Is cryptocurrency a safe bet? The short answer to that is: “no, it isn’t”. Does that mean you shouldn’t consider getting involved? That’s also a “no”.
Being a potentially world-changing technological innovation, each cryptocurrency has many challenges to overcome. These include a regulator and lawmaker hostility (will they be banned or become a subject to harsh rules?), technological competition (is this system replaceable by better tech?), and technological vulnerabilities (is there a possibility that some exploit would ruin the entire economic model of the currency?).
Since any of these black swan-type events could really happen to any of the cryptocurrencies in existence today, they should in no way be considered a safe bet. However, with a few tips and considerations, you can trade crypto assets with relative safety. Here are a few points for you.
Learn About Money
If you don’t already know the risks involved in investing in the potentially world-changing technology (cryptocurrency), you need to do some more homework before you part with any money. This isn’t just some moon-shoot-penny-stock you’re buying here. It’s a potential framework for an entirely new, entirely digital economy.
In your study, you should start with the critiques of the current financial system. Read up on central banking. Understand how the dollars, euros, or yuan in your pocket came into existence. Once you have a good grasp on what’s wrong with the current dominant system, you’re ready to start exploring the alternatives.
After your study, you might emerge thinking that Bitcoin and any other crypto asset are an unpleasant thing to deal with. Alternatively, you might come to believe that the only way out of the current mess we’re in is by returning to a hard monetary standard for the planet. Saifedean Ammous gives a great argument for Bitcoin in his book The Bitcoin Standard. Another great learning resource is Andreas Antonopoulos’s YouTube lectures.
Set Your Goals and Stick to them
What are you buying a cryptocurrency for? Do you just want to upgrade that banger into a Lambo or are you hoping for a day where the car salesman doesn’t even know what dollars are?
Think about the time-frame of your investment. With cryptocurrency, most analysts agree that we’re playing a years-to-decades long game. This is a revolutionary new financial system that we’re talking about. It may eventually usurp a corrupt legacy system defended by some of the most powerful institutions on the planet. The battle might be long and arduous.
Consider this when you’re investing. No one knows the direction the market will go. If demand continues to increase, so will the price, too. However, the inverse is also true. Set targets, both financial and time-based. Also, make sure that you stick to them. This, along with the conviction brought about by your previous study, will make it much easier for you to hold onto your investment even during particularly scary bouts of market volatility.
Choose Your Investments Wisely
The altcoin craze seems to be largely dying off now. Although some projects will survive, it is difficult to say which. At this point, given the development surrounding it, its previous performance, and the ever-improving infrastructure, Bitcoin appears to be by far the safest bet. Of course, it could still plummet to near zero in case if some network breaking vulnerability would be found or the entire planet decided to outlaw it. However, compared to projects under scrutiny from global regulators and much more complicated systems, like the smart contract platforms, Bitcoin is the closest thing to a safe bet in the industry.
That’s not to say that you shouldn’t diversify. The important thing is to be strong in your own investment decisions. Know exactly why you like whatever the cryptocurrency project is. Be prepared to argue its merits and know the answers to all potential rebuttals. If you can personally argue a strong case for your investment against good critique, then you can invest with confidence.
Cryptocurrencies are incredibly volatile. Their price can fluctuate by 20 percent or more in just the space of hours. This means picking a sensible entry point without vast experience reading price charts is tough.
One method to reduce the impact of market volatility on investment is by dollar-cost averaging. This means setting a regular interval that you will buy a set fiat currency amount of the asset you want exposure to. For example, $100 once a week for a year.
Dollar cost-averaging in this fashion makes the investment seem much less daunting. Even if the price does crash immediately following a purchase, you have many more opportunities to pick the asset up cheaper in the coming months. This makes it much easier to stick to your original investment plan since the impetus to bail out of an investment at the first sign of danger is greatly reduced.
Don’t Invest More Than You Can Afford to Lose
We’ll leave you with the most important piece of advice when investing in such a high-risk asset class as cryptocurrency. Never invest more than you can afford to lose.
Obviously, it would be awful if you bought as many Bitcoin currencies as you could and during the next few months or years, some black-swan event caused the price to plummet back to single figures. However, this is something you need to be prepared for. Make sure you are comfortable in your life before you invest. You should not be banking on Bitcoin or any other digital asset making you rich.
Before you decide how much you want to invest, realistically work out your incomings and outgoings during the month. If you are making more than you are spending, take a percentage of the difference and consider that as investible. You absolutely do not want to risk so much that your life would be negatively impacted (apart from you being a bit sad) if this whole thing were to come crashing down tomorrow.
All cryptocurrencies could still plausibly go to zero, so they definitely are not a safe bet. However, if you consider your investment rationally, you can indeed invest in the potential financial revolution safely.