The cryptocurrency market has taken the world by storm, drawing in a multitude of retail investors and institutional traders alike.
Interestingly, the crypto market has always placed investors on a rollercoaster ride, thanks to volatility. One time you witness the price of a coin like Bitcoin rise meteorically; the next, it takes a soul-crushing nose-dive.
Still, experts project the crypto market will register a compound annual growth rate (CAGR) of 12.8 %, ultimately reaching a market size of $4.94 billion by 2030.
In fact, savvy traders have been raking in massive profits (and considerable losses, too) while riding with every market ebb and flow.
So, if you’re a newbie, how do you establish an edge and profit off these “unpredictable” markets?
Well, education is king! So let’s get started.
The 5 Important Steps for Investing in Cryptocurrency
You need some sort of emergency fund to hedge you against uncertainties, a manageable debt level, and a diverse investment portfolio.
Your crypto investments then only form part of your larger investment portfolio. And hopefully, they’ll increase your returns.
These are the 5 crucial things to consider before you invest in crypto:
1. Research Well To Know What You’re Investing In
When dealing with crypto, you must figure out exactly what you’re pumping your hard-earned bucks into.
Remember, there are tons of cryptos out there, with new coins coming up and disappearing mysteriously. You must, therefore, do a thorough background check so you can make informed investment decisions.
Understandably, most cryptos are only backed by faith and confidence. They’re neither backed by fiat money nor hard assets like gold.
Take Bitcoin, for example. You only trust investors will pay a higher price than when you bought the coin. That drives the price higher, and you can profit from the spreads.
That’s different from stocks, where a company can grow its profits tremendously and distribute the returns to investors.
Cryptos rely exclusively on traders being optimistic and the market going bullish for you to gain. So before you invest, it’s crucial to weigh the potential upside and downside as well.
2. Invest Only What You Can Bear to Lose
As it turns out, investing in cryptocurrencies carries a very high level of financial risk.
Therefore, you shouldn’t channel the money you need into speculative assets like these. Remember, you could lose it all!
The money you need to pay for cash flow assets and hard assets like real estate should do better in a safe account. Moreover, you shouldn’t borrow money to invest in crypto.
Using leverage in an already volatile investment only compounds the risk, and things could go terribly against you. Unless you’re eyeing an absolutely positive return, experts recommend you stay off debt in crypto investments.
It’s also important you don’t overlook the security of the crypto exchange platform or broker you’re using. Experienced traders opt for crypto wallets to hold their tokens offline if they doubt the security of their assets elsewhere.
Fortunately, most crypto wallets employ top-notch security that even notorious scammers and hackers can’t breach.
3. Invest With a Long-term Perspective
Most entry-level investors look at the past trends and believe they’ll directly affect the future. Nothing could be further from the truth.
A previous sharp decline in price doesn’t always have to repeat itself in the future. Similarly, a previous win isn’t a guarantee the market will always be in your favor.
While Bitcoin used to be worth pennies and then later a couple of cents, it now goes for tens of thousands of dollars. Of course, there have been peaks and valleys as well.
Can we extrapolate sustained growth to the future? We can’t have “yes” for a definitive response here. Despite your edge being the ability to forecast price movements with a greater probability of success, that’s the reality.
While backtesting is important, savvy investors look to the future, not entirely on how an asset has performed previously. Ask yourself what will drive future returns. After all, you’re only interested in the gains of tomorrow.
4. Analyze the Market Volatility
Crypto prices are so volatile that they can plunge rapidly within seconds because of a rumor or Tweet that later turns out baseless.
Sophisticated traders know how to anticipate these events and can even profit off spikes. But for newbies, scalping may not be the most effective trading strategy during such times.
Forcing trades due to the fear of missing out is like treading on a minefield.
Volatility is particularly notorious in shaking out new traders. But once you’ve known what to do, you’ll buy low and sell high. And when the markets get chaotic and fuzzy, you’ll quickly know and hop out.
5. Manage Your Risk Properly
You’ve probably heard the phrase “taking care of the downside and letting the upside take of itself.”
Risk management comes in handy when dealing with volatile assets like crypto. Therefore, you must learn how to take care of your downside, which means managing your risks properly.
This often involves strict rules when risking your capital. Moreover, you must also find out how to mitigate your losses.
Financial planners strongly advise that you only risk a small percentage of your investment portfolio in crypto. Typically, you should limit this to between 1 to 5 percent of your total portfolio.
If things head south, you’ll still have money in reserve to invest in crypto later. Once you’ve taken a reasonable risk and managed it properly, you can employ advanced strategies to maximize your profits. Of course, you’ll learn all these in your investment journey.
If you liked this article, you might also enjoy reading: 6 Common Crypto Investment Mistakes Most Beginners Make