The cryptocurrency market is known for its extreme volatility, yet within this turbulence lie potential profit opportunities for those interested in trading digital currencies. Major cryptocurrencies like Bitcoin and Ethereum have shown remarkable growth from their initial launch — though they’ve undeniably weathered significant ups and downs throughout their history. While seasoned investors have long been active in the cryptocurrency space, newcomers often wonder how to take their first steps into this digital marketplace.
Here’s your roadmap to start navigating the crypto investment landscape and the key risks you’ll need to be mindful of.
5 Essential Guidelines for Cryptocurrency Investment
Before diving into crypto investments, ensure your finances are in order. This means having an emergency fund, manageable debt, and ideally a diversified investment portfolio. Your crypto investments can then become another component of your portfolio, potentially helping to increase your overall returns.
Consider these five key points when starting your cryptocurrency investment journey:
1. Understand What You’re Investing In
As with any investment, comprehend exactly what you’re investing in. For stocks, you’d read annual reports and SEC filings to analyze companies thoroughly. Apply the same diligence to cryptocurrencies, since there are thousands of them, each functioning differently and new ones emerging daily. Understand the investment case for each trade.
Many cryptocurrencies, like Bitcoin, are backed by neither hard assets nor cash flow from an underlying entity. Investors rely solely on someone paying more for the asset than they did. Unlike stocks, where company growth can drive returns, many crypto assets depend on market sentiment becoming more optimistic for you to profit.
Some popular coins include Ethereum, Dogecoin, Cardano, and Solana. Before investing, understand both potential upside and downside. If your financial investment lacks backing by assets or cash flow, it could potentially become worthless.
2. Remember, the Past is Past
A common novice mistake is extrapolating past performance to the future. While Bitcoin was once worth pennies and is now worth much more, the crucial question is: “Will that growth continue, even if not at the same meteoric rate?”
Investors focus on the future, not past performance. Consider what will drive future returns. Traders buying cryptocurrency today need tomorrow’s gains, not yesterday’s.
3. Watch That Volatility
Cryptocurrency prices are extremely volatile, potentially dropping rapidly on mere rumors that prove baseless. This volatility can benefit sophisticated investors with rapid execution capabilities or solid market understanding. For new investors lacking these skills or high-powered trading algorithms, it’s treacherous territory.
Volatility often favors high-powered Wall Street traders competing against other deep-pocketed investors. New investors can easily get overwhelmed by volatility, which often causes beginners to exit while experienced traders buy at reduced prices. In essence, volatility can help sophisticated traders “buy low and sell high” while inexperienced investors may “buy high and sell low.”
4. Manage Your Risk
For short-term asset trading, especially with volatile cryptocurrencies, risk management is crucial. As a newer trader, understand how to manage risk and develop a loss-mitigation process. This approach varies between individuals:
- Long-term investors might simply never sell, regardless of price fluctuations. This long-term mindset helps maintain the position.
- Short-term traders might set strict selling rules, such as selling when an investment drops 10%. Following such rules strictly prevents small declines from becoming major losses.
New traders should consider reserving only a portion of their trading capital initially. If a position moves unfavorably, they’ll have resources for future trades. Remember: you can’t trade without capital. Keeping some money in reserve ensures you’ll always have trading funds.
Risk management is emotionally challenging but essential. Selling at a loss is difficult but can prevent worse losses later.
5. Don’t Invest More Than You Can Afford to Lose
Avoid putting essential money into speculative assets. If you can’t afford to lose it entirely, don’t put it into risky assets like cryptocurrency or other speculative investments.
Keep money needed for near-term major purchases (like a house down payment) in safe accounts. For guaranteed returns, consider paying off high-interest debt – you’re guaranteed to earn (or save) the interest rate you’re paying.
Don’t overlook exchange or broker security. Though you legally own the assets, someone must secure them effectively. Some traders use crypto wallets for offline storage to prevent hacking.
Alternative Methods to Enter the Cryptocurrency Market
Beyond direct cryptocurrency investment, traders have several options:
- Crypto Futures: Allow leveraged bets on price movements, potentially generating massive returns (or losses)
- Bitcoin ETFs: SEC-approved exchange-traded funds investing directly in Bitcoin, available through most online brokers
- Crypto Exchange or Broker Stocks: Investing in companies profiting from cryptocurrency trading, like Coinbase or Robinhood
- Blockchain ETFs: Investing in companies potentially profiting from blockchain technology
Each method varies in risk and cryptocurrency exposure, so understand what you’re buying and if it meets your needs.
FAQs About Cryptocurrency Investment
How much money do I need to start investing in cryptocurrency?
Theoretically, just a few dollars. Most exchanges have minimum trades of $5-$10, though some trading apps have lower minimums. Be aware that some platforms charge significant fees for small trades, so find a broker minimizing your fees. Many “free” brokers embed fees (spread mark-ups) in cryptocurrency prices.
How does a blockchain work?
Blockchain technology records and timestamps all transactions. Think of it as a running transaction receipt. Cryptocurrency blockchains record and verify currency movements and ownership. Many operate on decentralized computer networks, with multiple computers verifying transactions and resolving discrepancies.
How do you mine cryptocurrency?
Some cryptocurrencies reward transaction verifiers through mining. Bitcoin miners solve complex mathematical problems during verification. Successful miners receive predetermined Bitcoin rewards. Mining requires powerful, energy-intensive processing units. As of March 2024, the Bitcoin system consumed as much annual energy as Malaysia.
How can I invest in Bitcoin?
Multiple options exist:
- Crypto exchanges (Coinbase, Kraken, Binance)
- Traditional brokers (Interactive Brokers, Robinhood)
- Financial apps (PayPal, Venmo, Cash App)
Watch for fees when buying Bitcoin and consider other key factors.
What are altcoins?
Originally a pejorative term for non-Bitcoin cryptocurrencies, “altcoin” is somewhat outdated now. While Bitcoin remains the largest by market capitalization, others like Ethereum and Solana have gained popularity. With over 15,000 cryptocurrencies existing, defining the industry as “Bitcoin and everything else” is less relevant.
Final Thoughts on Cryptocurrency Investing
Cryptocurrency remains highly speculative. Many smart investors invest elsewhere. For beginners, start small and only use money you can afford to lose.
Disclaimer: Before putting their money into the market, every investor should do their own due diligence on various investment ideas. Also, just because an investment product has performed well in the past doesn’t mean it will continue to do so in the future.
