So, you want to invest in cryptocurrency? Plenty of great reasons exist to invest in this new form of currency. Other points may make you want to stay away. For some investors, it is a great idea, but others may want to stay out of the fray. Which category do you fall in? That depends on several factors.
To determine whether investing in cryptocurrency is right for you, ask yourself a few basic questions. Answering them will help determine how good a fit cryptocurrency investing is for you and your particular financial management and investing style. Here are 5 questions to ask yourself before investing in cryptocurrency.
1. Do I understand what cryptocurrency Is?
The first question to ask yourself is if you have (or can obtain) a basic understanding of what cryptocurrency is. If you can’t wrap your head around that, it doesn’t make sense to invest. You may not understand everything a company like Procter & Gamble does before you buy its stock but at least you have a basic understanding that they are a multinational conglomerate that produces and sells a variety of tangible goods and services. You don’t need to know anything about surfactants but you should know that they are used in their business.
If you are starting from square one, it helps to know cryptocurrency is a secure digital currency that is not issued or controlled by any central entity (like a central bank). Iit is created with blockchain technology that keeps a public ledger of transactions that is, in turn, kept on a network of computers. If you already know this or are interested in learning more, cryptocurrency investing may be for you. If this all sounds like Greek to you, maybe put your money elsewhere.
2. Do I have the resources to learn more about cryptocurrency?
If you have or are ready to acquire a basic understanding of cryptocurrency and are interested in investing in this product, the next step is to dive in deep and learn as much as you can. You need to learn about the different categories of cryptocurrency, the different individual cryptocurrencies, the exchanges where they are traded, and how to use those exchanges. To do this, two different resources will prove very helpful and informative. Your options are investing time or finding a knowledgeable person to help you.
If you have the time and the wherewithal to dig down deep into how cryptocurrency investing works, by all means, do it. The nice part about investing in such a new market is that there is not yet much institutional knowledge to keep you at a disadvantage. If you are willing to put in the work, you can know just as much, if not more, than the experts in the field. If time is not a resource you have or are willing to invest, the other option is finding an expert who can help advise you. This is not as easy as walking into your favorite investment firm’s local branch and asking them to invest for you. Experts in this field are still few and far between so finding one may prove too difficult for your location and circumstances.
3. Do I have the resources to invest in trading?
Cove Markets notes that day trading is one increasingly popular path to getting involved with cryptocurrencies. As the article explains, “Day trading is the process of speculating on financial products and assets over the span of a single day.” The cryptocurrency market, which is known for its wild price swings on a seemingly minute-by-minute basis lends itself very well to this type of trading. When you can dedicate the time and focus it takes to do day trading right, plenty of opportunities to make huge profits arise. It is also likely some trial and error will be involved so you should have the capital to invest so you can weather some losses as you learn how to do it.
Day trading is not for the faint of heart. This is an immersive, hands-on trading activity in which you will have to be fully engaged to conduct properly. If you are willing to put in the time and money, it is probably the best way to go about investing in cryptocurrency. If you can’t dedicate what you need to do in order to be successful, daytrading in cryptocurrencies is probably not something in which you want to immerse yourself.
4. Do I truly believe in cryptocurrency?
In an ideal world, you should be passionate about your investments. You should believe in each company and think that, in the right circumstances, the company or the asset could take off and explode. This is the core of investing. It is playing a hunch that something you like and really believe in will catch on and others will start believing in it, too. This is what earns people long-term money when investing.
If you think cryptocurrency is the future of money and that fiat currency will soon be a thing of the past, then you should absolutely consider investing in this currency. If you think this whole concept is just a flash in the pan or the latest investing fad that will soon be replaced by something else, it may not be for you. This is not to say that if you do think it’s a fad you can’t make some money while it’s booming but chances are you will be far more interested and involved if you are passionate and truly believe in cryptocurrency’s potential.
5. How risk tolerant/averse am I?
Now we get to the real question. You may understand everything there is to know about cryptocurrency. You may have the time and resources to get the best advice and day trade all day long. You may love cryptocurrency and believe that is the future of money around the world. But, the biggest question you need to ask yourself is, how risk-tolerant (or risk-averse) am I? This is what, in the end, will truly determine if investing in cryptocurrency is right for you. For every overnight teenage millionaire in the world of cryptocurrency investing, there are just as many if not more cautionary tales of investors who lost their shirts.
A recent three-month period perfectly illustrates the rewards and risks of cryptocurrency. Bitcoin was trading at the time at just under $6,000. Over the course of a few weeks, the price rose to just under $20,000. Great, right? Well, in just a few more weeks, the price had dropped all the way back down to just under $7,000. If you got in around $6,000, that was amazing! If you sold at the right time, the profit was incredible. If you bought in near the peak though, within a few weeks you may have been completely wiped out. That’s the rollercoaster of cryptocurrency investing for you.
Conclusion
There are many good reasons to invest in cryptocurrency and probably just as many good reasons not to do so. For the right person, it can be a great opportunity. If you are interested in seeing if this kind of investing is right for you, ask yourself these 5 questions to help make your decision.