Cryptocurrencies are constantly in the headlines. With Bitcoin, Ethereum, and other major coins reaching all-time highs, it’s only natural to want in on the action.
But before you start buying cryptos, it is essential to ask yourself a few 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 downsides.
Here are four questions to ask yourself before you start trading cryptocurrencies.
1. Why do you invest in cryptocurrency?
If you’re considering investing in cryptocurrency, whether you’re just buying coins or mining cryptocurrencies, do it for the right reasons. Do you do it because you believe in the technology and think it has long-term potential? Or do you do 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 they enjoy the thrill of trying to anticipate market trends knowing that this is an unpredictable space.
Sophisticated cryptocurrency investors will study white papers and roadmaps from cryptocurrency teams and speculate on the potential of digital currency. If you expect demand to increase in the months and years to come, the investment may be worth it. But that time spent doing the research and making that judgment has to be worth it to you, too.
For the record: if you’re in it for the money, that’s perfectly fine. Just understand the risks before getting 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 on CNN Money.
The risk is so great that many credit card issuers don’t even allow cardholders to purchase cryptocurrencies with their credit cards, or they discourage doing so with high fees. Few cards on the market allow Bitcoin purchases, and most new crypto investors will be limited to the money they have to invest.
Since cryptocurrency prices can go up and down very quickly, you should 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 are investing a large sum of money, spread it out over several coins (see our guide to investing in Ethereum as a next step) to diversify your risk. And don’t invest more than you can afford to lose. Remember that 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, do you buy 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 believe that prices will eventually recover (albeit perhaps after a few ups and downs).
A speculator is someone who tries to make quick profits by timing market movements perfectly. They buy when prices are low and sell when they have gone up, even by a small amount.
Cryptocurrency speculation has become increasingly popular, especially among people with no financial market investment experience. Unfortunately, this often leads to bad decisions; investors get caught up in FOMO (fear of missing out) and start buying without having 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 traders are those who take a methodical approach and have a solid plan. They buy when prices are low and sell as soon as they reach their 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 wildly fluctuating costs of crypto make the formal exit plan all the more vital.
If your goal is simply to buy coins and hold them for the long term, your exit strategy can be quite simple: you’ll sell when (and if) prices rise high enough that you feel comfortable trading. cash.
Exit plans are slightly trickier with speculative trading, however. You will 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 crypto investments.
Each output method has its pros and cons; for example, selling directly to another person is often the fastest way to get cash on hand, but you need to find someone willing to buy your coins at the current market price. Trading on an exchange generally takes longer but gives you more flexibility regarding the price you are willing to accept. Whichever method you choose, make sure you have a plan in place before you invest any money so you know how and when you will exit your position.
Crypto trading is not for everyone
From financial investments to fashion, popular trends come and go; no infatuation appeals to everyone. Not every investment opportunity is a good opportunity for everyone.
Some people are more risk averse than others and don’t want to invest their money in something that could potentially lose its value overnight. Others simply don’t have the time or patience to track crypto prices day in and day out. And then some just aren’t sufficiently interested in the underlying technology to make informed investment decisions. If anything in this paragraph describes you, it’s probably best to avoid cryptocurrency altogether.
The bottom line is that there is no shame in admitting that cryptocurrency is not for you. It doesn’t make you any less smart or financially savvy; it just means that this particular investment opportunity does not match your goals or interests. However, if cryptocurrency excites you and you like the idea of investing more time and money to understand its trends, then jump on board the crypto bandwagon with confidence.