A Beginner’s Guide to Investing in Cryptocurrencies
Although cryptocurrencies are extremely volatile, if you’re trying to trade these digital assets, the volatility may present possibilities for profit. Since their inception, cryptocurrencies like Bitcoin and Ethereum have seen significant growth, but they have also gone through amazing boom-bust cycles. For years, seasoned traders have been making predictions about cryptocurrency, but how can a novice get started?
Here’s how to begin investing in cryptocurrencies and some important things to be aware of.
5 Steps for Investing in Cryptocurrencies
1. Understand What You’re Investing In
As you would for any investment, understand exactly what you’re investing in. If you’re buying stocks, it’s important to read the annual report and other SEC filings to analyze the companies thoroughly. Plan to do the same with any cryptocurrencies, since there are thousands of them; they all function differently, and new ones are being created every day. You need to understand the investment case for each trade.
In the case of many cryptocurrencies, they’re backed by nothing at all, neither hard assets nor cash flow of an underlying entity. That’s the case for Bitcoin, for example, where investors rely exclusively on someone paying more for the asset than they paid for it. Unlike stocks, where a company can grow its profits and drive returns, many crypto assets rely on market optimism for profit.
Some of the most popular coins include Bitcoin, Ethereum, Solana, Dogecoin, and Ether (a stablecoin). So before investing in cryptocurrencies, understand the potential upside and downside. If your financial investment is not backed by an asset or cash flow, it could end up being worth nothing.
2. Remember, the Past Is Past
A mistake that many new investors make is looking at the past and extrapolating that to the future. Yes, Bitcoin used to be worth pennies, but now it is worth much more. The key question, however, is, “Will that growth continue, even if it’s not at quite that meteoric rate?”
Investors look to the future, not to what an asset has done in the past. What will drive future returns? Traders buying a cryptocurrency today need tomorrow’s gains, not yesterday’s.
3. Watch That Volatility
The prices of cryptocurrencies are about as volatile as an asset can get. They could drop quickly in seconds on nothing more than a rumor that ends up proving baseless.
Volatility can be great for sophisticated investors with a solid grasp of the market’s fundamentals, but it can be a minefield for new investors. Beginners should be cautious and avoid getting caught in the emotional highs and lows of the market.
4. Manage Your Risk
If you’re trading any asset on a short-term basis, you need to manage your risk, especially with volatile assets like cryptocurrency. Develop a risk management strategy that suits your goals:
- Long-term investors might adopt a “never sell” approach, regardless of price fluctuations.
- Short-term traders could set strict rules, such as selling when an asset falls 10%.
New traders should start small and always keep cash in reserve to stay in the game. Selling a losing position hurts but can prevent more significant losses.
5. Don’t Invest More Than You Can Afford to Lose
It’s crucial to avoid putting the money you need into speculative assets. If you can’t afford to lose it, don’t invest it in risky assets like cryptocurrencies.
Whether it’s a down payment for a house or another important financial goal, keep that money in safe accounts. For guaranteed returns, focus on paying off high-interest debt.
Also, ensure the security of any exchange or broker you use. Many traders invest in crypto wallets to secure their coins offline and protect them from hackers.
Other Ways to Invest in Cryptocurrencies
1. Crypto Futures
Futures allow you to leverage price swings in cryptocurrencies. While they can generate massive returns, they also carry significant risks, especially in volatile markets.
2. Bitcoin or Ethereum ETFs
Spot Bitcoin and Ethereum ETFs approved by the SEC are now available through online brokers. They offer a convenient way to gain exposure to these cryptocurrencies.
3. Crypto Exchange or Broker Stocks
Investing in companies like Coinbase or Robinhood, which profit from crypto trading, is another indirect way to participate in the crypto market.
4. Blockchain ETFs
Blockchain ETFs allow you to invest in companies leveraging blockchain technology. While not entirely focused on crypto, these ETFs offer exposure to this growing sector.
Final Thoughts
Investing in cryptocurrencies can be an exciting and potentially profitable part of your investment strategy, but it comes with risks. Take the time to understand the market, manage your risk, and explore different investment methods to find the best fit for your goals.