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Investing in cryptocurrencies might seem exciting given the digital assets’ popularity and potential for significant gains, but crypto has seen significant volatility in the past and likely will in the future. It’s important to consider a few basics before investing in crypto.
The recent rise in Bitcoin’s price has caused some investors to believe in the growing acceptance of crypto, but crypto generally remains speculative and extremely volatile. Without an underlying asset to back them, crypto prices are driven solely by investor sentiment. This leaves many investors exposed to sharp losses when sentiment shifts.
These five basic rules of crypto investing take that volatility into account and can guide you as you get started.
Crypto prices aren’t backed by any underlying assets, such as cash flow or business performance, like some other investments. The coins’ values are solely based on what other crypto investors are willing to pay.
Crypto prices can be impacted by several factors, including geopolitical events, demand, regulatory proposals, accessibility and the economy. For example, high interest rates can scare investors away from riskier assets like crypto, while lower rates may fuel a higher risk appetite for crypto.
Given the volatility, it’s best to only invest money that you’re willing to lose when it comes to crypto. Crypto prices can drop in the matter of seconds based only on rumors or news.
Stick with well-known coins that have large market caps. Only investing in the most popular cryptocurrencies can provide some level of stability and risk management because coins with a larger market cap are less susceptible to price fluctuations.
These coins also have a deeper liquidity and offer a longer track record than some lesser-known, smaller coins. Popular coins are more likely to have stronger security measures in place and a higher likelihood of regulatory acceptance, too.
If you want to invest in crypto, any coins you purchase should be part of a broader, well-diversified investment portfolio that suits your long-term financial goals and doesn’t put all of your cash in crypto.
Attempting to day trade crypto is often what leads to major losses. Instead, treat the coins similarly to how you’d treat other assets in your portfolio — namely, as part of a bigger plan. In other words, diversify all of your investment holdings within your portfolio among various asset classes (think stocks, bonds and crypto as an additional asset).