Are you considering the purchase of cryptocurrencies? If you are, you belong to an increasingly expanding group of individuals who view digital assets as appealing investment options.
Cryptocurrency, also known as crypto, has gained a lot of attention. Many investors are interested in learning about this digital asset, which has grown rapidly and surpassed a market cap of over $100 billion in just a decade.
This beginner’s guide is your gateway to understanding cryptocurrency as an investment class, walking you through the fundamental aspects of venturing into this realm. Throughout this journey, you will understand the basics of cryptocurrency and the many coins on offer, consider crucial factors pivotal for informed investments, and gather vital insights to align this venture with your portfolio objectives.
The Distinct Nature of Cryptocurrencies and their Types
While all cryptocurrencies rely on the same underlying blockchain technology, each coin is different, and they’re all fundamentally different from fiat currencies. As of September 2023, there are over 26,000 different cryptocurrencies listed on CoinMarketCap.com. Bitcoin, the first and most well-known cryptocurrency, paved the way for this digital revolution. Other cryptocurrencies besides bitcoin are collectively referred to as “altcoins,” or alternatives to bitcoin.
In recent years, several cryptocurrencies have gained significant attention, attracting a large market value and building a wide user and investor base:
- Bitcoin
- Cardano
- USDC
- Tether
- Solana
- TRON
- Ethereum
- XRP
- BNB
- Dogecoin
Predicting the most progressive cryptocurrencies is challenging due to the newness of the latest crypto ecosystem and the youth of many cryptocurrencies. Even though these coins are considered significant, they still carry risks. There is a real and substantial possibility of investment losses. For instance, after experiencing considerable gains in 2021, the value of most cryptocurrencies plummeted in 2022. That’s why it’s crucial to thoroughly research each cryptocurrency before investing and determine if it aligns with your investment goals, and understand that the market is very different from forex trading.
Pre-Investment Considerations: Before Investing in Cryptocurrency
If you’re risk-averse, the volatility of cryptocurrency might make you hesitate. It’s important to remember that anyone can create their own cryptocurrency, and regulations surrounding cryptocurrencies are constantly changing. This means it’s crucial to thoroughly research any potential investments to avoid falling for scams.
Before diving into cryptocurrency investments, it’s important to reflect on your motivations. Are you simply following a trend, or do you have a well-thought-out strategy in mind? According to Avi Feldman, it’s crucial to never invest with the belief that there are no risks involved. Making easy money without any potential losses is simply not realistic. Instead, only consider investing in a particular cryptocurrency if you genuinely believe in its long-term growth prospects and are prepared for significant price fluctuations along the way.
Investors should carefully consider investing in cryptocurrency and approach it with caution. Though it may present a promising long-term investment opportunity, it is crucial to have clear intentions and expectations before diving into the market. Taking a long-term perspective is essential when investing, especially with assets as volatile as cryptocurrencies. Emotional decisions driven by fear of missing out or panic-selling during price drops are not advisable. These strategies usually lead to poor investment outcomes.
Is Cryptocurrency a Viable Investment?
Determining whether investing in cryptocurrency or any other blockchain product is a wise decision hinges on various factors. Just like any investment, the answer lies in aspects such as your risk tolerance both financially and psychologically, your time horizon, and the level of diversification within your portfolio.
Just because an asset is tradeable doesn’t mean it’s the appropriate investment for your specific situation. It’s essential to remember that all investments come with a risk of potential financial loss.
How Much to Invest in Cryptocurrency?
Experts advise that investing no more than 1% to 5% of your net worth is a prudent approach. When considering the allocation of your portfolio towards cryptocurrencies, it’s important to exercise caution. We recommend limiting exposure to crypto and never investing more than you can afford to lose. While including a small portion of crypto in a diversified investment portfolio may enhance the risk-adjusted returns, the specific amount to invest should be determined by your overall investment strategy and personal comfort with risk.
Considering the importance of diversification in the world of cryptocurrency, it’s crucial to pay attention to the specific crypto assets you hold. Some coins have more promising long-term use cases and may be less susceptible to price manipulation. While the entire crypto market is known for its volatility, larger and more liquid cryptocurrencies generally pose less risk compared to smaller-cap and more speculative ones. However, even established cryptos experience significant price swings. Therefore, it’s essential to carefully consider the mix of cryptocurrencies in your portfolio alongside the overall amount you own.
Advantages of Cryptocurrency Investments
Before 2022, the price of cryptocurrencies had little correlation with other investment classes such as stocks and bonds. Therefore, having a small exposure to this high-growth space could potentially improve risk-adjusted returns. However, in 2023, correlations between cryptocurrencies and other asset classes increased significantly, and it remains uncertain if this trend will continue.
Some experts draw comparisons between certain cryptocurrencies and gold. Both assets are considered fungible and durable because they are difficult to destroy. They also share the characteristic of being scarce due to their limited supply, and their purchasing power is not controlled by any central authority.
The network integrity behind cryptocurrencies is difficult to compromise due to the decentralization and transparency provided by the distributed ledger system.
Disadvantages of Cryptocurrency
While cryptocurrency investments have certainly gained global popularity, it’s crucial to take into account the possible drawbacks. The volatile nature of these investments can result in losses, as prices often experience drastic fluctuations within brief time frames. Furthermore, the absence of regulation renders crypto markets vulnerable to fraudulent activities, scams, and market manipulation.
Security concerns are another disadvantage of cryptocurrencies. Hackers often target cryptocurrency exchanges, putting your digital assets at risk. Additionally, the complexity of cryptocurrencies can be overwhelming for those who are new to the concept, leading to potential investment mistakes. Furthermore, some cryptocurrencies require significant amounts of energy for their mining processes, which has a negative impact on the environment and contributes to carbon footprints.
Founder Dinis Guarda
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