This article is for informational purposes and should not be construed as financial or legal advice.
Cryptocurrencies are often seen as tech-savvy and adventurous, but there are many compelling reasons why investing in them would be a good idea.
We’ve all seen stories about people who made the right Bitcoin investment prior to 2017, became millionaires, and can now retire in their 20s. Is this likely to happen to you? Of course not.
While these first adopters got incredibly lucky, modern cryptocurrency investment is not a get-rich-quick scheme. It’s an asset like any other, and when used correctly (for diversification, smart investments, high-risk-high-reward investing, etc.), it can help bring you closer to your financial goals.
For all of this to work, you have to be responsible when investing in cryptocurrencies. Here are the top five tips to help you get there.
1. Get your information from the right source
Any information can prove to be good. If someone gives you a tip on a trade while randomly sitting next to you in a waiting room at the dentist’s office, retroactively, this becomes a valid source of information.
The problem is that you can’t evaluate things retroactively, at least not when it comes to investing. By this same logic, if you were to guess the lottery numbers, guesswork would be a superior alternative to research.
The truth is that some surveys have been conducted by experts with years of experience in the field. Sure, you can find good information on your favorite subreddit, but it’s more likely to appear on the list of people who have dedicated their lives to studying this asset type.
Experts see some cryptocurrencies as the best potential investment for growth and scalability. These cryptos show promise for future growth and could be considered a sensible investment, even for beginners.
Just keep in mind that you’re not doing one-time research to make a one-time investment. Instead, you’re trying to figure out what credible sources of information are so that you can resort to them time and time again. Instead of looking for sources, you’re actually looking for resources.
2. Understand the risks and the potential
Cryptocurrencies are a risky investment. This is a volatile market that can go either way, which is why it’s never a good idea to invest more than you can afford to lose. Crypto gains are never guaranteed, so if you’re a single parent planning for retirement, it might be a good idea to start by prioritizing your retirement plan, your housing situation, and your debt.
On the other hand, if you have excess cash you plan to invest and have already put most of it toward S&P 500 companies; you can probably afford to buy BTC and a few risky coins that could potentially yield amazing returns. That said, again, this is for informational purposes only as risky coins could also have too high of risks.
This type of investment, when successful, can put you a lot closer to your other financial goals (some of which we’ve described in the first paragraph of this section).
Risk is fine; there’s nothing to be afraid of as long as you’re engaging in some sort of risk management. To do this, you need to have a set amount of money that goes into this investment and carefully measure the potential loss against a potential gain.
Some people have such a strong risk aversion that they actually avoid making a reasonable investment. What is risk aversion? Well, we’ll cover it in the next segment.
3. Understand the emotions that drive your decisions
In theory, all investments are data-based. In reality, nonetheless, investment has as much to do with psychology as it does with economics. The problem is that you often don’t understand or know how to describe these subconscious forces driving your decisions.
First, there’s loss aversion (not because it’s the most common one but because we’ve already mentioned it). This is a scenario where you fear losing money more than you’re looking forward to winning it. For you, the loss of $100 bears more emotional weight than a gain of $100 would (in the opposite direction).
Greed is another big one. You want the money, you need the money, and this drives your decisions. In a way, it’s the opposite of loss aversion. It’s also what makes a lot of people prone to gambler-like behavior when investing. Moreover, this is not exclusive to crypto.
Another huge psychological phenomenon is the FOMO. You’re afraid that you’ll miss out on something that everyone else will capitalize on.
Lastly, you have the positivity bias. This is a psychological phenomenon based on the idea that good things are more likely to happen (that good outcomes are, for some reason, more likely than bad ones). This is not true, but it will impact your decision-making.
4. Diversifying your investments
The next thing you need to understand is the importance of diversification, even when doing crypto. Now, this may seem a bit redundant. After all, you know about diversification already. In fact, cryptocurrencies are probably one of the assets that you’re buying to diversify your broader portfolio.
You may not realize that you need to diversify your cryptocurrencies as well. Not many guides actually cover this topic.
There are several ways to do so. First, you can check their market capitalization and put some money in the largest coins (ETH and BTC), but you also want to take a risk, now and again, usually with a much smaller portion of your coins.
Like with standard diversification, you want to go for assets with low correlation. This means that you want to pick coins that are on different blockchains, tied to different industries, etc. The bigger the difference, the better.
Still, if you can’t be bothered enough to do the research, just putting your money in different cryptocurrencies is better than nothing. Diversification is what keeps your investment safe.
5. Regularly monitor your investments
The market is volatile, and you have to watch out for your investments as much as you can. Fortunately, you can do it via any device, and these exchanges really put much effort into being as transparent as possible.
Due to the volatility of the market, positional investing doesn’t really make too much sense. This means that you’ll have to check up on your investments relatively regularly.
This is also another reason why picking the exchange with the right UI is so important. You’ll spend hours and hours looking at this screen, refreshing, refreshing, and refreshing again in hopes that your coin will increase in value (or stop going down). Customization and actually liking the interface can make this a bit less tedious.
Most importantly, no human has the ability to sense the change in the market. This is why you need notifications, but most of these have to be set up. In fact, you can even set up stop orders, which will help automate your trades and minimize the chance of you missing out on anything important.
By being responsible, you can easily mitigate most downsides of crypto investing
High risks always come with high rewards, and if you learn how to manage risks, show some restraint, and do your research, you could get the most out of this situation. The key thing is to understand that you’re an investor, and you need to act like one. So, you need to learn how to do your research, how to diversify, and how to automate your trades. All that you know about investing still applies; it’s just that the landscape is a bit different (more volatile).