If you have been investing in cryptocurrencies, you know that they are highly volatile instruments. They are known for their dramatic price swings, making it difficult for investors and traders to accurately predict the best entry and exit points. However, the volatility can also work in your favour if you apply solid strategies. These include incorporating safety measures that maximise your potential.
Below, we share some of the tips for safely investing in cryptos. The article also discloses the risks associated with cryptocurrency investment so you can start your ventures on a good note.
Crucial Steps to Safely Invest in Cryptocurrencies
If you are new to investing in cryptocurrencies, here are the main steps for safely investing in them.
Learn the Market
Do not invest your money in cryptocurrency without learning how the market works. Understand what causes price swings of the tokens you prefer. Plus, be familiar with different types of cryptos whether liquid or illiquid. You should also learn how blockchain networks, hashing algorithms, consensus mechanisms, and more work. This way, you will know the right asset to invest in at a particular time and maximise your chances of earning profits. And, practise continuous learning as regulations change and new technologies are introduced in the crypto market. You do not want to miss out on any opportunity.
Find a Credible Broker
Another crucial element in safely investing in cryptocurrencies is using a suitable broker. For instance, if you are in the UK, ensure it is regulated in your region by the Financial Conduct Authority (FCA). Since many investors find the research process to be overwhelming, consider top recommendations from experts like those at Invezty.
Use a Secure Digital Wallet
With many cryptocurrency wallets in the crypto landscape, selecting and using the most secure ones is crucial. You do not want to lose your tokens to hackers simply because you overlooked this element. Confirm whether a wallet is highly encrypted and features unique recovery phrases. While many investors leave their cryptos at an exchange, doing so is risky. This is especially with one that has a hacking history.
Conduct Market Analysis
It is advisable to conduct technical or fundamental analysis before opening a position. This will help you discover the best strategies that might increase your chances of earning profits. Investors can find tools for this activity on the best brokers’ platforms for increased efficiency. Never rely on other traders’ approach but yours.
Have a Budget
Always set aside some funds for investing in this market to avoid overspending. Remember, digital token values fluctuate with market conditions, making it challenging to make accurate predictions. While you can earn profits, losses are inevitable. You do not want to lose more than you can afford and end up emotionally frustrated.
Common Risks and How to Avoid Them
There are various risks in the cryptocurrency landscape that you should note before kickstarting this venture. Here are the common ones.
Volatility Risk
This is a common risk in cryptocurrency trading, and has left many with losses. The crypto market is highly volatile and asset prices tend to constantly fluctuate in a short period. While this element can favour your trades, it can also bring profits. The trick here is applying risk management controls like stop-loss orders. This will help close your position when the asset’s price reaches a certain level.
Liquidity Risks
There are liquid and illiquid cryptocurrencies in the market. Liquid cryptos are popular ones like Bitcoin and Ethereum. They are easy to sell, especially when managing large trades on large-cap cryptos. Illiquid cryptos are altcoins and those with smaller capitalisation. Such asset prices skip around more violently when large orders enter the market. One way to avoid liquidity risk is diversifying your portfolio across multiple instruments with a mix of liquid and illiquid. This way, one gain may cover a loss, thus mitigating the amount of losses you were to incur.
Scam and Fraudulent Activity Risks
The crypto market is largely unregulated, and scammers are everywhere, looking to take off with innocent investors’ money. For instance, you might find yourself investing in a crypto project with no real service or storing your tokens in an unsecured wallet. Before investing in any project, ensure it is legitimate and has no attractive offers that sound too good to be true. Most importantly, have a credible and reputable exchange or broker in your corner. Check their regulatory status and what other investors say about them before committing.
Regulatory Risks
The laws and regulations regarding the cryptocurrency market are subject to rapid change. Governments across various regions may decide to regulate cryptos differently. This means that future regulation could be pivotal to a crypto’s value. It could make investors sell their tokens and cause the value of the cryptocurrency to fall. It is crucial to stay abreast of crypto market regulations for informed decisions. Also, stick to investing with regulated brokers or exchanges for maximum experience and potential.
Crypto Trading Risks
The volatility of the cryptocurrency market makes crypto trading a highly risky venture. However, this hasn't stopped investors from exploring this market. In fact, cryptocurrencies are gaining global traction primarily due to the potential for good profits. Note that the crypto market can move over 10% in minutes, thus affecting an asset’s price. Many investors with open positions will panic and make decisions due to fear of losing their money. The market move can also positively impact your position, leading to excitement or greed setting in. Regardless of how your position is affected, do not make a decision based on emotions. Stick to your plan, as the price can go up and down again in minutes.
Conclusion
Safety matters when investing in cryptocurrencies and any other asset. The most important element is prioritising your needs and making decisions aligning with them. Also, understanding the crypto market risks is important, as you will be able to decide on how much you can tolerate. If you are a new crypto investor, start investing with a small capital and gauge your skill level using top brokers’ demo accounts. You can also keep a journal to write down your strategies. This will help you identify areas of improvement, especially whenever you incur losses.
