Cryptocurrencies are constantly making headlines. With Bitcoin, Ethereum and other major currencies hitting all-time highs, it’s natural to want in on the action. But before you start buying cryptos, it is essential that you ask yourself some questions. Cryptocurrencies are volatile and risky, so you need to make sure you’re doing it for the right reasons and that you’re prepared for the potential downside. Here are four questions to ask yourself before you start trading cryptocurrencies.
1. Why are you investing in cryptocurrency? If you are considering investing in cryptocurrency, whether you simply buy coins or mine cryptocurrency, do it for the right reasons. Are you doing it because you believe in the technology and think it has long-term potential? Or are you doing it because you think you can make a quick buck? The most successful crypto investors are passionate about the underlying technology. They follow Bitcoin, Ethereum, and emerging crypto providers on Hacker News and Twitter, and enjoy the thrill of trying to anticipate market trends while knowing it’s an unpredictable space.
Crypto-savvy investors will study cryptocurrency teams’ white papers and roadmaps and hypothesize whether the digital currency has potential. If you believe that demand will increase in the coming months and years, the investment may be worth it. But that time spent researching and making that judgment call must also be worth it. For the record, if you’re in it for the money, that’s perfectly fine. Just understand the risks before you get on board.
2. What can you afford to lose? Cryptocurrencies are volatile and widely considered a high-risk investment opportunity. In fact, half of Bitcoin investors are “in the red,” according to an interview published by CNN Money. The risk is so great that many credit card issuers won’t even allow cardholders to buy cryptocurrencies with their credit cards, or discourage it with high fees. Few cards on the market allow Bitcoin purchases, and most first-time crypto investors will be limited to the cash they have on hand to invest. Since cryptocurrency prices can go up and down very quickly, you need to be prepared for the possibility of losing some or all of your investment. Keep this in mind when considering how much money you are willing to invest in crypto. If you’re investing a large amount of money, spread it across multiple coins (see our guide to investing in Ethereum as the next step) to diversify your risk. And don’t invest more than you can afford to lose. Remember, there is always a chance that prices will crash overnight and never recover.
3. What is your investment strategy? Consider how cryptocurrency will fit into your overall investment strategy. For example, are you buying cryptocurrency as an investment or as a speculative bet? There is a big difference between the two approaches. An investor is someone who buys with the intention of holding their position for the long term; they believe in the underlying technology and think prices will eventually go back up (though maybe after some ups and downs). A speculator is someone who tries to make quick profits by perfectly timing market movements.
They will buy when prices are low and then sell as soon as they have risen even a small amount. Cryptocurrency speculation has become increasingly popular, especially among people with no experience in investing in financial markets. Unfortunately, this often leads to poor decision-making; investors get caught up in FOMO (fear of missing out) and start buying without a clear understanding of what they are doing. If you want to speculate in cryptocurrency, that’s fine; just make sure you know what you’re doing and don’t invest more money than you can afford to lose. And if you decide to go this route, remember that the most successful speculators are those who take a methodical approach and have a solid plan. They buy when prices are low and then sell as soon as they reach the target profit margin.
4. What is your exit strategy? Investing is easy, but selling can be difficult. When the time comes to sell your cryptocurrencies, will you be able to do so? Your exit strategy, or plans to cash out your investment at some point in the future, is an important consideration before any investment venture; however, the highly fluctuating costs of crypto make a formal exit plan much more vital. If your goal is simply to buy coins and hold them for the long term, then your exit strategy can be quite simple: sell when (and if) prices rise high enough for you to feel comfortable cashing out. However, exit plans are a bit more complicated with speculative trading. You want to sell quickly if prices start to drop.
You can sell directly to another person, trade on a cryptocurrency exchange, or use a peer-to-peer trading platform such as LocalBitcoins to cash out your cryptocurrency investments. Each exit method has its pros and cons; for example, selling directly to someone else is often the fastest way to get cash, but you have to find someone willing to buy your coins at the current market price. Trading on an exchange usually takes longer, but gives you more flexibility in terms of the price you are willing to accept. Whichever method you choose, make sure you have a plan before you invest money so you know how and when you will exit your position. Crypto trading isn’t for everyone Whether it’s financial investments or fashion, popular trends come and go; no madness pleases everyone.
Not every investment opportunity is a worthwhile opportunity for every person. Some people are more risk averse than others and don’t want to invest their money in something that could potentially lose all of its value overnight. Others simply don’t have the time or patience to track crypto prices day in and day out. And then some aren’t interested enough in the underlying technology to make informed investment decisions. If anything in this paragraph describes you, it’s probably best to stay away from cryptocurrency. The bottom line is that there’s no shame in admitting that cryptocurrency isn’t for you. It doesn’t make you any less smart or financially savvy; it just means that this particular investment opportunity doesn’t suit your goals or interests. However, if cryptocurrency excites you and you love the idea of investing more time and money to understand its trends, jump on the cryptocurrency bandwagon with confidence.