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What to know before investing in Cryptocurrency

Henning Taeger
Henning Taeger
Henning is a writer and editor here at Dollargeek who is passionate about personal finance and cryptocurrency. He enjoys sharing his knowledge about financial management and cryptocurrency with readers, helping them make informed decisions about their money. In his spare time, Henning can be found playing the latest video games or jamming on his guitar. He is constantly on the lookout for new ways to improve his financial literacy and stay up-to-date on the latest trends in the world of cryptocurrency.

DollarGeek's goal is to help you make the best financial decisions. To help us do this, many or all of the products featured here are from our partners. However, this doesn’t influence our evaluations or ratings.

What to know before investing in cryptocurrency
Table of Contents

If you’re interested in buying cryptocurrencies, you may wonder about the first steps to getting started. While the blockchain technology that these currencies run on is hugely complex, you don’t need to be a technical expert to invest in them. Let’s look at some of the main points you need to think about before going ahead.

Why should you invest in crypto?

Different people have different reasons for investing in cryptocurrencies. Having said that, there are a few reasons that we see time and time again, and they’re worth looking at in detail.

  • To make money from a volatile asset. A glance at the history of Bitcoin and other major tokens reveals periods of spectacular growth, but they’ve also suffered some dramatic price falls at times. This adds up to make the majority of them volatile assets whose prices can swing wildly, opening up the possibility of large profits but also the risk of significant losses.
  • Because of long-term growth potential. If you consider digital money to be the money of the future, then investing in it seems to make sense. Maybe you think that more people will be using it every year, gradually pushing up the price due to growing demand.
  • To diversify investments. Cryptos give an alternative to traditional investments, which is a good thing if you want to diversify for peace of mind or better returns.
  • To feel more in control of your money. Finally, the emergence of cryptos has allowed us to take full control of our money. If you prefer to manage your own investments, you can do this with digital money and not rely on anyone else to do it for you.  

Important things to know before investing

We’ve just seen some good reasons for investing in cryptocurrencies, but that’s just one side of the story. There are also some important issues you need to know about before going any further. We can start by looking more deeply at the question of price volatility.

If you look at the price chart for Bitcoin or any other major cryptocurrency, you’ll see a series of peaks and troughs. This is because the price has risen and fallen several times.

Every time it drops, this could be an opportunity to buy it for less than its worth. However, the problem is that we don’t know at the time whether it will rise again or keep on falling.

Since digital money is still relatively new, we don’t have as much historical information to fall back on as we do with assets like stocks and commodities. This adds an extra element of risk to the investment, as we simply don’t know how they will react over time and given different economic situations.

Going back to the point about looking after your own investments, this can be liberating, but it also brings some risks. If you lose access to your crypto wallet, you might lose all your money in it. There’s no helpdesk or office you can go to ask them to sort out any problems like this for you.

Learn about investing

The rise of cryptocurrencies has undoubtedly caused countless people to get interested in investing for the first time. This is an exciting way of investing, and it’s relatively easy to get started with. However, it’s still a type of investing and many of the key aspects that apply to other types of investing also need to be used here.

This means that you should understand areas like diversification, technical analysis, and different strategies. Doing this will increase your chances of success and help you to feel more comfortable about what you’re doing.  

Do the research

You have a few decisions to make before investing in digital money. The first one is which token you want to buy. While Bitcoin has grabbed the majority of the headlines in the last few years, there are many other digital currencies you might be interested in.

This is where you need to look at analysis and the latest news, to try and work out which token has the brightest future. If you’ve ever bought stock, it’s the same idea, as you want to find something that’s worth more than its current market value. Of course, that’s easier said than done.

The next point to consider is where you’re going to buy the token. There are plenty of crypto exchanges for you to choose from, and it’s essential that you find one you can trust.

Therefore, you need to look for one that’s regulated and has a solid reputation. The fees also vary from one exchange to another, so take a look at how much your transaction is going to cost you.

After that comes the question of where to store your crypto. These tokens have to be stored in a wallet, with hot and cold wallets the key choice to make.

A hot wallet is always online, while a cold wallet is a piece of hardware that only goes online when you connect it to the internet to do something with it.

Balance your portfolio

We briefly mentioned the matter of balancing your portfolio earlier, and there’s no doubt that this is a key aspect of investing. For most people, putting all of their money into a single crypto token doesn’t make sense. The volatility of these currencies means that it would be a risky move, so what do you need to do?

You’ll want to consider your risk tolerance first. Are you happy to run the risk of buying a highly volatile token that could gain or lose a large amount? If so, how much of your overall cash for investing will you put into it? The answer to this question is different for every person, so take some time to consider what you want to do.

Some sources suggest that cryptos should only make up 5% or 10% of your overall portfolio, but not everyone agrees. For example, if you’ve never been interested in traditional investing, then maybe you plan to only invest in these tokens.

That’s understandable, but perhaps we could flip this point and say that investing in cryptos could be the gateway to other investments, so you diversify by adding other assets to your portfolio after buying crypto and achieve the right balance in that way.  

Mistrust stories that are too good to be true

One of the most eye-catching aspects of cryptocurrencies in the last few years has been the way that some people say they’ve made millions from small initial investments. While these are great stories to read, you shouldn’t go into this thinking that you’ll make a fortune with little effort.

Only a tiny percentage of investors make huge money, and most of them managed to get in at the perfect time, before a token really took off.

Investing in cryptocurrencies can be a smart way to grow your money, but don’t believe that it’s something that guarantees massive returns. Like any type of investment, you might win, and you might lose. This is why you shouldn’t invest money you can’t afford to lose in this or any other type of investment. No one can guarantee how much you’ll make.

Which crypto should you choose?

You might think that all cryptocurrencies are essentially the same, but there are some different types you need to know about. We can break them down into the following categories, to make this clearer.

  • Payment tokens like Bitcoin, Litecoin, and Dash allow you send money and pay third parties for goods and services. These are the most common types of digital currency.
  • Utility tokens like Ethereum are designed to let you access a particular platform and use its services.
  • Exchange tokens are native to a certain crypto exchange, including the likes of the KuCoin and Binance Coin.
  • Security tokens are mainly used to govern or regulate a platform or community.

The market is dominated by payment tokens, and that’s the type most new investors look at. But even if you decide to do that, there are numerous tokens to consider.

Will you invest in a high-value, established token like Bitcoin, or look for an up-and-coming coin that could have a lot of growth potential? Any new token should have a white paper that explains how it works and what it actually does.

This goes back to the question of doing sufficient research to understand the market, and then matching the findings to your investing needs and risk tolerance.

There’s a huge amount of information and analysis available on these tokens, so you need to work out what advice to follow and what to ignore.

Conclusion

Cryptocurrencies now offer one of the most interesting types of investment on the market, and this has encouraged many people to buy them.

While this isn’t a guaranteed recipe for success, by following these guidelines and making the right moves, you’ll give yourself a far better chance of making money from these tokens.

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