Cryptocurrencies, Bitcoin, and alternative coins were among the best-performing asset classes in 2021, as more investors flocked to the crypto market in the hopes of profiting from long-term growth from digital investments. On the other hand, cryptocurrencies are risky investments subject to substantial price movements. This is only one of many risk concerns that crypto investors must consider if they want to make money investing in this new asset class, which already has a market capitalization of more than $2 trillion.
Investing in digital assets is similar to traditional asset classes such as equities and bonds. Here are some basic investing principles to keep in mind as you manage your cryptocurrency holdings. You can buy over 100 cryptocurrencies like Cardano(ADA) at CEX.IO
Before this article continues, we want to emphasise that this article is not financial advice. Even the best cryptocurrencies can be highly volatile and may not be suitable as investments. As we reiterate later, you should only invest what you are prepared to lose.
Diversify your storage
There are a few options for storing your cryptocurrency to keep it safe. Hot or cold storage is used to store digital assets. A hot digital wallet is saved online, whereas a cold digital wallet is stored offline, generally on a hard drive. Experts recommend keeping the bulk of your crypto in a cold wallet to prevent hackers from obtaining access.
It’s helpful to keep some cryptocurrency in a hot wallet online so crypto traders may swiftly use enter and exit positions. According to Yubo Ruan, co-founder of Parallel Finance, new decentralized lending and staking protocol on Polkadot, a good crypto storage approach keeps about 80% of long-term money in a cold wallet. After that, the hot wallet can be utilized for short-term transactions.
Liquidity prioritization
When it comes to determining how to invest in the crypto market, liquidity is crucial. Because the market changes swiftly, crypto traders must enter and exit positions quickly. This implies that there must be a demand for crypto so that market players may acquire at the best price and sell at a profit should they wish to sell any of their holdings. “You don’t want to acquire an asset that has enormous potential but isn’t being traded, so you’re sitting on it and at the mercy of the market,” explains Tally Greenberg, head of business development at Allnodes, a crypto hosting service.
Looking at a crypto asset’s recent trade volume might help determine liquidity. The amount of cryptocurrencies purchased and sold is referred to as trading volume, reflecting the asset’s overall popularity.
Harness the volatility
Because crypto is still a new asset, there is still a lot of speculation and hype surrounding it, which leads to a lot of volatility. While significant price swings are usually considered a concern, daily volatility is natural and healthy for the crypto market, which may benefit. Greenberg argues why volatility is beneficial to intelligent traders. However, to manage your volatility risk properly, you must first determine what sort of trader you are and how you will handle the market’s price fluctuations.
She emphasizes that it’s essential to keep a careful eye on what’s going on in the market and the traded item itself. This entails keeping up with the latest news and any connected blockchain upgrades and historical charts to spot developing trends.
Only invest what you can afford to lose
Cryptocurrencies are highly speculative assets with a significant risk of loss. Always invest how much you can afford to lose in the crypto market, just like a regular investment. If you can’t tolerate the chance of losing your entire crypto investment, you can’t afford to take the risk of investing the amount you’re thinking about.
According to Ruan, determining risk tolerance in the crypto market boils down to how much money you make and your experience level. A newcomer to crypto should devote a smaller portion of their investable income to the asset than a devoted crypto enthusiast or DeFi specialist.
Claim your gains frequently
Crypto market traders, according to experts, should take profits often. Gains should be kept in your hardware wallet as a best practice. When it comes to taking gains, crypto investors are frequently confronted with the risk that a cryptocurrency’s price could fall or rise. Profit-taking regularly smooths out this risk over time. “A lot of folks just purchase and hold for an indeterminate period of time,” Greenberg continues, “and they’re at the mercy of memes and celebrity tweets.” This position is supported by most crypto books.
To properly define your profit-taking crypto trading strategy, it’s vital to understand why you’re joining a crypto trade in the first place, just as it is with any investment. You may define your entry and departure points this way.
Diversify your portfolio
Putting all of your eggs in a single basket is not a good idea in the crypto world. A better approach to minimize risk in crypto investing is to have your crypto portfolio invested in various coins and crypto projects. Many investments are available on the market associated with cryptocurrency and blockchain, including the “internet of things,” non-fungible tokens, DeFi projects, and a wide variety of coin types.
You can even diversify by cryptocurrency exchanges because some exchanges don’t have the same assets. Crypto investors may minimize their overall risk profile by distributing their holdings among several digital assets.
Dollar-cost averaging
Dollar-cost averaging, or DCA, is an investment method in which a certain amount of money is invested over time rather than all at once. Investors can weather market fluctuations in the same way that taking profits regularly smooths out price risk. Using a DCA method, you invest a fixed amount during bull and down markets. Buying assets at a low price while the crypto market is down help investors to sell them for a profit in the long term.
Cryptocurrency is a brand-new asset class that has generated a lot of buzz. However, the use of DCA can help to keep the hype under check. DCA also helps eliminate emotion from new market positions and overlook the short term in favor of longer-term holdings by acquiring your crypto over time.
Final words
Cryptocurrencies can be a good investment if threaded carefully and following good investment strategies similar to the ones mentioned in this blog post.