In 2021, cryptocurrencies were one of the most successful asset classes, with a total market value of more than $2 trillion. As a result, more investors got into the crypto market in search of growth from digital assets that had the potential to appreciate over time.
Cryptocurrencies are inherently risky assets that tend to experience significant price fluctuations. Unfortunately, this is just one of the numerous risks that cryptocurrency investors must consider if they wish to succeed in this new asset class.
7 Best Practices for Investing in Cryptocurrency
Investing in digital assets is no more complicated than investing in traditional assets like equities and bonds. Here are some fundamental investment ideas to consider while managing your crypto investments.
Choose the right mix of storage and exchange platforms
Investing in cryptocurrencies is a complex activity that requires a high level of expertise, technical knowledge, and risk-taking. For this reason, it is highly recommended that you have a diversified portfolio that combines storage and trading platforms.
Hot and cold storage is used to store digital assets. Hot storage platforms store cryptocurrencies that can be accessed within minutes, while cold storage involves storing digital assets offline without Internet access.
It’s handy to have a hot wallet online for crypto traders to enter and exit positions rapidly. In addition, keeping roughly 80% of long-term assets in a cold wallet is a useful crypto storage method. The hot wallet may then be used for short-term transactions.
Prioritize liquidity over size
Liquidity is how an asset or security can be quickly bought or sold in the market without affecting its price. If you invest in cryptocurrencies, you must prioritize liquidity over size because cryptos are notoriously volatile assets. The liquidity of a cryptocurrency determines how easily investors can buy and sell digital assets without influencing the overall price. Therefore, selecting liquid cryptocurrencies can help investors take advantage of market opportunities.
Consider diversifying investments across top digital currencies
There are more than 19,000 cryptocurrencies today, but not all have high liquidity levels. Some cryptocurrencies may have low trading volumes that sometimes result in large bid-ask spreads within a short time after being purchased or sold. For this reason, experts recommend diversifying investments across the leading coins such as bitcoin (BTC), ether (ETH), and bitcoin cash (BCH).
Avoid investing in cryptocurrencies associated with a low volume of transactions
Some large-cap coins such as BTC and ETH generate significant revenues for miners who confirm transactions on their decentralized networks. However, low-volume cryptocurrencies may struggle to attract miners, which increases the risk of these digital assets becoming obsolete over time. You must avoid investing in cryptos that trade at reduced prices due to reduced transaction volumes to prevent this.
Don’t invest with money that you cannot afford to lose
Since cryptocurrencies are new assets, the spaces are highly volatile, and their prices fluctuate. As a result, experts recommend that investors do not bet all of their capital on digital currencies, particularly at the beginning of their journey on this asset class. Even if some cryptos appreciate many times over in value in the future, they can also decrease dramatically in value just as fast.
Consider dollar cost averaging when investing for long-term gains
Many people have made enormous profits from cryptocurrencies by using dollar-cost averaging methods. Dollar-cost averaging lets investors buy assets regularly over time instead of investing all their capital in one go. It’s handy to use dollar-cost averaging when investing in cryptocurrencies to avoid the risk of investing too much at once.
Don’t forget they’re still risky investments
The cryptocurrency market is volatile because its size and liquidity levels are relatively small compared to other asset classes like equities and foreign exchange markets. As a result, cryptocurrencies could be impacted by regulations or government policies across different geographies. Large swings in price and volume witnessed by top digital currencies such as bitcoin, ether, and bitcoin cash can be a major concern for traders. Therefore, you must monitor the market regularly to get accurate quotes on these assets.
Investing in cryptocurrencies is not as complicated as some may think if you follow a few fundamental investment principles. First, it’s important to research all the major players within the crypto industry, including exchanges and storage platforms.
There are many risks to consider when investing in the cryptocurrency market because digital assets are inherently volatile assets. The best way to overcome these risks is by diversifying your portfolio with the top coins that have experienced success over time, prioritizing liquidity over size, and avoiding low-trade volume cryptocurrencies.
It would help if you now had an idea about the different ways to help you succeed within this space. If you are willing to put some effort into managing your investments, you can generate significant returns.