Cryptocurrency investing is currently one of the most lucrative and accessible ventures available. With that said, being successful in cryptocurrency isn’t as simple as one might think. It takes more than just to buy bitcoin and keep it in a wallet to start making considerable profits in this niche.
Moreover, the cryptocurrency market is incredibly volatile and risky. Consequently, jumping in feet first will most probably result in losing most of your starting capital. For this reason, we decided to create this article that will set you up with the basics of investing in cryptocurrencies.
Here, you will learn about the risks involved with cryptocurrency investing and the importance of having an investment strategy. We will also talk about some important prerequisites of crypto investing such as fundamental and sentiment analysis, portfolio management, and how to choose the right crypto exchange.
So let’s get started, shall we?
Main benefits of cryptocurrency investing
If you are new to the cryptocurrency market, you might be wondering what the big deal behind these digital assets is. Well, investing in crypto has numerous advantages, including:
- Incredible potential returns – cryptocurrencies are high-risk, high-reward assets. This means that even modest investments can bring in crazy profits in short amounts of time.
- 24/7 availability – the crypto market never sleeps. This means that you can trade crypto at any time in the day, and be able to use it as a secondary source of income without it impeding on your work schedule.
- Global reach – unlike stock markets that are usually confined to their countries of origin, cryptocurrency markets are borderless. You can purchase Bitcoin or speculate on the price of crypto, no matter where you are in the world.
Understanding the risks
If investing in cryptocurrencies was easy, everyone would be a millionaire by now. Truth is, while crypto can allow investors to access large amounts of wealth, it remains a highly risky venture.
First, cryptocurrencies are highly volatile, which means that their prices can fluctuate wildly during short time frames. While this can help savvy traders make huge profits, it can also cause less experienced investors to take considerable losses.
Second, because they are such a novel asset, cryptocurrencies are mostly unregulated. This means that if your country isn’t too fond of them, you might want to refrain from investing large sums of money in such an uncertain asset.
And finally, you will need to be extra careful when storing cryptocurrencies. Unlike with traditional money, where your bank will keep your funds, you are the sole custodian of your crypto. This means that you need to store and keep them safe at all times using specialized crypto wallets.
With all that in mind, we can finally begin our guide on how to invest in cryptocurrencies.
Create an investment strategy
First and foremost, you will need to set up an investment (or trading) strategy. Drawing out a precise plan will allow you to build emotional intelligence and not trade on a whim. Consequently, it should help you become more consistent in your investments and grow your profits over time.
Here are some tips on how to set up an investment plan:
- Set realistic goals – first, set yourself some goals that you are trying to reach. For instance, “make X trades per month” or “increase capital by 3% each week”. This way you will be able to keep track of your investment journey and thrive for growth.
- Invest only what you are prepared to lose – because cryptos are so volatile, you should never invest more than you are willing to lose. Never invest money that you need for your basic needs like food, rent, or mortgages.
- Keep a trading/investment journal – keeping a journal will allow you to become a more consistent trader. You will be able to learn from past mistakes and double down on working investment strategies.
- Learn about capital and risk management – understanding exactly how much of your capital you should invest in a particular cryptocurrency is one of the most difficult things to assess when starting out in crypto. You should always keep in mind the potential losses in your investments and try to limit these to a minimum.
- Prepare an exit plan – the markets work in cycles and you should have an exit plan for when the crypto market is about to shift into negative momentum. Take profits occasionally as the prices go up and always be ready to sell out losing positions before losses start to pile up.
Learn fundamental analysis
Fundamental analysis helps you evaluate the viability of a certain cryptocurrency as a mid or long-term investment. Before investing a large amount of money in a certain coin, you should always do the following:
- Read the whitepaper – the whitepaper of every cryptocurrency will include every detail about the project, its tokenomics, the utility of the token, etc. A good whitepaper should be easy to understand and well written. Scammy projects usually will often use incomprehensible terms trying to hide the weak fundamentals of their token.
- Research the team behind the project – the success of a crypto project is directly linked to the team that is creating it. As such, you should always do a bit of research about the people that are involved and if they have previous experience in blockchain projects.
- Beware of scams – there are hundreds of new coins being released in the market all the time. Because crypto is such a tempting investment, many scammers try to lure people into investing in their tokens and then conduct a rug-pull scheme, leaving investors holding worthless tokens.
Assess market sentiment
Emotion plays a big role in the price of cryptocurrencies. The markets can swing due to the overall sentiment being either good or bad. For example, in the case of good market sentiment, FOMO (fear of missing out) will take over, driving prices even higher up.
On the other hand, if sentiment is bad, FUD (fear, uncertainty, doubt) could take over, and drive prices to the ground. This is why you should conduct a thorough sentiment analysis before you invest in a certain token or coin.
To do this there are numerous free online tools you can use, such as:
- Check the crypto fear and greed index.
- Use sentiment analysis tools like cryptomood or lunarcrush.
- Check google trends.
- Follow cryptopanic to assess the number of FOMO or FUD news pieces.
Manage your portfolio carefully
In the cryptocurrency market, Bitcoin is still king. It remains the most valuable and popular cryptocurrency which has proven to be a great store of value over the years.
However, many alternate cryptos may outperform Bitcoin in the short term. Consequently, beginner traders might be tempted to put all of their capital in these high-risk, high-reward tokens.
However, to be successful in this market, you will need to meticulously choose which tokens to invest in. Expert crypto investors usually have most of their holding in coins that have proven their value such as Bitcoin and Ethereum, and only a small portion of their portfolio is dedicated to high-volatility altcoins.
For example, a good portfolio distribution would be:
- 60% Bitcoin
- 20% Ethereum
- 20% Altcoins
Choose your cryptocurrency exchange
Finally, you will need need to choose a reliable trading platform where you will purchase, trade and sell your cryptocurrencies. There are two major types to choose from:
- Centralized exchanges (CEX) – which are run by companies that match the user’s buy and sell orders and take a small fee for their effort. The main advantage is that they offer FIAT to crypto trading pairs. However, the caveat is that they keep custody of your funds until you withdraw them from the exchange. Examples: Binance, Coinbase, Kraken, Huobi.
- Decentralized exchanges (DEX) – these are decentralized platforms where the buy and sell orders are executed by smart contracts. Consequently, users keep control of their funds, but DEXes don’t offer FIAT trading pairs. Examples: Uniswap, PancakeSwap, 1Inch.
Investing in crypto can be exciting and profitable, but also very risky if you don’t know what you are doing. Hopefully, our article gave you the groundworks on how to start investing in cryptocurrency. Remember, crypto is still young and as an investor, you are catching the early train. Just tread carefully, and you should slowly start building wealth thanks to these incredible assets.