Investing in cryptocurrency is a risky business. It's a highly volatile market, and while it has produced top returns for investors over time, there's always the possibility that you could lose everything.
If you're thinking about investing in cryptocurrency, it's important to do your research. Understand what you're investing in, and don't get caught up in the idea that past gains will continue into the future.
There are thousands of cryptocurrencies to choose from, and they all function differently. Some of the most popular coins include Ethereum, Dogecoin, Cardano, and Solana.
When investing, it's important to manage your risk. Don't invest more than you can afford to lose, and only use money that you don't need in the short term. It's also a good idea to set aside a certain amount of trading money and only use a portion of it, to begin with.
There are several ways to invest in cryptocurrency, including crypto exchanges, crypto wallets, and crypto futures. You can also buy crypto through traditional financial service providers such as CashApp, PayPal, and Robinhood.
Before investing, it's crucial to understand the risks and only invest money you can afford to lose.
Characteristics | Values |
---|---|
What is cryptocurrency? | A digital currency that can be used to buy goods and services or traded for profit. |
How does it work? | Cryptocurrency is supported by blockchain technology, a networking protocol that keeps a shared, tamper-proof record of transactions. |
Why do people invest in cryptocurrencies? | People invest in cryptocurrencies because they hope their value will rise, netting them a profit. |
How volatile is it? | Cryptocurrency is one of the most volatile asset classes. |
How risky is it? | Cryptocurrency is a relatively risky investment. |
How much money do I need to start investing in cryptocurrency? | In theory, it takes only a few dollars to invest in cryptocurrency. |
How to invest in cryptocurrency? | You can buy cryptocurrency using a crypto exchange or through certain broker-dealers. |
How to choose a cryptocurrency exchange? | Some factors to consider when selecting an exchange are security, fees, the volume of trading, minimum investment requirements, and the types of cryptocurrency available. |
How to store cryptocurrency? | You can store cryptocurrency in a digital wallet, either a "hot" wallet that is accessible via the internet or a "cold" wallet that is a physical storage device. |
How much to invest in cryptocurrency? | It is recommended to invest no more than 1% to 5% of your net worth in cryptocurrency. |
What You'll Learn
Understand what you're investing in
Before investing in cryptocurrency, it is important to understand exactly what you are investing in. There are thousands of cryptocurrencies, and they all function differently. New ones are being created every day, and there is no guarantee that they will be successful.
Cryptocurrencies are decentralised, meaning they are not issued, backed, or regulated by a central authority like the U.S. government. They are created digitally through a validation process that relies on blockchain technology. This produces a secure encrypted record of the value of each virtual coin and its associated transactions.
Some of the most popular coins include Ethereum, Dogecoin, Cardano, and Solana. Each has unique characteristics, and you may choose to invest in one or several different cryptocurrencies.
When investing in cryptocurrencies, it is important to understand the investment case for each trade. Many cryptocurrencies are backed by nothing at all, neither hard assets nor the cash flow of an underlying entity. This means that investors rely exclusively on someone paying more for the asset than they paid for it. As such, the market must become more optimistic and bullish for you to profit.
Before investing, it is important to 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.
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Don't focus on past performance
When investing in cryptocurrency, it's important to remember that past performance does not guarantee future results. This is true of any stock, fund, or even the overall market itself.
History is full of funds that delivered strong performance for a year or several years, only to fizzle out over time. For example, the ARK ETFs, notably ARKK, delivered over 150% returns in 2020 and beat the S&P 500 in 6 out of 7 years. However, it is still unlikely to beat the market in the long term.
Another example is the CGM Focus Fund (CGMFX), created in 1997 by legendary manager Ken Heebner. From 2000 to 2007, it was the top-performing fund, beating every other actively managed mutual fund. However, after 2008, the fund's performance declined, and investors who got in late chasing its prior performance ended up losing money.
Therefore, when investing in cryptocurrency, it's crucial to do your research and not solely rely on past performance. Look into the investing philosophy, the management team, and the overall health of the fund or cryptocurrency before making your investment decision.
Additionally, keep in mind that the cryptocurrency market is highly volatile, and prices can swing wildly in a short period. As such, a long-term investment horizon is generally recommended to ride out the short-term fluctuations.
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Be wary of volatility
Volatility is a measure of how much the price of an asset has moved 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 a volatile asset class, with the potential for significant upward and downward movements over short periods.
Cryptocurrency is an incredibly volatile investment. In one day, Bitcoin's value dropped by 30%. This volatility is due to several factors, including supply and demand, investor and user sentiments, government regulations, and media hype.
As a newer asset class, crypto is subject to rapid price fluctuations and is, therefore, riskier than more established investments. Positive or negative news coverage, earnings reports, and unusual spikes in trading volume can all impact the price of crypto and increase volatility.
Additionally, the varying belief in its utility as a store of value and method of value transfer also contributes to volatility. Some investors view crypto as a hedge against inflation and an alternative to traditional stores of value like gold, while others are unsure of its long-term viability.
The fear of missing out on big price movements also plays a role in crypto volatility. Investors fear that they will miss out on large upswings or fall victim to significant downswings, leading them to panic buy or sell, further influencing demand and prices.
When deciding whether to invest in crypto, it is essential to consider your risk tolerance and remember that crypto is a highly volatile asset class. Diversifying your investments and pairing crypto with less volatile assets can help reduce the potential downside of volatility.
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Only invest what you can afford to lose
Investing in cryptocurrency is risky and volatile. It's important to remember that you could lose money from your investments. Therefore, it's advisable to only invest what you can afford to lose financially. This is a good way to avoid making bad investment decisions and putting money into products that you don't fully understand.
If you invest what you can afford to lose, it will be easier to cope with a small loss if something goes wrong with your investment. However, it's also important to keep in mind that the amount you invest will affect how much you might earn. So, when setting your investment amount, consider your financial goals and risk tolerance.
For example, if you're investing for the short term, it's generally recommended to only invest money you can afford to lose. On the other hand, long-term investors have more time to ride out the downs and may not be as affected by short-term losses.
Additionally, you can spread the risk by diversifying your investments, which can help keep potential losses at a manageable level even when investing larger amounts.
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Choose a reputable exchange
Choosing a reputable exchange is an important step in investing in cryptocurrency. Here are some things to keep in mind when selecting an exchange:
- Security: Ensure that the exchange has strong security measures in place to protect your assets from hackers and online threats.
- Fees: Compare the fees charged by different exchanges, as these can vary significantly. Look for an exchange with competitive fees to maximise your returns.
- Trading volume: Opt for an exchange with a high trading volume, as this indicates liquidity and can lead to better pricing.
- Minimum investment requirements: Consider the minimum investment required by the exchange. If you are a beginner, look for an exchange with a low minimum investment requirement.
- Types of cryptocurrency: Different exchanges offer different types of cryptocurrencies. Choose an exchange that offers a wide range of cryptocurrencies to invest in, including the ones you are interested in.
- Reputation: Research the reputation of the exchange. Look for reviews and feedback from other users to get an idea of their level of satisfaction with the platform.
- Regulatory compliance: Check if the exchange is licensed and complies with relevant regulations. This can provide an extra layer of protection for your investment.
- Customer support: Opt for an exchange that offers responsive and reliable customer support to assist you with any issues or queries you may have.
- User interface: Choose an exchange with an intuitive and user-friendly interface, especially if you are a beginner. This will make it easier to navigate the platform and execute trades.
- Additional features: Some exchanges offer additional features such as insurance in case of cybersecurity breaches or the ability to stake your cryptocurrency to earn interest. Consider which features are important to you and look for an exchange that offers them.
Remember to conduct thorough research before selecting an exchange, as this can help you make a more informed decision. It is also crucial to only invest what you can afford to lose, as cryptocurrency investments carry a high level of risk.
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Frequently asked questions
There are several ways to start investing in cryptocurrency. You can use a traditional finance app like CashApp, PayPal, or Robinhood to buy crypto, or you can use a crypto-first digital wallet or exchange provider, such as Coinbase, Gemini, or Kraken. You can also use a decentralised exchange, such as Uniswap or SushiSwap, which doesn't have a central authority or intermediary.
In theory, it only takes a few dollars to invest in cryptocurrency. Most crypto exchanges have a minimum trade of around $5 or $10. However, it's important to be aware that some trading platforms will take a large chunk of your investment as a fee if you're trading small amounts.
There are several precautions you can take to keep your crypto secure. Firstly, only deal with reputable exchanges and digital wallet providers. Protect your access with strong passwords, two-factor verification, and secure internet connections. Be vigilant about phishing scams and never share your password or key with anyone.