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.
5 commandments of crypto investing
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.
1. Don’t invest money you can’t afford to lose
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.
2. Go for the popular coins
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.
3. Buy other investments
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).
4. Consider crypto exchange-traded funds
Spot Bitcoin and Ethereum ETFs can be a way to diversify your holdings and buy crypto within an exchange-traded fund. A spot Bitcoin or Ethereum ETF pools investors’ money to purchase Bitcoin. The fund is managed by an investment firm and listed on a traditional stock exchange, like other types of ETFs.
ETFs make investing in crypto cheaper and more accessible. You can avoid potentially questionable crypto exchanges and opt for something a bit more regulated. Of course, the availability and affordability of Bitcoin or Ethereum ETFs doesn’t necessarily make these digital assets a good investment for you; they’re just easier to access.
5. Stay up to date on crypto regulations
Crypto regulation across the U.S. and the globe varies. Depending on how digital assets are structured, both federal and state regulators could assert authority over transactions in the U.S.
Stay up to date on what the current regulations are in your state. In general, the IRS classifies crypto as property, meaning that any time you sell, buy or trade crypto, there may be tax implications.
Bottom line
Before investing in crypto, it’s always a good idea to consider what your long-term financial goals are. Don’t invest money you can’t afford to lose and always diversify your holdings. Stick with the popular coins. If you want to invest in crypto but would rather avoid a crypto exchange and prefer more regulation, consider investing in a spot Bitcoin or Ethereum ETF. Also, stay up to date on what the current regulations are for digital assets.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.