5 Golden Rules of Cryptocurrency Investing
- A crypto meltdown is less likely to wreck your finances if you only invest money you can afford to lose and make sure cryptocurrency only makes up a tiny portion of your portfolio.
- Maintain a long-term perspective while making investments, and thoroughly investigate any cryptocurrency before purchasing it.
Last year, it seemed as though the price of cryptocurrencies would only rise and that there was no way to lose money. Even a trading hamster may choose profitable cryptocurrencies. However, several cryptocurrencies have now fallen by 80% or more from their record highs. This serves as a sharp reminder that these are dangerous investments with both upside and downside potential.
The concept of reducing risks is central to many of the golden investment rules. If you’re going to invest in cryptocurrencies, the ideal situation is for you to gain from rising prices while avoiding financial ruin if the market declines. You can achieve it with the aid of these five guidelines.
1. Never invest more money than you can afford to lose.
The temptation is to invest every dollar you have in the cryptocurrency king in the hopes of making large profits when you see forecasts that Bitcoin (BTC) may reach $1 million. The issue? All that money might be lost. You won’t go bankrupt if the sector tanks if you only invest money you can afford to lose.
Investing in cryptocurrencies carries risk. There’s a potential that the blockchain may transform how we handle money or possibly replace traditional currencies as the internet’s future money. Or it may not. Numerous projects will fall short, and the entire sector may go under. There are several big obstacles to overcome, whether it’s legislation, the introduction of central bank digital currencies (also known as Gov Coins), or the development of even more cutting-edge technology.
2. First, cover other financial bases
Building solid financial foundations are essential before investing in cryptocurrencies. That entails keeping up with your retirement payments as well as establishing an emergency fund that can pay for three to six months of living expenses. Prioritize this over any cryptocurrency investments if you’re attempting to pay off debt.
An emergency fund will enable you to address a financial emergency that arises the next week without incurring debt or having to liquidate assets, maybe at a loss. Imagine if you had purchased $2,000 worth of Bitcoin in November as opposed to saving the money for a rainy day. It could only be worth $600 right now. Even while it could bounce back, in the long run, it wouldn’t help if you had to sell today. How would you feel if you experienced a medical emergency or lost your job this week and your financial safety cushion was held in Bitcoin rather than a bank?
3. Make a variety of investments
The classes of assets you purchase and the specific assets within each class are two different ways to diversify your portfolio. The majority of experts advise investing only a modest portion of your overall wealth in cryptocurrencies. The remainder needs to be invested in less risky assets like stock or real estate. How much depends on your financial status, believe in cryptocurrencies, and risk tolerance. If you still have a long way to go before retiring, you could be more inclined to increase your exposure to cryptocurrencies because you’ll have more time to recover if something goes wrong.
Diversifying your cryptocurrency holdings is also a wise decision. Some investors exclusively opt to invest in Bitcoin and Ethereum (ETH), which makes sense given that these are the most well-established cryptocurrencies with the strongest long-term prospects. Don’t bet everything on one or two lesser cryptocurrencies even if you want to acquire them.
Depending on the crypto industries you regard to be the most promising, take into account a variety.
4. Plan for the long run
Investing with a 10- to 20-year perspective is one method to weather the crypto market’s volatility. Short-term trading makes it very impossible to try to time the market, and many investors lose money doing it. Instead, seek initiatives with solid management and high usefulness that could succeed in the ensuing decades.
Because the sector is so young and there is a lot we don’t know about how it will develop, it isn’t always simple to think long term. But it’s a strategy that will aid in maintaining perspective during even protracted lows and guard against forming snap judgments. For instance, even if many projects did not survive the 2018 crypto winter, if you had purchased each of the top 50 cryptocurrencies five years ago, you would have seen a growth of roughly 700 percent.
Never invest in a cryptocurrency you haven’t thoroughly investigated. We all have busy lives, therefore it might be alluring to invest a little sum of money in an alternative cryptocurrency that you read about online. However, there is a lot of false information available, and it is your money. Your financial objectives and techniques are only known to you. While research doesn’t ensure success, it greatly lowers the likelihood of falling victim to fraud or purchasing a cryptocurrency with poor long-term potential.
Crypto is a fairly new asset class. Some consumers felt under pressure to purchase cryptocurrency last year so they could invest early in the next great thing. They purchased cryptocurrency out of a fear of losing out, often using funds they needed immediately at the expense of other financial targets. It’s critical to secure your funds and study the market before investing in cryptocurrency. In this manner, another cryptocurrency drop would be upsetting but not disastrous.