurrency is a better form of value transfer because it provides privacy, security, and immutability (irreversibility) that traditional money does not.
4. How much capital do I require to begin investing in cryptocurrency?
In theory, investing in cryptocurrency costs only a few dollars. Most cryptocurrency exchanges, for example, have a minimum trade amount of $5 or $10. Other cryptocurrency trading apps may have a lower minimum.
However, it's important to understand that if you're trading small amounts of cryptocurrency, some trading platforms will take a large portion of your investment as a fee. As a result, it's critical to find a broker or exchange that charges the least amount of money. Indeed, many ostensibly "free" brokers include fees – known as spread mark-ups – in the price you pay for your cryptocurrency.