Cryptocurrencies aren’t like land, gold, stocks or other traditional forms of investment, but there’s one rule that holds true for investors no matter what: you should never invest more than you can afford to lose.
Beyond this essential bit of wisdom, though, what else do new cryptocurrency investors need to know?
1. How do I choose which cryptocurrencies to invest in?
Carefully consider the asset you’re looking at investing in. Is it a well-known digital currency with a track record – for example, Bitcoin, Ethereum, Ripple, Bitcoin Cash or Litecoin? Or is it a new cryptocurrency that’s only recently launched?
“It might be best to look at the purpose of the cryptocurrency you’re interested in, how long it has been in the market, its market capitalisation and its underlying tech solutions,” writes Nigel Green, founder and CEO of the financial consultancy DeVere Group. “Cryptocurrencies that solve problems are less likely to fail than those that are essentially ICOs.”
2. Beware of hype
“The rollercoaster nature arises from sudden changes in the perceived value of a given cryptocurrency,” CNN Business noted recently. “Although their prices are, like traditional stocks, determined by supply and demand, hype also plays a role. News coverage can influence prices, too. Any mention of someone hacking a cryptocurrency exchange sends prices plummeting, for example, while even the rumour of greater regulation reassures investors and drives up prices.”
3. Track the market and other investors
Keep an eye on what other investors are doing. This doesn’t mean following a herd mentality, but it does mean paying attention to trading movements and volume trends. In other words, do some technical analysis.
“Technical analysis is basically a study of how the psychology of the market is manifested in how a chart for an instrument looks,” accountant Chris Grech advises. “For example, when prices are going up and volumes dry up, you ought to be very careful with that price movement because it indicates that a very tiny portion of the market is participating in that price increase. Conversely, if there’s a market correction accompanied with large volumes in that token, then it should mean that the correction is supported by a relatively large portion of the market.”
4. Think long-term
Finally, if you’ve taken all the previous precautions, be prepared to ride out slumps and crashes if you can afford to do so. For example, financial analyst Tony Yoo recently told The New York Times that, despite seeing his investments lose nearly 70 per cent of their value, he plans to hold onto his cryptocurrencies. As the Times noted, Bitcoin only passed the $1,000 mark in 2013. Even with the declines seen in 2018, Bitcoin’s value is still much higher than it was five years ago.
“There’s just so much more behind this new wave of technology and innovation that I’m sure will take over our society in due time,” Yoo said.