The rapid increase in the appeal of digital currencies since Bitcoin's first big run in 2017 has motivated the masses to look into how to buy cryptocurrencies.
In fact, over 420 million people are estimated to use crypto around the world.
According to a 2023 Forbes survey, most people agree it is a legitimate investment.
Still, the same survey reveals that 58% of people do not trust cryptocurrency as an investment.
For those who have freshly entered the digital currency arena or are contemplating it, a cautious strategy can help you avoid considerable loss.
Here are our 6 Top Tips to Avoid a Crypto Catastrophe:
1. Be Vigilant About Security
Securing your crypto investment is a crucial factor when it comes to purchasing digital currencies. Individuals who prefer not to delve into the complexities of crypto cybersecurity may find it more convenient to store their assets with a reputable custody provider that boasts strong, audited security measures. These providers often have security procedures that are more beginner-friendly.
Conversely, those seeking a more direct approach might opt to self-custody their wallet to secure their assets. This usually involves purchasing crypto on a trading platform and then transferring the assets to a personal digital wallet or a physical cold wallet (a device similar to a USB designed for storing crypto).
However, remember that while self-custody provides greater flexibility in managing your crypto, it also means you're on your own regarding security. Only you have access to your private key. It is not stored anywhere else.
Therefore, if your private or exchange accounts are compromised, the crypto trading platform you use goes under. If you mistakenly send your coins to an incorrect wallet address, you can permanently lose access to your assets, with no customer support to assist you.
2. A Diverse Portfolio Is Vital for Enduring Success
The urge for full commitment to a single cryptocurrency is prevalent, driven by various factors such as staunch supporters and persuasive fraudsters. While there are instances where tokens valued at half a cent surge to hundreds of dollars, most projects yield modest returns or fade away entirely when faced with the initial onset of bear market conditions.
In the unpredictable crypto market, diversifying your portfolio by incorporating leading projects in sought-after sectors like DeFi, NFTs, gaming, and layer-one protocols is the most secure strategy.
Once these areas are accounted for, placing smaller wagers on potential high-return investments is not unreasonable. However, closely managing the size of your positions is crucial to reducing losses.
3. Understand the Nature of Your Investments
Like any investment, you must grasp what you're investing your money into. If you plan on purchasing stocks, delve into the annual report and other SEC filings to thoroughly examine the companies.
This same level of detailed analysis should be applied when investing in cryptocurrencies, as countless ones are available, each operating differently and new ones emerging daily. It's essential to understand the investment theory for each transaction.
Cryptocurrencies are not supported by tangible assets or cash flow from an underlying entity. Bitcoin is a prime example, where investors solely depend on the prospect of someone else paying more for the asset than they initially paid.
In contrast to stocks, where an increase in company profits can generate returns, many cryptocurrency assets need a more bullish and optimistic market for you to gain profit.
Some of the most sought-after coins are Ethereum, Dogecoin, Cardano, and XRP. Before investing, check the Dogecoin price to comprehend both the potential gains and losses. If your financial investment lacks support from an asset or cash flow, its value could potentially dwindle to nothing.
4. The Impact of Taxes
Before diving into the world of digital currency investments, evaluating the potential tax impacts could be beneficial. These impacts can differ significantly based on your location, down to your country, state/province, and city, and are consistently changing as the sector expands.
Consulting with a tax professional or tuning into reliable sources about how your digital currency investments might impact your taxes in the upcoming year could spare you from unforeseen difficulties in the future.
5. Manage Risks
Considering the unpredictable nature of cryptocurrency trading, a defensive approach is advisable. While the potential for profit is substantial, losses can be abrupt and severe. Cryptocurrencies may also carry a higher risk of becoming worthless compared to other assets. It's wise only to invest what you are comfortable with losing.
If your goal is portfolio diversification or saving towards a specific target (especially short-term), the volatility of cryptocurrency might make it an unsuitable choice. In case your profits from cryptocurrencies grow beyond your intended portfolio allocation, you might want to think about redistributing some of those earnings into more stable asset classes. This strategy could help to balance out some of the volatility in your overall investment portfolio.
6. Be Patient
Following thorough research, it's probable that you've acquired a sense for the cryptocurrency market and have pinpointed one or more ventures worthy of your investment. The subsequent move is to decide on the timing of your investment. The digital currency sphere is fast-paced and notorious for its severe fluctuations.
Bear in mind that digital currencies carry a high level of speculation. For each individual who becomes a millionaire overnight through Bitcoin, countless others have invested heavily into the virtual token space only to have their funds evaporate. Investing here implies taking on a certain level of risk.
Endnote
Cryptocurrency represents a significantly uncertain financial market segment, leading many savvy investors to allocate their resources elsewhere.
But, for those novices interested in dipping their toes into crypto trading, the wisest strategy would be to begin with modest investments and only employ funds they are comfortable losing.
Kristin McCasey is a partner and editor atPlay Louder!She is a former award-winning film editor turned work-at-home-mom blogger. Three years after their son was born, she and her husband left their Los Angeles careers to have more time as a family. She now works with her husband, Joe, on their finance blog, teaching others how to achieve financial independence.