In the last few years, new asset classes have risen for investors to consider, with cryptocurrency being one of the most controversial and popular. Starting years ago with the rise of Bitcoin, other cryptocurrencies were created and an entire market was formed from this. Choosing to invest in cryptocurrency has become common, but it isn’t without risk.
What is Cryptocurrency?
A cryptocurrency is a digital form of currency that is secured by something known as cryptography. This means that it is nearly impossible for the coin to be replicated or counterfeit. Most cryptocurrencies exist on a decentralized platform that is based on a technology called blockchain and are issued by non-central authorities, insulating them for regulation.
Due to this, any given cryptocurrency coin can be extremely volatile, here one day and gone the next. One strategy for mitigating this risk is to seek exposure to the entire crypto market through investment vehicles such as the cryptocurrency index, which allow an investor to put money into a group of crypto coins by buying just one asset.
4 Things to Know About Cryptocurrency Investing
While the idea of investing in an alternative asset class such as cryptocurrency is enticing, there are four principles to be aware of:
1. Cryptocurrency is volatile
Cryptocurrency is infamously volatile by design. Bitcoin dropped by 30% in a single day in the past, which is a single-day decline that very few asset classes will ever see. Certain coins may not have been vetted by the platform allowing them to be invested in, meaning there may be no product roadmap, a limited team, or other factors. Due to this, it’s crucial to know that putting money into cryptocurrency puts you at far higher risk than other assets.
2. You need to perform research prior to investing
Before investing in a cryptocurrency, learn as much as you can about the team behind it, their motivation, what they hope that crypto coin can do, and more. The more information you have, the more educated investment decisions you’ll be able to make. This is doubly important when investing in a market as volatile as cryptocurrency.
3. Diversification is a key to success
Diversification is one of the most effective strategies to reduce short-term portfolio risk by owning a variety of assets of a single class. To diversify a crypto portfolio, you can use a crypto index that invests in a variety of different coins, or you can do it yourself. If you diversify your portfolio yourself, aim to invest in coins that have little impact on each other.
4. Avoid following the herd
Social media and cryptocurrency have built something of a relationship. With prices subject to extreme volatility, groups on social media have found ways to temporarily spike prices in certain coins by 100s of %. While this works for the lucky few who already hold the coin, many end up losing money by investing in the coin when it’s high, only for its price to drop all the way back down.
Avoid investing in a cryptocurrency because you see everybody talking about it online or on social media. Do your own research to determine if it’s a viable investment for your crypto portfolio.
Change your Investment Strategy Today
Cryptocurrency is one of the most volatile asset classes an investor can consider adding to their portfolio today. With the future of the crypto market constantly in flux, it’s important to consider your cash flow before diversifying into cryptocurrency. Only invest what you are comfortable losing and always perform market research on individual cryptocurrencies.