5 golden rules for investing in cryptocurrencies

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These tips can help you build wealth in the long run.


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Most important points:

  • If you only invest money that you can afford to lose and crypto represents only a small percentage of your portfolio, there is less chance of a crypto crash derailing your finances.
  • Keep a long-term perspective on your investments and take the time to research each crypto before buying it.

Last year it felt like crypto prices were only going to go in one direction and investors couldn’t be wrong. Even a trading hamster could pick winning cryptos. But today, many cryptos are down 80% or more from their all-time highs. It’s a stark reminder that these are risky investments that can go up as well as down.

Many of the golden rules of crypto investing revolve around the idea of ​​minimizing risk. If you are going to buy crypto, the ideal scenario is that you will benefit if crypto prices skyrocket, but not face a financial disaster if the market crashes. These five rules will help you with that.

1. Only invest money you can afford to lose

When you see predictions that Bitcoin (BTC) could reach $1 million, the temptation is to put every available penny into the king of crypto in hopes of big profits. The problem? You could lose all that money. If you only invest money that you can easily lose, you won’t be broke if the industry goes bad.

Investing in cryptocurrencies is risky. There is a chance that blockchain will revolutionize the way we manage money or even become the future currency of the internet. But that may not be the case. Many projects will fail and the entire industry may collapse completely. Whether it’s regulation, the introduction of central bank digital currencies (aka Gov Coins) or the evolution of even newer technology, there are some significant hurdles to overcome.

2. Cover other financial bases first

If you want to invest in crypto, it is important to start by laying a solid financial foundation. This means you have an emergency fund to cover three to six months of living expenses, in addition to your retirement contributions. If you are trying to pay off debt, prioritize any crypto investment.

If you face a financial emergency next week, an emergency fund will help you cover it without incurring debt or having to sell assets, possibly at a loss. Imagine you spent $2,000 in Bitcoin last November instead of putting it into an emergency fund. It could be worth as little as $600 today. While it may recover in the long run, it wouldn’t help if you had to sell today. How would you feel if you lost your job or went through a medical crisis this week and your financial buffer was in Bitcoin instead of banking?

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3. Diversify your investments

Diversification comes in many forms – the types of assets you buy and the individual assets within each class. Most experts recommend investing only a small portion of your total portfolio in crypto. The rest should be invested in low-risk assets, such as real estate or stocks. The exact amount depends on your risk tolerance, your belief in crypto and your financial situation. If you have decades ahead of you before planning your retirement, you may be more willing to expose yourself to more cryptocurrencies because you have more time to recover if things go wrong.

It is also good to diversify within your crypto portfolio. Some people choose to invest in Bitcoin and Ethereum (ETH) only, which makes sense because they are the most established cryptos and have the best long-term survival rate. But if you want to buy smaller altcoins, don’t go for one or two.

Consider a mix of crypto sectors depending on which one you find promising. For example, my portfolio has a strong focus on smart contract cryptos as this is an area that I have studied extensively and I love that many other cryptos have been built on top of these blockchains. I have some exposure to gaming and metaverse tokens, and I avoid privacy tokens completely. Other investors will likely have different priorities and areas of expertise.

4. Think long term

One way to survive crypto volatility is to invest with a 10-20 year mindset. It is nearly impossible to time the market through short-term trades – and many investors lose money this way. Instead, look for projects with strong leadership and good usability that could perform well in the coming decades.

It’s not always easy to think long term because it’s too early for the industry and we don’t know much about its evolution. But it’s an approach that helps keep even long-term decline in perspective and avoid emotional decisions. For example, if you had bought each of the top 50 cryptos five years ago, you would have seen an increase of about 700%, despite the fact that many projects did not survive the crypto winter of 2018.

5. Research

Never buy a cryptocurrency that you have not researched thoroughly. We all have busy lives, and it can be tempting to put a small amount of money into an altcoin you’ve heard of online. But it is your money and there is a lot of misinformation. Only you know your investment strategies and objectives. Research does not guarantee success, but it significantly reduces the risk of scams or buying crypto that does not have good long-term potential.

At the end of the line

Crypto is a relatively new asset class. Last year, some people felt compelled to buy crypto so they could join the next big deal early. They bought crypto out of fear of missing out – in some cases with the money they needed in the short term, at the expense of other financial goals. If you are considering buying crypto, it is essential to consolidate your finances and research the industry first. In this way, another crypto crash will be disappointing, but not devastating.

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