A Beginner's Guide To Investing In Basic Cryptocurrencies

Investing in cryptocurrency is risky, but it can also be rewarding. Cryptocurrencies are virtual currencies that are secured by blockchain technology and are not issued, backed, or regulated by a central authority like a government. They are highly volatile and susceptible to large price swings, which can be an opportunity for profit for sophisticated investors. Before investing in cryptocurrency, it is important to do your research, understand the risks, and only invest what you can afford to lose. There are several ways to invest in cryptocurrency, including buying it directly through an exchange or app, investing in crypto funds or companies, or even becoming a crypto miner.

Understand what you're investing in

Understanding what you're investing in is a crucial step in the process of investing in cryptocurrencies. Here are some key considerations to help you make informed decisions:

Research the Cryptocurrency Market

Before investing, take the time to learn about the different cryptocurrencies available. Go beyond the well-known names like Bitcoin and Ether and explore the thousands of other coins and tokens. Understand their unique characteristics, including the underlying technology, consensus protocols, and intended use cases. This knowledge will help you make more informed investment decisions.

Evaluate the Investment Case

Each cryptocurrency functions differently, and it's important to understand the investment case for each one you consider. Some cryptocurrencies, like Bitcoin, are not backed by any hard assets or cash flow. Their value depends solely on the market's optimism and bullish sentiment. In contrast, other cryptocurrencies may have specific use cases or be backed by certain assets, which can influence their potential upside and downside.

Understand the Risks and Volatility

Cryptocurrencies are known for their high volatility, and their prices can fluctuate drastically in a matter of seconds. This volatility can be challenging for new investors, as it requires a sophisticated understanding of the market's fundamentals and trends. It's important to recognize that cryptocurrency investments carry significant risks, and there is always the possibility of losing your entire investment.

Consider the Underlying Technology

Blockchain technology is at the heart of most cryptocurrencies. Take the time to understand how blockchain works, including concepts like consensus protocols (proof-of-work and proof-of-stake), mining, and staking. This knowledge will help you grasp the security and integrity of the cryptocurrency you're investing in, as well as potential opportunities for passive income through staking rewards.

Read Cryptocurrency White Papers

White papers are essential documents in the cryptocurrency space. They outline the specifics of a cryptocurrency project, including its purpose, timeframe, and technical details. A well-written white paper should provide a clear understanding of the project's goals and development roadmap. Be cautious if a project lacks a white paper or if the white paper seems incomplete or misleading, as this could indicate fundamental issues.

Evaluate Your Risk Tolerance

Investing in cryptocurrencies carries a high level of risk. Before investing, assess your risk tolerance and ensure that you are comfortable with the potential losses. Only invest what you can afford to lose, as the cryptocurrency market is highly unpredictable. Diversifying your investments across multiple cryptocurrencies can also help manage risk.

Understand the Regulatory Landscape

The regulatory environment for cryptocurrencies is constantly evolving, and it varies across different countries and jurisdictions. Stay informed about the legal status of cryptocurrencies in your region and be aware of any tax implications associated with buying, selling, or holding cryptocurrencies. Regulatory changes can significantly impact the market, so it's important to stay up to date.

In summary, investing in cryptocurrencies requires a thorough understanding of the market, the underlying technology, and the associated risks. Conducting diligent research, evaluating your risk tolerance, and staying informed about regulatory developments will help you make more informed and strategic investment decisions in the cryptocurrency space.

Remember that past performance doesn't guarantee future results

Investing in cryptocurrency is a risky business. It is a volatile market, and investors need to be aware that past performance does not guarantee future results.

Cryptocurrency is a decentralised virtual currency, which means it is not issued, backed, or regulated by a central authority. It is also one of the most volatile asset classes, with large price swings. This volatility can be a double-edged sword, offering the potential for huge gains but also substantial losses.

When considering investing in any cryptocurrency, it is essential to remember that the market is inherently unpredictable. While it is worth studying the historical performance of a particular cryptocurrency, it is misleading to rely solely on this data to make investment decisions. The market's strongest performers tend to change every decade, and factors such as market conditions, investor sentiment, and chance events can significantly impact future performance.

For example, the growth of FAANG stocks in the 2010s does not guarantee that these stocks will continue to outperform in the future. Similarly, just because Bitcoin has experienced tremendous growth since its debut does not mean that this trend will continue indefinitely.

To make informed investment decisions, it is crucial to understand the broader context and consider a range of factors beyond past performance. These factors include the underlying technology, market conditions, regulatory changes, and the overall health of the economy. By diversifying their portfolios and conducting thorough research, investors can improve their decision-making and potentially mitigate the risks associated with investing in cryptocurrencies.

In summary, while past performance can provide valuable insights, it should not be the sole basis for investment decisions. Investors must remember that the cryptocurrency market is highly unpredictable, and a holistic evaluation of various factors is essential for making more informed choices.

Be prepared for volatility

Volatility is the speed and significance of price movements. When both are high, the market is volatile. This means the direction in which the price moves is irrelevant. When there’s volatility, the price is fluctuating downwards, upwards, or both rapidly.

Cryptocurrencies are one of the most volatile asset classes. They are considered a complex, disruptive, and elegant technology that has made lots of people rich. It is therefore not surprising that many are attracted to the allure and risky state of cryptocurrencies.

The cryptocurrency market is largely unregulated due to the complexity and the difficulty in regulating an open-source and decentralized technology. With an absence of regulations, there is an influx of bad actors that would manipulate the markets since there is no supervision. Market manipulation makes the general market unstable and highly volatile. This will induce panic and will lead to even more chaos and volatility, given that the cryptocurrency market is easily moved by news and sentiments.

Cryptocurrencies haven't reached mass adoption, so their value is still fuelled by hype and speculation. That is why they possess a high-risk return trade-off.

The relative infancy of the cryptocurrency market means that its liquidity is currently very low. A low liquidity market – such as the cryptocurrency market – is easily susceptible to sudden and aggressive fluctuations in prices, since a single large order can move the markets and send the price soaring or crashing in an instant.

Volatility creates uncertainty and makes trading more complicated. It can last anywhere from a few days to months, to even years! Volatility usually affects a general market, but only a specific asset or group of securities can experience it. Including cryptocurrencies.

A volatile market or security creates opportunities to turn more profit than normal. To best do this, you have to first understand why it’s occurring.

There are several factors that cause volatility in cryptocurrency:

• Employment rates can affect inflation volatility, which causes volatility in the financial market as it reduces the purchasing power of a country overall.
• Inflation causes prices and interest rates to go up - and hyperinflation can make them skyrocket. Both of these factors drastically impact the financial market. When prices for commodities go up, people have less capital to invest and trade.
• Economic recession or growth. Economic recession makes it difficult for companies to maintain their profitability, causing a massive decline in the stock market. During a recession, stocks usually fall and then rise suddenly.
• Quarterly results. Traders will try to prepare, predict, and protect their crypto before the results are published. Afterward, they will use the new information to enter into new crypto investments or exchanges or change their current strategy.
• A change in management. In cryptocurrency, this could refer to the founders or developers. A new launch of features or tangential products of a cryptocurrency can also cause volatility.

How to use Volatile Trading to your Advantage

Volatility is highly risky, but with the right knowledge, you can use it to your advantage. Here are some tips:

• Define goals and risk measures. Before doing any trading, you need to ensure you are comfortable with volatile trading. Defining concrete goals and setting measures to decrease risk are necessary to keep your securities safe.
• Refine your short-term trading strategies. After determining your profit target in a percentage, you can also sell your positions in parts. For example, you could sell one-third of a position when the value increases slightly, and hold the rest to wait for a better opportunity.
• Analyze and target market trends. Keep your focus on cryptocurrencies that are trending in the market. Try to find crypto that is trending upwards, wait for volatility to strike, and get into the sale just before the value accelerates.
• Keep updated on new information. Staying informed on the newest market developments is crucial. Make sure that the notifications on your financial applications are turned on. Review new data before making trading decisions, and search for the latest articles on the cryptocurrencies you have invested in.

Manage your risk

Only Invest What You Can Afford to Lose

As with any investment, you should never invest more than you can afford to lose. This rule applies to all markets, but even more so to cryptocurrencies, which can experience double-digit losses in a matter of hours. While cryptocurrencies have turned some early investors into millionaires, they have also left many novice investors in financial peril. Apart from the fact that these assets can quickly lose their value in response to ever-changing government policies, crypto trading platforms can fall victim to a hack or shut down operations.

Move Your Crypto Assets into Cold Storage

Storing your assets on a centralized exchange can come with a number of risks, like site crashes, hacks, and even bankruptcy. Transferring crypto assets to a cold storage device can mitigate some of these risks. A cryptocurrency exchange holds your private keys and therefore controls your assets. Cold storage, on the other hand, gives you full custody over your assets. Cold storage devices are not connected to the internet, which drastically reduces the ability of hackers and cybercriminals to access your funds.

Hedge Your Crypto Portfolio

Hedging has long been used in traditional financial markets as a form of risk management. It involves buying or selling an asset to potentially help reduce the risk of loss from an existing position or adverse price movements in an asset. While hedging limits the potential gains from your crypto investment, it is still a better option than losing a significant portion of your investment. One of the simplest ways to hedge a crypto investment is through the "Dollar-Cost Averaging" (DCA) strategy, which involves incrementally buying or selling crypto at regular intervals rather than deploying capital in one large purchase or selling one's entire holdings at once.

Diversify Your Portfolio

When it comes to crypto or any other investment, avoid putting all your eggs in one basket. Do not invest in only one cryptocurrency, regardless of your conviction. Instead, spread your investment across several digital assets. You can diversify your crypto holdings by investing in projects based on their use case or technology. For instance, Bitcoin has been touted as a store of value, while Ethereum has become the largest platform for decentralized applications and smart contracts. It is good to remember that there are hundreds of cryptocurrency projects trying to achieve different things.

Avoid Excessive Leverage

While the idea of using margin to increase your order size may sound good in theory, a 1% move against you could wipe out your entire portfolio. You could lose your entire principal during a forced liquidation. A safer approach is sticking to lower leverage amounts, which provide more room to increase your gains and a buffer zone to exit a bad trade.

Only invest what you can afford to lose

Cryptocurrency is a risky investment. Its value is extremely volatile and can fluctuate dramatically in a single day. As such, it's important to only invest what you can afford to lose. Here are some reasons why:

Protect Your Finances

Before investing in crypto, ensure you have your finances in order. This includes having an emergency fund, a manageable level of debt, and a diversified portfolio of investments. When investing in crypto, only use money that you are fully prepared to lose. This means having enough savings to cover your essential expenses and any financial commitments.

Understand the Risks

The cryptocurrency market is highly unpredictable and volatile. The value of cryptocurrencies can rise or fall by double-digit percentages within hours. This volatility is driven by various factors, including supply and demand, user sentiments, government regulations, and even social media posts by tech entrepreneurs. As a result, it's challenging to predict when values will rise or fall.

Avoid Emotional Investing

Fear of missing out (FOMO) is a common pitfall for new investors. It's important to avoid investing emotionally and to only invest what you can afford to lose. Don't invest money that you need for essential expenses or upcoming purchases. Instead, invest with a long-term perspective and a well-thought-out strategy.

Manage Your Risk

When investing in volatile assets like cryptocurrency, it's crucial to manage your risk. Consider setting rules for buying and selling to avoid emotional decisions. For example, you might decide to sell a certain percentage of your investment if it drops below a specific value. This helps prevent small declines from turning into significant losses.

Diversify Your Investments

Diversifying your investments across different cryptocurrencies and exchanges can help reduce your overall risk. By investing in a range of digital assets, you lower the chances of losing all your capital. Additionally, consider investing in a mix of major, established cryptocurrencies like Bitcoin and Ethereum, along with newer, promising projects.

In summary, investing in cryptocurrency carries significant risks. To protect yourself, only invest what you can afford to lose. This means having your finances in order, understanding the volatile nature of crypto, avoiding emotional investing, managing your risk, and diversifying your investments. By following these guidelines, you can make more informed decisions when investing in cryptocurrency.

Frequently asked questions