Financial Blog

When investing in cryptocurrencies, the biggest challenge is not getting caught in the hype. With an unprecedented rise to fame, digital currencies are quickly finding their prominence in the portfolios of many retail and institutional investors. This is despite the fact that analysts continuously warn investors against its volatile nature and unpredictability and its potential to cause just as much financial loss as they potentially earn. 

If you just started paying attention to cryptocurrency and are wondering whether to invest, here are some things you need to know.

Don’t put in more than what you can afford

Remember that, compared to other investments, crypto is considered as the riskiest of them all. While this may mean that the payout can be much higher compared to other investments this also means that losing is so much more devastating. 

Danger varies in degree. Bitcoin, the original cryptocurrency, has been around for more than a decade and it’s significantly less likely to disappear than most other coins. But it’s not free of risk either.

Always do your research

Here’s one thing to keep in mind, don’t fall into the mindset of thinking that, just because many people are buying a coin, that coin will become valuable. Remember that “Someone else will buy it from you at a higher price” is not a value proposition. Instead, do your research about the technology used, the value propositions, and risks that come with the coin you’re eyeing. To help you out here are some questions that you should ask before investing in crypto:

• What’s the price of a coin?
• Does the crypto coin have an official page?
• How transparent are they when it comes to information on their project? 
• Is there a forum/community you can discuss this with?
• What’s the latest news about a particular coin?

Don’t fall victim to FOMO, the Fear of Missing Out

Fear of Missing Out (FOMO) is a surefire way to destroy your wealth if you don’t plan carefully. The problem is that this is often more aligned to the “Gut feeling” of an investor towards an investment that should be researched and analyzed first. 

If it sounds too good to be true, it probably is

Much like any other financial institution, crypto is also prone to frauds, and scams. There are more than enough people claiming that their crypto will be the next big thing and, in some cases, claim to be able to overtake Bitcoin. But is it? Again, do your research. 

Crypto borrowers should also keep an eye out. Some crypto exchanges offer more than 100x leverage, meaning borrowers can borrow up to 99% of the cost of the investment. Doing so would juice your profits if a coin’s value goes up, but if it goes down you could be quickly wiped out.

Don’t trust blindly, verify first

Crypto may be safer on the technical side thanks to it’s blockchain technology, but that doesn’t mean that it’s 100% safe from more traditional forms of scamming. Remember last May? Following Elon Musk’s appearance on the US show Saturday Night Live, scammers allegedly defrauded people out of up to $5,000,000 worth of various crypto, particularly, Dogecoin by impersonating the show’s Twitter account. Users were asked to transfer dogecoin to a blockchain address with the assurance that they would receive double the amount they sent.

This too good of a proposition was a red flag. The point is, just like with any other financial asset, there’s always someone out there aiming to take advantage of others. So be sure to know the signs that you’re being targeted. 

Be aware of “Unit Bias”

Not all coins are created equal. Just because a coin is trading at $10, it doesn’t mean that it’s “cheaper than bitcoin, which is trading at 34,382.20 as of the time of this writing.

There are more than a thousand cryptos currently available in the market, some aiming to be the next bitcoin and some created to solve a specific issue, with each having varying levels of support and decentralization. 

So how would you know the value of a particular crypto coin? By knowing the background of the coin, how and why it was created, who’s working on it, how big is the developer community, among others.

You can buy a fraction of Bitcoin (and other crypto)

Depending on the coin, instead of buying an entire coin for its full price, you can opt to buy parts of a coin for a more affordable price.  The best part is that, despite buying only a fraction of a coin you can still see your investment grow. Bitcoin, for example, can be bought up to $10-$25  instead of the whole +$30,000 cost of a whole coin and play around from there.

As Billionaire Mark Cuban once said on television about buying bits of Dogecoin, “It’s a whole lot better than a lottery ticket”.

Use cost averaging, don’t obsess over the price

Markets will fluctuate from day to day, hour to hour, minute to minute, but any crypto worth its price, any investment of any kind worth its price, is a long-term bet. If you want a dopamine hit, go for a run, stick to your hobbies, or watch an action movie.

What’s the best way to invest and not obsess? It’s using Cost Averaging. Buy a set amount of whatever crypto you like at regular intervals, whether it be daily, weekly, or even monthly, and leave it. Let the market do its work.

If you have a long-term view, less likely to be pressured to sell or up your position based on short-term movements if you use this method.