Strategic Crypto Investing: Getting Started The Right Way

Investing in crypto is a hot topic, but it's also a risky business. So, how much should you invest? Well, that depends on your financial goals, risk appetite, and knowledge of the market. It's generally recommended that you invest no more than 1% to 5% of your net worth in crypto to gain exposure and potentially improve your risk-adjusted returns. But remember, crypto is a highly volatile and uncertain market, so only invest what you can afford to lose.

How much money are you comfortable investing?

The amount of money you should invest in crypto depends on your financial goals, your timing window, and your risk appetite.

Some experts recommend investing no more than 1% to 5% of your net worth. This is a safe allocation when considering an investment with higher risk. While 1% - 5% invested in crypto may not seem like a lot, it has the potential to build over time.

However, it's important to never invest more than you can afford to lose. With crypto, you may never know what's coming, so this advice is still prudent today.

Consider how much you’re willing to invest, and what your appetite is for crypto volatility. A low crypto allocation can still deliver opportunities not seen with traditional investments. Even if it’s just 1% of your allocation, you’re still going to get a taste of how the crypto market works.

If you want to invest in a cryptocurrency with a high value per coin, most exchanges allow you to invest on a dollar basis, rather than buying a whole coin. Focus on the total amount of money you want to invest, rather than the number of coins you want to buy.

Additionally, while cryptocurrency has yielded substantial profits for certain investors, others have incurred significant losses. There’s no guaranteed ‘free lunch’. The possibility of high returns in crypto is balanced by the risk of substantial losses. The value of your investment could plummet, and with the current size and visibility of the crypto market, it’s uncertain whether future returns will resemble the more stable, albeit less dramatic, returns of gold.

How much money are you comfortable losing?

The most important rule of investing in crypto is never to invest more than you can afford to lose. This is because cryptocurrencies are still relatively new and extremely volatile assets that can gain or lose significant value in a single day. While the long-term trend has been bullish, there is still skepticism and opportunism in these markets.

Therefore, the first principle is to only invest an amount of capital that you are fully prepared to lose should the market take a downturn. At the very least, you should have enough emergency savings before putting any funds into crypto. Once you're ready to invest, make it no more than 5% of your portfolio. This is enough to gain exposure to potential gains while limiting the impact of losses on the overall portfolio.

If you want to invest in a cryptocurrency with a high value per coin, most exchanges allow you to invest on a dollar basis, rather than buying a whole coin. This means you don't need a huge amount of money to invest in something like Bitcoin. Focus on the total amount of money you want to invest, rather than the number of coins you want to buy.

Remember, there is no such thing as an easy way to make a lot of money without risk, so it's important to never invest in anything with the belief that you can't lose. Use caution and be clear about your intentions and expectations beforehand. You should only consider cryptocurrency as an investment if you believe in its long-term prospects and are willing to ride out large price swings.

Can you stomach a volatile market?

Cryptocurrency is a highly volatile market. Prices can fluctuate dramatically in a short space of time, and it can be a challenging environment for new investors.

Volatility in the crypto market can be beneficial for sophisticated investors who can execute trades rapidly or have a good grasp of the market's fundamentals. They can take advantage of the volatility to "buy low and sell high". However, for new investors, it can be a minefield, and it is easy to get crushed by the volatility.

Beginners are more likely to make emotional decisions, such as buying when the price is rising for fear of missing out or selling when prices drop. These emotional decisions are usually not good for your investments.

If you are considering investing in crypto, you need to be prepared for these price swings and have the stomach to watch the market rise and fall, sometimes as much as 30% in a day. Ask yourself if you are comfortable with this level of risk and volatility.

It is also important to remember that, unlike the stock market, the value of most cryptocurrencies is not tied to any tangible asset or company fundamentals. This means that the price can be influenced by market sentiment and demand, making it more unpredictable.

To manage the risk of volatility, it is recommended to take a long-term perspective and hold your investments for the long term. This will help you avoid making impulsive decisions based on short-term price movements.

Additionally, consider diversifying your crypto investments across multiple cryptocurrencies and only invest a small percentage of your portfolio in crypto, such as 1-5% of your net worth. This will limit your exposure to crypto-specific risks while still allowing you to benefit from the potential gains of this emerging market.

Remember, investing in cryptocurrency is risky, and you should only invest what you can afford to lose.

What's your risk appetite?

Before investing in any form, it is crucial to understand your risk appetite. This is especially true for cryptocurrencies, which are highly volatile and susceptible to frequent price swings. Understanding your risk appetite will help you determine how much money you can afford to lose and your investment time frame.

Your risk appetite is the amount of risk you can handle psychologically and financially. It is your ability to handle the possibility of negative outcomes without panicking. If you can handle price swings in a rational manner, your risk appetite is high. On the other hand, if you panic at small losses, your risk appetite is low. It is important to find a balance between the emotional and financial sides of investing. You need to be able to both cope with and afford any drops in your investments.

Your risk appetite will depend on your temperament, lifestyle, and responsibilities. For example, if you are close to retirement age, have children, or have large amounts of debt, you will likely have a low-risk appetite. Additionally, the purpose of your investment will also play a role in determining your risk appetite. Are you investing to grow your savings in the long term, or are you looking for short-term gains? It is a very personal decision and can be emotional.

When it comes to cryptocurrencies, it is important to remember that they are high-risk investments due to their volatility. There is a possibility of losing all your investment, so you should only invest what you can afford to lose. Most financial experts recommend investing no more than 1% to 5% of your net worth in cryptocurrencies. At the same time, you should also consider diversifying your crypto investments by investing in multiple cryptocurrencies to reduce risk.

Understanding your risk appetite is crucial in determining how much to invest in cryptocurrencies. By assessing your financial situation, emotional tolerance, and investment goals, you can make informed decisions about the amount and types of cryptocurrencies to invest in. Remember, investing in cryptocurrencies is speculative, and you should be prepared for potential losses.

How does crypto fit into your investment portfolio?

Crypto can be a valuable part of your investment portfolio, but it is a high-risk and volatile asset class. Here's how it fits into your investment portfolio:

• Diversification: Crypto can be a way to diversify your portfolio by including an exciting new asset class. It is important to note that crypto is not correlated to traditional asset classes like stocks and bonds, so adding a small exposure to crypto may improve the risk-adjusted returns of your portfolio. However, crypto is still a relatively new and small market compared to the global stock market.
• Risk Management: Crypto is considered a high-risk and volatile investment due to its extreme price swings. Therefore, it is generally recommended to limit your crypto allocation to a small percentage of your overall portfolio, typically between 1% to 5% of your net worth. This helps to manage the overall volatility and risk of your portfolio. If you are new to crypto investing, you may want to start with an even lower allocation, such as 1% to 2%.
• Long-Term Perspective: Crypto investments should be made with a long-term perspective in mind. The crypto market is prone to high volatility, and prices can fluctuate dramatically over short periods. By taking a long-term view, you can avoid making emotional decisions, such as buying when the price is rising or selling when prices go down.
• Research and Due Diligence: It is crucial to conduct thorough research before investing in crypto. Understand the technology behind crypto, such as blockchain, and take the time to evaluate the unique characteristics and investment thesis of each cryptocurrency. Consider factors such as real-world adoption potential, technical specifications, the credibility of the founders and developers, community engagement, and competitors.
• Security and Storage: Safely storing your crypto is essential. You can choose to keep your crypto on a reputable exchange or platform that offers custody and safekeeping of your assets. Alternatively, you can use a crypto wallet, which can be a "hot" wallet (internet-connected) or a "cold" wallet (offline). Cold wallets, such as hardware devices or USB drives, provide greater security but come with the risk of losing access to your crypto if you misplace the device or keycode.
• Dollar-Cost Averaging: Instead of trying to time the market, consider using dollar-cost averaging by making small, recurring purchases of crypto on a set schedule. This helps to reduce the impact of volatility and avoids the psychology of trying to perfectly time market tops and bottoms.

Frequently asked questions