Cryptocurrency attracts investors because of the prospect of high returns, as with Bitcoin. The good news is that you can still invest in a cryptocurrency and gain high returns: several currencies have shown high returns, although none have repeated Bitcoin’s success. There are numerous types of cryptocurrencies, and beginners may feel confused. Thus, readers can use this article to learn more about investing in cryptocurrency safely.
The Pros of Investing in Cryptocurrency
Blockchain technology has altered the world and offered us one of the best innovations of the 21st century: cryptocurrency. Many people want to experience the same level of success as those who bought Bitcoin when it was worthless. Thus, the first advantage is the potential to get high returns if you invest successfully. But let’s not get ahead of ourselves and discuss all the other benefits of investing in cryptocurrency:
- Decentralized nature. Unlike traditional financial systems, cryptocurrencies are decentralized, which means they are not controlled by a single institution such as a government or bank. This can provide investors with more control over their investments.
- Lower fees. Due to the decentralized nature of most cryptocurrencies, users are not required to pay for the services of a middleman. For instance, you don’t have to pay a transaction fee when exchanging one crypto for another or transferring coins from one place to another.
- Faster speed. Even though Bitcoin used to have problems with transaction speed, it’s been handled, and new coins emerged that offer to approve transactions within seconds. Thus, this feature offers great business potential since they are no longer required to wait several business days to receive funds.
- Potential for high returns. Cryptocurrencies are notorious for their volatile character, meaning their value can fluctuate rapidly. While this is dangerous to invest in, it also has the potential for big returns on investment.
- Security. Cryptocurrencies employ blockchain technology, which provides a high level of security by encrypting transactions and preventing fraud. However, take this fact about cryptocurrency security with a grain of salt, given how many crypto exchanges have been hacked.
- Cryptocurrency portfolio diversification. Investing in cryptocurrencies can help diversify a portfolio because it is a distinct asset class from traditional investments.
- Accessibility. Anyone with an internet connection can trade cryptocurrencies, and there are numerous platforms and exchanges where investors can buy and sell cryptocurrencies.
Despite the numerous benefits of digital currency, there are many cryptocurrency risks related to investing. Keep reading to learn about these risks.
The Cons of Investing in Cryptocurrency
Despite the numerous benefits of cryptocurrency, there are many disadvantages to investing in this highly speculative asset. The disadvantages are as follows:
- Crypto market volatility. Volatility is viewed as a positive occurrence when you invest in cryptocurrency, which costs nothing and then increases in value, like Bitcoin. However, things may go in a different direction. This makes forecasting cryptocurrency’s future performance challenging and can result in severe investor losses.
- Security risks. There have been numerous huge thefts from exchanges despite efforts to protect users. Moreover, users report their wallets being hacked and loss of digital money due to loss of information, such as private keys, etc., not to mention numerous cryptocurrency scams that affect users’ perception of cryptocurrencies.
- Lack of cryptocurrency regulation. Most governments and financial institutions do not yet oversee cryptocurrencies, making them more vulnerable to fraud and scams.
- Limited adoption. Despite increasing acceptance and use across numerous countries and industries, many businesses and investors refuse to accept bitcoin or altcoin investments.
- Complexity. Investing in cryptocurrencies can be complicated and confusing, especially for individuals who are new to the market. People have no guarantees that they won’t make an error that would lead to funds loss.
Today, cryptocurrency market manipulation is widespread. Typically, people buy specific coins and try to boost this cryptocurrency’s value, promoting it across different platforms. Once they succeed and more people buy a cryptocurrency for long-term prospects, they immediately sell it, earning profit. In the meantime, other investors lose their funds.
Factors to Consider When Investing in Cryptocurrency
Despite the numerous disadvantages in the previous section, it doesn’t mean you have to abandon all hope and not invest in cryptocurrency. Instead, adopt a strategy of studying the asset before engaging in cryptocurrency trading and learning about trading and its tools.
The following are a few factors to consider when investing:
- Your technical skills. Investing in cryptocurrency without first learning how to use a crypto wallet, protect your assets, and understand the cryptocurrency overall is not recommended.
- Your risk tolerance. Many experts emphasize that cryptocurrency is more of a long-term investment. Some investors prefer buying coins at a lower price and selling them as soon as they gain more value. However, many investors don’t tolerate risk, and as soon as they notice a decrease in value, they get rid of the coin. However, the coin may increase in value in the future.
- Understanding of technical analysis. This factor derives from the previous one. If an investor had checked the charts and used trading tools, they would have known that the currency was decreasing in value only to experience a spike in the future. Thus, investing only after conducting a cryptocurrency market analysis is recommended. There are numerous tutorials and educational materials for free, so it’s not that difficult to learn about cryptocurrency trading.
- Your goals. Your strategy depends on your goals. For instance, many cryptocurrency traders choose day trading to gain profit quickly. However, this strategy requires dedication and time. However, if you’re considering long-term investments or diversification of your portfolio to protect your assets, your strategy should be entirely different.
- Cryptocurrency taxation. Check your country’s legislation related to cryptocurrency. Most likely, you have to file tax returns on your cryptocurrency gains, depending on the size of your income.
Consider these factors before investing in cryptocurrency. Moreover, another important factor includes investing only if you are ready to lose these funds. As mentioned, cryptocurrency is extremely volatile and unpredictable, so using your emergency funds to invest is not recommended.
Tips for Safely Investing in Cryptocurrency
Now that you know what factors to consider before investing in cryptocurrency, check out a few valuable tips to secure your funds:
- Do your research. As mentioned, you won’t invest successfully without understanding the asset you are investing in. Don’t just assume that the chosen cryptocurrency is the next best thing since sliced bread only because an influencer tweeted about it. Some people speculate by influencing the market and gaining profit out of such actions. Thus, you can invest in cryptocurrency only if you have studied it and are positive that it will perform well. Such factors include positive changes on the platform or steady growth in the past.
- Store your cryptocurrency securely. Look for a wallet with strong security features like encryption and multi-factor authentication.
- Use strong passwords. Use strong and unique passwords for all of your cryptocurrency accounts and wallets.
- Diversify your portfolio. Spread your risk among several cryptocurrencies by diversifying your cryptocurrency holdings. Consider investing in a combination of well-established and newer cryptocurrencies.
- Don’t buy more than you can afford to lose. Cryptocurrency is a volatile and dangerous asset class, so don’t invest money that you require for daily spending or other vital financial goals.
- Use a reliable exchange or trading platform. To purchase and sell cryptocurrency, use a reliable cryptocurrency exchange with two-factor authentication and a good community reputation.
- Be aware of scams. One of the most common scams is when someone asks you to invest in an asset promising high returns. Check if these claims have a logical explanation. If not, then don’t invest.
- Benefit from trading tools that prevent loss. Such tools as stop-loss and stop-order enable traders to manage their portfolios during high volatility times.
So, the overall strategy includes understanding the asset you invest in, diversifying your portfolio, and using a secure crypto wallet. It’s also recommended to use a hardware (cold) wallet to store huge amounts of cryptocurrency.
Despite the potential for significant rewards, investing in cryptocurrency can be risky. Investors should consider the risks and rewards before investing in cryptocurrency and educate themselves on the assets they plan to buy. Only that way they can make logical decisions.