Investing In Cryptocurrency: Knowing When To Take The Plunge

Cryptocurrency is a digital currency that can be used to buy goods and services or traded for profit. It is a risky investment due to its volatile nature and unpredictable price swings. However, it has produced top returns for investors over time. Before investing in cryptocurrency, it is important to understand the technology, do thorough research, and carefully consider your risk tolerance and investment goals. Here are some key points to consider when deciding whether and how to invest in cryptocurrency.

Understand the technology and the market

Before investing in cryptocurrency, it is important to understand the technology and the market. Cryptocurrencies are powered by blockchain technology, a distributed ledger technology that produces a secure encrypted record of the value of each virtual coin and its associated transactions. Blockchain technology is designed with security, transparency, speed, and accuracy in mind.

Each blockchain has a consensus protocol to ensure the integrity of the ledger. There are different types of consensus protocols, such as proof-of-work and proof-of-stake protocols. For example, proof-of-work protocols require substantial mining setups to validate transactions, while proof-of-stake protocols reward holders with the highest stakes with validation rewards.

It is also important to understand the different types of cryptocurrencies and their unique characteristics. While Bitcoin was one of the earliest and remains the best-known cryptocurrency, there are now over 2.4 million different cryptos as of May 2024. Some other top cryptocurrencies by market cap include USDC (US Dollar Coin), Ethereum, Binance, Solana, and Cardano.

The cryptocurrency market is highly volatile, and it can be difficult to predict when values will rise or fall. It is important to do your research and understand the risks before investing in this space.

Research and vet the investment

Researching and vetting a cryptocurrency investment is crucial to making informed decisions and minimising risks. Here are some detailed strategies to help you thoroughly research and evaluate potential investments in the cryptocurrency space:

Utilise Social Media:

Social media platforms offer a valuable resource for gauging market sentiment and identifying trending coins and events. Twitter, for instance, is excellent for understanding the prevailing opinions on specific cryptocurrencies. Follow a diverse range of experts, from investors and financial journalists to crypto entrepreneurs and celebrities. Facebook groups like Crypto Coin Trader and Crypto Trader News provide heavily moderated spaces to discuss trending coins and market sentiment. Telegram is another useful platform for staying up to date with the latest developments, analysis, and insights, but be cautious of potential scams and fake followers.

Analyse the Fundamentals:

It is essential to analyse the fundamentals of any altcoin you consider investing in over the long term. Assess the utility of the coin. Does it offer something genuinely new, or does it improve upon existing technology? Read the whitepaper to understand the underlying technology and the coin's utility, future prospects, and potential within the ecosystem. Understand the 'tokenomics'—the economy based around the token—and evaluate whether it has the potential to create sufficient demand in the long term.

Research Upcoming Events:

Keep an eye on upcoming events that could impact the short-term trajectory of specific cryptocurrencies or the market as a whole. For example, a Bitcoin halving can affect not only the price of Bitcoin but also the broader crypto market. Use a crypto calendar application like CoinMarketCal to stay informed about relevant events.

Follow the Numbers:

Pay attention to numerical factors such as transaction volume, market capitalisation, trading volume, and liquidity. Check various exchanges like Binance and Kraken to compare transaction volumes across different cryptocurrencies. Market capitalisation, calculated by multiplying the current price of a coin by the total number of coins in circulation, is a valuable indicator of stability and growth potential. Generally, a higher market cap indicates a safer investment. Trading volume can help you assess the liquidity of a cryptocurrency and determine whether recent price movements are backed by significant market activity.

Evaluate the Team and Partners:

The credibility and experience of the team behind a cryptocurrency project are crucial factors in your investment decision. Assess the core leadership team, developers, partners, investors, and advisors. While large, well-established cryptocurrencies may have notable names on their teams, be wary of fake cryptocurrencies that falsely claim celebrity endorsements. Dig deeper and approach grand claims with scepticism. Look for a reputable team with a proven track record of success in the industry.

Consider your motivation

Before investing in cryptocurrency, it's important to ask yourself why you're doing it. There are many investment vehicles available, most of which offer greater stability and less risk than digital currencies.

Are you interested in cryptocurrency simply because of its trendiness? Or is there a more compelling reason for investing in one or more specific digital tokens? Different investors have various personal investment goals, and exploring the cryptocurrency space may make more sense for some individuals than for others.

Begin by evaluating your personal risk appetite, investment goals, and portfolio diversification. You may be interested in cryptocurrency as an alternative asset to what you already hold, or because of the potential for higher returns, despite the higher risk.

Before investing in cryptocurrency, gain a personal understanding of what you hope to achieve as this will help set the course for your actions.

Volatility and risk

Cryptocurrency is a highly volatile asset class with large price swings. It can be difficult to predict when values will rise or fall, and the drivers of large swings in value may not always be clear.

The possibility of investment loss is real and substantial. For example, following strong gains in 2021, the value of most cryptocurrencies fell dramatically in 2022. Keep in mind that anyone can launch a cryptocurrency, and how it's regulated is in flux, so it's vital to thoroughly vet any possible investments to avoid scams.

Long-term prospects

You should only consider investing in cryptocurrency if you believe in its long-term prospects and are willing to ride out large price swings. When you invest, it's important to take a long-term perspective. This is especially true for cryptocurrencies, which can quickly go up or down in value.

Investing in highly volatile assets can make it easy to fall into the trap of letting your emotions drive your decisions, such as buying when the price is rising for fear of missing out, or selling when prices go down. These emotional decisions usually aren't good for your investments.

Security and privacy

Cryptocurrency transactions offer privacy and security through pseudonymous transactions and secure blockchain technology. Furthermore, transactions are secured by the nature of the blockchain system and the distributed network of computers verifying transactions. As more computing power is added to the network, it becomes even more secure.

However, it's important to note that while crypto blockchains are very difficult to hack, individuals can be susceptible to hacking due to the same risks inherent in any online activity. Theft remains one of the most common threats to cryptocurrency users, and hackers have stolen tokens worth billions of dollars. There are also a number of schemes to trick users into giving up their tokens, such as doubling scams, social engineering, and market manipulation.

Diversification

Cryptocurrency can offer investors diversification from traditional financial assets such as stocks and bonds. While there's limited history on the price action of the crypto markets relative to stocks or bonds, so far, the prices appear uncorrelated with other markets. That can make them a good source of portfolio diversification.

By combining assets with minimal price correlation, you can generate more steady returns. If your stock portfolio goes down, your crypto asset may go up, and vice versa. However, crypto is generally very volatile and could end up increasing the volatility of your overall portfolio if your asset allocation is too heavy on crypto. Most financial experts recommend limiting crypto exposure to less than 5% of your total portfolio.

Choose a wallet

When it comes to choosing a cryptocurrency wallet, there are several factors to consider. Firstly, you need to decide what you plan to do with your cryptocurrency. If you're interested in the NFT market, choose a wallet that can connect to NFT marketplaces such as OpenSea, SuperRare, and Solanart. For example, MetaMask is often used for buying, selling, storing, and listing NFTs on OpenSea.

On the other hand, if you're solely interested in storing or sending and receiving cryptocurrency, Coinbase, Trust Wallet, Atomic, and Exodus are good options.

Another consideration is whether you want a mobile app version of your wallet. Some wallets are designed for desktop computers and may not have mobile-friendly interfaces.

If security is your primary concern, a hardware crypto wallet might be the best option. These wallets come in the form of a USB stick that can be disconnected from your system and the internet for added security. Examples include Trezor and Ledger Nano X. However, hardware wallets can be expensive and may be locked if you forget your password or lose the device.

Software wallets, on the other hand, are more convenient and accessible but are more susceptible to hacking and malware attacks. Examples include Blockchain and Atomic Wallet.

Ultimately, the best wallet for cryptocurrency depends on your specific needs, and it's important to stay informed about the constantly evolving world of crypto.

Manage your investment

Once you've decided to invest in cryptocurrency, it's important to manage your investment wisely. Here are some tips to help you manage your cryptocurrency investment:

• Have a strong financial foundation: Before investing in crypto, ensure you have a solid financial footing that can withstand the risks and potential losses associated with crypto investing. Have an emergency fund, pay off high-interest debt, and contribute to a retirement account.
• Choose a reputable platform: Select a well-known and beginner-friendly cryptocurrency exchange, such as Coinbase, Gemini, or Kraken. Consider security, fees, trading volume, minimum investment requirements, and the types of cryptocurrency available.
• Diversify your crypto holdings: Don't put all your eggs in one basket. Diversify your crypto portfolio by investing in multiple cryptocurrencies. This can help reduce the impact of price volatility in a particular coin.
• Set allocation limits: Only invest a small portion of your overall portfolio in crypto, typically recommended as no more than 1% to 5% of your net worth. This helps manage risk and ensures that crypto is just one part of your diversified investment strategy.
• Long-term perspective: Cryptocurrency is highly volatile, with large price swings. Take a long-term perspective and avoid making emotional decisions based on short-term price movements.
• Regularly review and rebalance: Periodically review your crypto holdings and overall portfolio. If your crypto investments move outside your acceptable allocation bands, consider rebalancing to stay within your risk tolerance.
• Security and protection: Keep your cryptocurrency secure by dealing only with reputable exchanges and digital wallet providers. Use strong passwords, two-factor authentication, and secure internet connections. Be vigilant about phishing scams and never share your passwords or private keys.
• Stay informed: Stay up-to-date with the latest developments in the crypto space. Follow news, research, and analysis from trusted sources to make informed decisions about your crypto investments.
• Risk management: Understand how to manage risk based on your investment strategy and risk tolerance. For long-term investors, this may mean holding through price fluctuations. For short-term traders, it could involve setting strict rules for buying and selling, such as stop-loss orders.

Frequently asked questions