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| investing in cryptocurrency |
This guide outlines 10 essential tips for achieving success in investing in cryptocurrencies. The cryptocurrency space presents unique prospects, but it also presents challenges and risks that traditional markets have not faced. High volatility, technical complexity, and regulatory uncertainty can overwhelm new investors. But by following the basic principles of strategic asset allocation, secure storage, dollar-cost averaging, and buying fundamentally strong projects, you can carefully include cryptocurrencies as part of a well-balanced portfolio.
- Investing in cryptocurrencies, which is still a new and volatile asset class, follows many of the same rules as investing in other markets.
- The most important rule is to never invest more than you can afford to lose.
- Storing your cryptocurrencies securely in a secure wallet or through a reliable custody service is essential.
- Approach this market with eyes wide open, willing to make a long-term commitment based on solid convictions, not short-term speculation.
1. Never Invest More than You Can Afford to Lose
Cryptocurrencies are still relatively new assets that are highly volatile and can gain or lose significant value in a single day. While the long-term trend has been bullish, there is still uncertainty and opportunism in these markets.
For this reason, the first principle is to only invest an amount of capital that you are fully prepared to lose in the event of a market downturn. At the very least, you should have enough emergency savings before putting any money into cryptocurrencies. Once you are ready to invest, it should be no more than 5% of your investment portfolio. This is enough to capture potential gains while limiting the impact of losses on the overall portfolio.
2. Use Dollar-Cost Averaging
Use dollar-cost averaging for cryptocurrencies, which is making small, frequent purchases on a set schedule, such as weekly or monthly. Automate these purchases through the exchange instead of buying manually each time.
Dollar cost averaging allows you to systematically build a position while avoiding the psychology of trying to time the market's tops and bottoms. As a result, relatively more cryptocurrencies will be bought when prices fall and less when they rise, reducing the impact of volatility. Paying some extra transaction fees is often beneficial in the long run. You may also sometimes consider making additional opportunistic purchases when the market drops significantly.
3. Research and Stick to the Fundamentals
Screening for cryptocurrency investing involves different metrics than the stock market. These often include assessing real-world adoption potential, reviewing technical specifications, surveying founders and developers, surveying community engagement, and evaluating competitors.
Prefer projects that are time-tested or that offer unique capabilities that cannot be easily copied and that promise widespread adoption. Beware of assets linked solely to speculation without any real fundamentals.
The critical fundamentals to research are the utility of the token, its transaction speed and scalability, the security of the network, the cryptographic language(s) used, the transparency of the team, and the competitive advantages it has over rival cryptocurrencies.
4. Stick to the Major Crypto Currencies
Large, well-established crypto assets like Bitcoin and Ethereum have first-mover and adoption advantages, have significant market capitalization, and are linked to a series of financial products built on them, such as ETFs and derivatives markets. These popular currencies have survived several major market cycles and recessions.
Although risks remain, larger cryptocurrencies have generally shown resilience, unlike newer or smaller currencies. However, if the opportunity arises, consider rebalancing to capture periodic profits from key assets into promising new projects of real-world interest. As with any particular asset or security, avoid overweighting major cryptocurrencies relative to the overall size of your investment portfolio and your risk tolerance.
5. Use Safe Storage
Store large cryptocurrency holdings in a hardware wallet or at a trusted crypto custodian rather than leaving them on an exchange long term. Leading hardware wallets include Trezor and Ledger, and some software-based wallets like Electrum are considered secure. These provide enhanced security protection such as offline storage, encryption, PIN codes, multi-signatures, recovery phrases, and anti-tampering mechanisms.
Keep your recovery phrase in a safe place, such as a locked vault or bank vault. Do not store the recovery phrase electronically; If you must, encrypt or password protect it. Be careful when entering sensitive wallet data on devices. Use complex and unique passwords.
6. Employ Common Sense
Be objective when evaluating cryptocurrency investments. Don't fall prey to fear of missing out, currency speculation, or hype cycles. Also avoid any assets that contain promises of easy money, guaranteed returns, or anything that sounds too good to be true. It always is.
Maintain a balanced portfolio across multiple asset classes. Don't overexpose yourself in cryptocurrencies. Check any cryptocurrency-related information for accuracy before acting on it. Understand that investing in cryptocurrencies is still largely speculative and be prepared to cut your losses if your investment theses change. Consider consulting fee-based financial advisors for guidance tailored to your financial situation and goals.
7. Take the Time To Understand the Technology
Take time to learn about the underlying technology that powers different crypto assets. Knowing how blockchain networks, consensus mechanisms (e.g., proof-of-work vs. proof-of-stake), hashing algorithms, and smart contracts work will give you a better view of a project's prospects.
Learning the basics of cryptography also helps you better understand the capabilities of products like zero-knowledge proofs. Subscribe to industry publications and legitimate blogs independent of the cryptocurrencies you invest in and stay up to date on new technological developments in the field.
8. Pay Attention to the Courts and Regulations
Follow relevant legal issues and regulatory developments, as well as legislative proposals related to cryptocurrencies, both domestically and abroad. Major regulations can significantly impact pricing and adoption. For example, when China banned cryptocurrency mining, it led to many miners moving their operations.
Stay up to date on governance changes enacted by blockchain projects as well. This could dramatically change quota returns, development financing and other dynamics.
9. Use Crypto Indicators to Inform Decision-Making
While cryptocurrency volatility makes accurate predictions impossible, tried-and-true technical indicators such as moving averages, relative strength and crossovers can provide valuable signals. For example, moving average crossovers may identify momentum shifts. New crypto-specific indicators such as on-chain activity, memory pool size, average transaction fees, addresses by holding time, etc. are also important.
Evaluating indicators can help improve the timing of entries and exits. Combine technical and blockchain-based analysis to get a more complete perspective. Always maintain a long-term outlook rather than reacting to daily price fluctuations.
10. Stay Disciplined
Create a strong rules-based framework. A systematic approach based on pre-defined criteria helps move away from making decisions based on emotion, which can be costly. Continuously improve your portfolio and strategy based on lessons learned. Be flexible and open to new information rather than restricting yourself rigidly to any one system.
How Much of My Portfolio Should I Allocate to Crypto?
Most financial experts recommend limiting cryptocurrency exposure to less than 5% of your total portfolio. Cryptocurrencies are considered a high-risk asset class. Limiting allocation helps manage overall volatility and risk. Those new to cryptocurrency investing may start with 1% to 2% as an introduction. Only risk capital that you can afford to lose should be exposed to cryptocurrency price fluctuations.
What Are the Tax Implications of Investing in Crypto?
Cryptocurrency investments can create complex tax liabilities. Capital gains and losses must be reported when selling or trading cryptocurrency assets. Cryptocurrencies are treated as property by the Internal Revenue Service, so they are subject to the same short-term and long-term capital gains tax rates that apply to other assets such as stocks. However, these rules and classifications are subject to change. Keep detailed records of all crypto transactions.
What Is Crypto Self-Custody?
Self-custodial occurs when owners of digital assets maintain and control their private keys, which are essentially the passwords that grant access to these tokens and funds. Self-custody can be done using hardware, software or paper wallets.
What Is a Crypto Custodian Service?
Custodians are third-party services that hold crypto assets and provide security against threats such as hacking, fraud, and lost private keys. They can mitigate self-custodial risks through robust protocols and insurance. For large cryptocurrency holders, regulated custodians add oversight and financial controls.
The Bottom Line
Investing in cryptocurrencies carries significant risks and should be approached with caution. This still nascent market is subject to high volatility and uncertainty. However, crypto assets also offer unique possibilities for those willing to accept higher risks. By allocating only speculative capital that you can afford to lose, dollar-cost averaging positions, focusing on fundamentally strong projects, using cold storage, and employing disciplined portfolio management, you can more safely navigate these choppy waters.
Be objective, think long-term, and consider the risks of cryptocurrencies relative to your overall finances. Don't chase fleeting gains. The cryptocurrency market will continue to mature, and its adoption is steadily increasing. Patience and diligence remain key virtues in the world of digital assets and decentralized finance.
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