Investing In Cryptocurrency: How To Pick The Right One

Investing in cryptocurrency is risky, so it's important to do your research and proceed with caution. Cryptocurrencies are decentralised, meaning they are not issued, backed, or regulated by a central authority like the U.S. government. This makes them highly volatile, with large swings in value over short periods of time.

There are several ways to invest in cryptocurrency, each with varying levels of risk. You can buy cryptocurrency directly using a crypto exchange or app, or through certain broker-dealers. You can also invest in crypto funds and companies, or even a cryptocurrency Roth IRA.

Before investing, it's important to ask yourself a few key questions: How will investing in cryptocurrency affect your portfolio? Is it a good long-term investment? What are the potential risks and financial health of a given cryptocurrency?

It's also crucial to only invest what you can afford to lose, and to diversify your portfolio to minimise risk.

Understand the risks

Volatility

Cryptocurrency is one of the most volatile asset classes, with large price swings. For example, after strong gains in 2021, the value of most cryptocurrencies fell dramatically in 2022. The prices of cryptocurrencies can be extremely volatile, and the industry is filled with uncertainty. This volatility can be a double-edged sword, leading to large gains or large losses.

Regulatory uncertainty

The regulatory landscape for cryptocurrencies is still evolving, and regulatory changes can significantly impact the value of your investments. There is also the worst-case possibility that cryptocurrency becomes illegal and therefore worthless.

Security

Cryptocurrency exchanges and individual investors are susceptible to hacking and cybersecurity risks. It is important to only deal with reputable exchanges and digital wallet providers, protect access with strong passwords and two-factor verification, and be vigilant about phishing scams.

Lack of government protection

Cryptocurrencies are not currently subject to much government regulation, so transactions don't come with the same legal protection as traditional investments like stocks.

Scams and fraud

The cryptocurrency space has been a popular vehicle for fraud, such as pump-and-dump schemes. It is important to thoroughly research and vet any potential investments to avoid scams.

Tax consequences

There are tax consequences to buying and selling cryptocurrencies, and it is important to understand the tax implications of using crypto, especially if you purchase something or sell your crypto investments.

Research the market

Researching the market is a crucial step in deciding which cryptocurrency to invest in. Here are some detailed steps to help you conduct thorough market research:

• Start with the Basics: If you are new to the world of cryptocurrency, it is advisable to start with well-established currencies like Bitcoin and Ethereum. There is a wealth of information available online about these currencies, and understanding them can provide a solid foundation for further exploration. The original Bitcoin whitepaper by Satoshi Nakamoto and the book "Mastering Bitcoin" by Andreas Antonopoulos are recommended resources to begin your journey.
• Understand Blockchain Technology: Blockchain technology is at the heart of cryptocurrencies. Take the time to learn about different blockchain consensus protocols, such as proof-of-work and proof-of-stake mechanisms. This knowledge will help you grasp the underlying technology powering cryptocurrencies and make more informed investment decisions.
• Explore Established Platforms: Before venturing into smaller coins and projects, familiarise yourself with established platforms. Visit their websites, read their whitepapers, and evaluate their legitimacy. Look for important information such as contact details, terms of use, privacy policies, and the quality of content. Be cautious of websites with poor grammar, broken elements, or those lacking external citations.
• Understand the Project's Vision and Problem-Solving Approach: A crypto project should have a clear vision and aim to solve a specific problem. Evaluate whether the project is targeting a new or established market and how blockchain technology will benefit the industry. Assess if the project makes sense and offers a unique value proposition compared to its competitors.
• Research the Team: The credibility and expertise of the team behind a crypto project are essential factors to consider. Look beyond a few names and titles on the website. Research their professional backgrounds, previous experiences, and qualifications. Utilise platforms like LinkedIn and Twitter to learn more about the team members and their level of activity and engagement.
• Study the Project's Roadmap: A crypto project's roadmap outlines its expected progress and milestones. While software projects often face delays, be cautious of projects that constantly miss their timelines or have unrealistic timeframes. Understand that investing in the early stages of a project may require patience before seeing results.
• Identify Strategic Partners: Established partners can enhance a crypto project's credibility and provide valuable resources, publicity, and industry experience. Evaluate the quality and nature of these partnerships. Reputable collaborations with renowned companies, official institutions, or research institutes add significant weight to a project's credibility.
• Utilise Multiple Sources: Don't rely solely on the information provided by the project developers. Expand your research to include external sources, news websites, analysts' insights, and other businesses. Explore social media platforms to gauge the project's presence, community engagement, and overall sentiment. Remember that people investing in a project can easily get hyped and emotionally attached, so maintain a calm and analytical perspective.
• Evaluate Competitors: Understand the competitive landscape by researching other projects in the same industry or market. Compare their differences, development status, and competitive advantages. This analysis will help you identify the unique strengths and weaknesses of the project you are researching.
• Assess Tokenomics: Tokenomics refers to the distribution, circulation, and total supply of a cryptocurrency. Understand the total amount of tokens issued, whether there is a hard cap, and the potential impact on price. Be cautious of projects where the team holds a large portion of tokens, as their decisions can significantly influence price action.
• Consider Liquidity and Market Cap: A cryptocurrency with sufficient liquidity allows for easier buying and selling. A low-volume cryptocurrency may indicate a lack of interest from investors or a potential scam. Additionally, consider the market cap—a small market cap means the price can be easily manipulated by a few large holders.
• Explore Purchasing Options: Understand how and where you can purchase the project's tokens or cryptocurrency. Buying directly from an exchange is generally safer than sending money to a contract, as the latter carries a higher risk of technical issues or fraudulent activities.

Remember, conducting thorough market research is essential to making informed investment decisions. Take your time, evaluate multiple sources, and don't rush into any investments without a clear understanding of the project and its potential.

Know the crypto landscape

The crypto landscape is ever-evolving, with new cryptocurrencies emerging regularly. As of May 2024, there were over 2.4 million cryptocurrencies, according to CoinMarketCap.com. With such a vast array of options, it is crucial to navigate the landscape carefully and stay informed about the latest developments. Here are some key aspects to consider:

• Exchanges and Data Aggregators: Cryptocurrency exchanges like Binance, Coinbase, Crypto.com, and Kraken are reliable sources for finding new crypto investments. They offer a wide range of coins and provide essential information for research and analysis. Additionally, data aggregators like CoinMarketCap and CoinGecko provide valuable insights into new cryptocurrencies, their prices, market capacity, and trading volume.
• Social Media and Messaging Platforms: Social media platforms like Twitter and Telegram are excellent sources for real-time information on new cryptocurrencies. Developers and founders often use these platforms to share updates and announce new coins. Setting up notifications for specific keywords related to crypto can help you stay ahead of the curve.
• Tools for Validation: To verify the validity and legitimacy of a cryptocurrency, you can use tools like KryptView and BSCCheck. These tools provide detailed information on transactions, contracts, holders, prices, and other critical aspects, helping you make informed decisions.
• Decentralized Finance (DeFi) Platforms: DeFi platforms, such as Maker, Uniswap, and Aave, offer a unique ecosystem that combines blockchain, programming, and user interfaces. They facilitate the creation of decentralised applications (dApps) and often have native tokens used within their networks.
• Non-Fungible Token (NFT) Marketplaces: NFTs are unique digital assets that have gained significant traction in the crypto space. Popular NFT marketplaces like OpenSea, Rarible, and SuperRare offer a wide range of NFTs, including those related to art, sports, and luxury brands.
• Initial Coin Offerings (ICOs): ICOs are fundraising events for potential coin releases. While they have faced scrutiny due to scams and regulatory issues, they still exist in a highly regulated form.
• Exchange-Traded Funds (ETFs): ETFs offer indirect exposure to cryptocurrencies by investing in derivatives or securitized crypto that trade on mainstream exchanges. The approval of Bitcoin Spot ETFs in January 2024 provided investors with a more affordable way to gain exposure to Bitcoin.

Staying informed about the crypto landscape is essential for making prudent investment decisions. By utilising the resources mentioned above, you can gain valuable insights into new cryptocurrencies, their performance, and the overall market dynamics.

Consider your investment strategy

Before investing in cryptocurrency, it's important to consider your investment strategy and how crypto might fit into your portfolio. Ask yourself: What are your financial goals? How much risk are you comfortable with? How does crypto fit into your overall investment plan?

• Risk tolerance: Cryptocurrency is a highly volatile and risky investment. The prices of cryptocurrencies can fluctuate dramatically, and there is a possibility of losing all your investment. It's crucial to only invest what you can afford to lose.
• Diversification: Diversifying your investments across different cryptocurrencies and other asset classes can help manage risk. Consider investing in a range of cryptocurrencies rather than putting all your eggs in one basket.
• Long-term perspective: Cryptocurrency is a long-term investment. The market can be extremely volatile, with rapid price swings. It's important to have a long-term perspective and avoid making emotional decisions based on short-term price movements.
• Portfolio allocation: Determine how much of your portfolio you want to allocate to cryptocurrency. Experts recommend investing no more than 1% to 5% of your net worth in crypto. At the same time, consider the overall amount you invest in crypto and the variety of cryptocurrencies you hold.
• Research and due diligence: Conduct thorough research on any cryptocurrency before investing. Understand the unique characteristics, risks, and potential of each coin. Look at factors such as price, market cap, trading volume, social sentiment, legal and regulatory environment, and the whitepaper.
• Investment strategy: Define your investment strategy and stick to it. Are you a long-term investor or a short-term trader? What is your entry and exit strategy? Having a clear plan can help you make more informed decisions and avoid emotional trading.
• Expert advice: Consider seeking advice from a financial advisor or a crypto expert, especially if you are new to the space. They can provide guidance and help you navigate the complexities of the market.

Be aware of the volatility

Volatility is a measure of how much the price of an asset moves up or down over time. Generally, the more volatile an asset is, the riskier it is considered to be as an investment. Crypto is widely considered to be a volatile asset class, with the potential for significant upward and downward movements over short time periods.

Cryptocurrency is an incredibly volatile investment. In one day, Bitcoin's value dropped by 30%. This volatility is due to several factors. Firstly, crypto is a speculative investment, with no intrinsic value. Its market value is based entirely on speculation or educated guesswork. This means that the investment's value is not very grounded, making its price incredibly sensitive to even slight changes in investors' expectations or perceptions.

Secondly, crypto is a relatively new asset class, and its price is still in the discovery phase. Prices will continue to change as investors, users, and governments work through the initial growing pains and concerns until prices stabilize, if a stable point can be reached.

Thirdly, crypto prices are influenced by supply and demand, investor and user sentiments, government regulations, and media hype. For example, media outlets, influencers, industry moguls, and well-known crypto fans create investor concerns, leading to price fluctuations. Positive or negative news coverage, earnings reports, and unusually high spikes in trading volume can also increase volatility.

Lastly, crypto prices are influenced by the actions of "whales", or investors with large enough holdings to influence market value. If these whales were to suddenly sell their holdings, it could cause a panic among other investors, leading to a rapid drop in prices.

Due to the volatile nature of crypto, it is important to carefully consider your risk tolerance before investing. Crypto should only make up a small part of your overall portfolio, and you should never invest more than you can afford to lose. It is also important to diversify your crypto holdings, as some coins have better long-term potential and are less likely to be manipulated in price.

Frequently asked questions