While the volatility of cryptocurrencies offers profit potential for traders, it also presents significant risks. Since their inception, cryptocurrencies such as Bitcoin and Ethereum have experienced substantial increases but have also been subject to dramatic boom-and-bust cycles. Despite experienced traders having engaged in speculation for years, how can newcomers effectively enter this industry?
Five steps to cryptocurrency investing
Before delving into cryptocurrency investments, it’s crucial to ensure your financial groundwork is solid. This includes establishing an emergency fund, managing debt responsibly, and ideally, maintaining a diversified investment portfolio. Investing in cryptocurrencies can complement your existing holdings and potentially enhance overall returns. As you embark on your cryptocurrency investment journey, consider these five key factors.
1. Recognize the investment you are making.
Understanding your investment is fundamental, much like any other asset. Just as you would scrutinize annual reports and SEC filings for stocks, it’s crucial to conduct thorough research for each cryptocurrency you consider. With hundreds of cryptocurrencies, each serving unique purposes and new ones emerging constantly, this diligence is essential for informed decision-making. Unlike traditional assets backed by tangible assets or business cash flows, many cryptocurrencies lack such support. For example, Bitcoin’s value hinges solely on the belief that future buyers will pay more for it.
2. Recall that the past is history.
Novice investors often make the mistake of assuming past performance guarantees future results. While Bitcoin has shown significant growth from its lows, the key question remains: ‘Will this growth trajectory continue, albeit perhaps at a more moderate pace?’ Instead of dwelling on historical gains, prudent investors look forward to what could drive future profitability. Those entering the cryptocurrency market seek tomorrow’s gains, not simply those of the past.
3. Keep an eye on that volatility
Cryptocurrency values exhibit extreme volatility, capable of vanishing within seconds due to unfounded rumors. This volatility can offer significant advantages to savvy investors who can react swiftly and possess a deep understanding of market fundamentals, current trends, and future trajectories. However, for novices lacking these skills or sophisticated trading algorithms, navigating this landscape can be fraught with challenges.
4. Control your exposure to danger
Managing risk is essential in trading any asset, especially volatile ones such as cryptocurrencies. Novice traders must learn strategies to mitigate risk and develop systems that limit potential losses. Each individual’s approach to risk management can vary:
For long-term investors, managing risk might involve holding onto their investments regardless of short-term market fluctuations. Their focus on the long-term perspective allows them to stay committed to their investments.
5. Never invest more money than you can lose
Finally, it’s crucial to avoid investing money that you need in risky assets. Investing in volatile assets like cryptocurrencies or other speculative investments should only be considered with funds you can afford to potentially lose entirely.
Money earmarked for upcoming expenses, such as a down payment on a home or a major purchase, should be kept in safe and accessible accounts to ensure it’s available when needed. Additionally, prioritizing the repayment of high-interest debt offers a guaranteed return, as it reduces the overall interest payments regardless of the interest rate.
Additional bitcoin investment options
While many traders opt to invest directly in cryptocurrencies, there are alternative, indirect approaches to entering the market. Some of these include:
Crypto futures: These provide an alternative way to speculate on Bitcoin price fluctuations, leveraging opportunities to potentially generate significant profits (or losses). The dynamic futures market amplifies the already volatile movements in cryptocurrencies.
Bitcoin ETFs: A number of exchange-traded funds that make direct investments in Bitcoin were approved by the Securities and Exchange Commission in January 2024. The majority of internet brokers that sell conventional securities like equities and bonds also provide spot Bitcoin exchange-traded funds (ETFs). Thus, using these ETFs as a fund-like product can be a simple way to purchase cryptocurrency.
Crypto exchange or broker stocks: Consider investing in businesses poised to benefit from the growing cryptocurrency market, regardless of market outcomes. Examples include brokers such as Robinhood or exchanges like Coinbase, which derive a significant portion of their revenue from cryptocurrency trading.
Blockchain ETFs: You can invest in companies positioned to benefit from blockchain technology through a blockchain ETF. These ETFs typically include major publicly traded firms in the industry. It’s important to note, however, that these companies often have diverse business activities beyond cryptocurrencies. This diversification can reduce both the potential gains and losses specifically tied to cryptocurrency-related activities.
Article by: https://www.linkedin.com/pulse/how-know-right-time-invest-cryptocurrencies-nxdeep-connectz-nragc/