5 Things New Crypto Investors Should Know
Crypto investing can be an adventure, but it's not without risks.
According to research by Motley Fool Money, over 50 Million Americans are likely to buy crypto in the next year. If you're thinking of investing in cryptocurrency, here are some things you should know.
1. You're in for a wild ride
Cryptocurrencies are volatile investments. Even if you're used to investing in the stock market, you may not have experienced the considerable highs and lows of crypto. For example, Bitcoin (BTC) recently fell to a 3-month low and lost almost 50% of its value in just six weeks. And that still left it over 35% up since the start of the year.
There's potential for high returns, but you'll need to be ready to hold through the dips. The first time your portfolio loses value, it can be nerve-racking. But remember, by investing for the long term, you can afford to wait for prices to rise again. That's also why research is important and can give you the confidence to weather the storms.
2. There's danger to investing in crypto
We've touched on volatility, but that's not the only risk you'll face. Here are a few others.
- Hacking: You may have heard about exchange hacks and wallet hacks, but cryptocurrencies can get hacked, too. To give you a recent example, EasyFi (EASY) a decentralized lender that specializes in microlending, was attacked in April. Hackers attacked the founder's computer and stole about $6 million as well as around 3 million EASY tokens. The developers acted quickly to recover the funds and stop the hacker from spending the tokens, but it is a good reminder that blockchain is not immune to security threats.
- Fraud: Cryptocurrency's mix of hype, popularity, technical complexity, and tales of profit has attracted a fair share of scammers. From fake coins to fake websites promising unfeasibly high returns, you need to tread carefully.
- Regulation: One crypto CEO has already sounded a warning for investors: Governments across the world can and probably will introduce increased crypto regulation. This may be a good thing, as it could reduce instances of fraud. But it depends how strict the rules are. As recent events in China show, some governments may ban crypto services altogether, which would not be good for investors.
Some industry observers also worry that the crypto bubble might burst completely, which is why it's not advisable to put your whole portfolio into cryptocurrency. Only invest what you can afford to lose, and make sure your emergency fund is topped up before you buy your first Bitcoin.
3. There's no such thing as too much research
When you first start to understand cryptocurrency, it can feel overwhelming. Just when you think you've got a handle on blockchain technology, you find yourself grappling with terms like:
- Smart contracts
- Proof of work
- Decentralized finance (DeFi)
You don't have to be an expert in blockchain programming to buy crypto. But the more you learn, the better decisions you can make. There's a lot of hype and a lot of overpromising going on. Research will help you separate the wheat from the chaff -- and help you get a feel for which experts you want to listen to.
Take it slowly and make use of the wealth of information resources out there. Use social media to connect with other crypto investors. If there's a particular digital currency you're interested in, sign up to the Reddit forum and see what other people think about it. And for more help understanding crypto, check out our guide to cryptocurrencies explained, in plain English.
4. There's more to blockchain than Bitcoin alone
According to CoinMarketCap, there are over 10,000 different cryptocurrencies on the market today. Some of them will be tiny coins that are unlikely to ever cross your radar. Depending on which cryptocurrency exchange you use, you'll find as many as 60 or more different digital currencies listed.
Depending on your risk tolerance, you may want to branch out into other currencies. For example, I put the majority of my crypto money into the top four coins and also bought some smaller ones that seemed interesting. I actively sought out environmentally friendly currencies, because that's important to me. You can invest in the coins that strike a chord with you -- you might pick ones that earn interest or ones that operate in a particular area like lending or security.
When you start reading about the different types of cryptocurrency and looking at their prices, it's easy to feel as if you need to buy them right away -- especially if the price is rising. Take your time; prices will rise and fall. It's more important to understand exactly what you're putting your money toward.
Any reputable coin will have a white paper that explains what it does and what problem it's trying to solve. You can also look at the management team and see what experience they bring to the table. And search their names to see if they've been connected with any fraudulent schemes in the past. That's a definite red flag.
5. Don't be afraid to make mistakes
Finally, try not to beat yourself up if things don't go as planned. This is a new and constantly changing environment, so you won't be able to foresee everything. The beauty of only investing what you can afford to lose is that a wrong move won't bankrupt you.
That doesn't mean you should go in without an investment strategy. But as long as you're clear about your goals and risk tolerance, crypto investing is like any other journey in life. If things go wrong, work out what you can learn from the situation and keep moving.
Our Research Expert
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