So, you’ve heard about Bitcoin and other cryptocurrencies, and you’re ready to add these new kids on the block to your investment portfolio — that’s great!
To make the best decisions for your portfolio, educate yourself on the basics of cryptocurrencies and what you need to get started. Also, be sure to do your homework on a crypto’s fundamentals before adding any new assets to your portfolio.
Things you must have before investing in cryptocurrencies
Investing and trading cryptocurrencies can be different than investing in other assets, but there are some similarities as well. Here are the most important things you must have before jumping into the cryptocurrency investing space:
- A cryptocurrency exchange or a broker where you can buy and sell cryptocurrencies
- A secure cryptocurrency wallet to store your cryptocurrencies
- Knowledge about the cryptocurrency’s fundamentals
- Money you can afford to lose
- An investment strategy that’s unique to your risk tolerance
The most important things to know about cryptocurrency investing
Cryptocurrency investing is one of the newest ways to earn profit. As market participants find out more about the industry, many misconceptions are resolved and more people can be a part of the marketplace:
- At the time of writing, over 21,000 cryptocurrencies other than Bitcoin are out there, and the number may change drastically in the future.
- A cryptocurrency is a cross between a currency and a digital asset. Like a currency, you can use it to pay for things. Like a digital asset, you can invest in it for long-term gains.
- You’re not buying a currency; you’re buying the idea behind the coin, which is supported by an underlying blockchain technology. Blockchain technology is a distributed ledger that records a growing list of data.
- Cryptocurrency investing is very new, so its investment resources are constantly evolving.
- Always read about the background of a cryptocurrency, its underlying technology, its management, and its community before investing. Ask yourself what problem a cryptocurrency is trying to solve and why that solution matters.
- If you’re buying a cryptocurrency to hold long term, you’re looking for capital appreciation. If you’re actively getting in and out of trades, you’re speculating.
- The cryptocurrency market is extremely volatile. Make sure you’re investing money you can afford to lose and have enough understanding behind the potential future growth of your investment assets.
- Unlike the stock market, you can participate in the cryptocurrency market 24 hours a day, 7 days a week.
- Buy the freaking dip. What does that mean? It means that instead of panicking when the prices drop to a dip, it may be the best time for you to buy. Don’t buy when the prices have gone up so much in a short amount of time and the markets are hyped up. Of course, for all your investment decisions, you must analyze the market from different points than just the low price.
- Diversify your portfolio with at least five cryptocurrencies from different categories to manage your risk. Expand your horizons by investing in stocks with exposure to blockchain technology and the cryptocurrency market.
Checking cryptocurrency fundamentals before adding to your portfolio
Before you invest in a cryptocurrency, you must do a little research about it. Pay attention to the following key components when you do your crypto research:
- The crypto’s white paper: A white paper is something like a business proposal for new cryptocurrencies. It includes everything potential investors need to know about the crypto, such as technology, purpose, financial details, and so on. Think of it as your crypto’s resume.
- The team behind the crypto: No one really knows who created Bitcoin, but the rest of the cryptocurrencies out there normally have a team behind them who guide the company and its blockchain technology. Make sure to find out about team members’ experience in the field, their motivations, and their authority.
- Partnerships: If you’re not willing to take a lot of risk, seeing who in the industry has put their trust in the hands of the cryptocurrency you’re considering buying is very important. Another good thing about having partners in the traditional world is that the cryptocurrency may have a higher chance of being accepted by the masses.
- The crypto’s technology: Many cryptocurrencies are tokens from blockchain companies with multiple products. The more you get to know the products and the technology behind the cryptocurrency, the better.
- The crypto’s contribution to society: What problem is this cryptocurrency trying to solve? Does it matter to you? Is the team behind the cryptocurrency just trying to get rich quick, or does it have a long-term plan for the betterment of society? Finding answers to these questions can help you decide whether you should consider buying this cryptocurrency.
- The road map: Many companies behind cryptocurrencies have sections on their websites dedicated to their road maps: where they come from, what they’ve achieved, and what they’re planning to accomplish in the future. If available, road maps are a great way to discover a ton of fundamental information about the crypto in a few minutes.
