In little over a decade, cryptocurrencies have gone from being an unknown experiment to a much-vaunted asset class. If you are a newcomer to crypto then you are joining a fairly large group of people – more than 200 million worldwide – who have been investing in crypto over the same period. And many of them will tell you that while investing in crypto can earn you some sweet profits, it is certainly not all rainbows and unicorns.
There are some risks you need to understand before you dive in. So here are seven things you gotta keep in mind before you do so.
1. The Big Picture
Undoubtedly, the crypto industry has grown rapidly. In a relatively short period of time, by early 2022, it had attained a market capitalization of more than $2 trillion. Today, following a series of debacles including the bankruptcy of the exchange FTX, it is down to a little under $1.0 trillion, still, that’s nearly 5% of the combined market capitalization of all companies listed on the New York Stock Exchange. But crucially, according to a recent study, 20% of Americans own crypto today. Many of them do so, not because they understand it, but because of FOMO (Fear of missing out).
Despite the size and increasing popularity of crypto, it is at high risk due to its volatile nature, regulatory uncertainty, and its susceptibility to cyber-attacks. It’s important to do your research and consider these factors before making any investment decisions.
Let’s talk about one of the biggest risks that come with investing in crypto: Volatility. The market can be super unpredictable and swing wildly from one day to the next. And you know what that means? Yes, you guessed it: You could be up very big one day, and then way down the next day, all because of some news or event that affects how investors feel about the market.
Just take the price movement of Bitcoin. In December 2022, when the crypto market was reeling under the FTX bankruptcy, it had lost nearly two-thirds of its value since Q1 of 2022. Today, it has risen since the start of the new year, but it is still half of where it was in March 2022. There are three main factors that explain this kind of volatility:
- Speculation: Many people invest in cryptocurrencies with the hope of making quick profits, leading to speculation and volatility in prices.
- Market sentiment: Cryptocurrency prices can be heavily influenced by market sentiments, such as news and events related to the industry or individual cryptocurrencies. This can cause sudden price swings in either direction.
- Lack of adequate regulations: Cryptocurrencies are not yet regulated by many governments around the world, which can cause uncertainty and instability in the market. U.S. authorities, in particular, are not in a hurry to give their blanket regulatory blessing on crypto.
The high volatility can make investing in crypto feel like a high-stakes game of chance. It’s important to consider how much risk you’re willing to take on before you jump in. Are you comfortable with the possibility of losing a significant portion of your investment if the market takes a dive? Or are you looking for stable returns over the long term?
There’s no one-size fits all approach here. It really depends on your individual circumstances; your goals and risk tolerance. Do not invest your nest egg or retirement plan contributions in cryptocurrencies. Never invest more than you could afford to lose in any speculative investment.
So, when it comes to trading cryptocurrencies, there are a ton of different platforms out there to choose from. Some of the big names include Coinbase, Binance, Kraken, and Gemini. These platforms offer a wide range of crypto assets to trade, as well as additional features like staking, borrowing, and lending.
But it's not just about the big players – there are also a ton of up-and-coming platforms that are shaking things up in the world of crypto. For example, there's Uniswap, which is a decentralized exchange that allows users to trade directly from their own crypto wallets. Since the demise of FTX, volumes have been increasing on decentralized exchanges. Then there's BlockFi, which offers interest-bearing accounts and loans backed by your crypto holdings.
No matter which platform you choose, it's important to do your research and make sure it's secure and reliable. Look for platforms with a good track record, strong security measures, and transparent fee structures. And don't forget to compare fees across different platforms – even small differences in fees can add up over time and eat into your profits.
Ultimately, the platform you choose will depend on your individual needs and preferences. So, take the time to explore your options and find the platform that's the perfect fit for you!
When it comes to choosing a crypto trading platform, it's important to consider your individual needs and preferences. Here are a couple of examples:
Let's say you're someone who's just getting started with crypto and you want a platform that's easy to use and navigate. You may prefer a platform for its user-friendliness or design or for its depth of educational resources or you may prefer a platform that has advanced features and trading options. There are also platforms on which you can trade anonymously. Whatever your individual needs and preferences, there's a platform out there that's the perfect fit for you – so take the time to explore your options and find the one that works best for you!
4. Types of Crypto
When it comes to making an investment, there are a ton of options to choose from – some are volatile and high-risk, while others are more stable and predictable. Here are a few examples to consider:
Bitcoin: This is the OG of cryptocurrencies and is most widely accepted as a form of payment. It's also known for its volatility, as mentioned higher up in this article. So while it can be a potentially lucrative investment, it's not without its risks.
Tether: Tether is a stable coin that's designed to maintain a steady value of $1 USD per coin. It's often used as a way for traders to move funds between exchanges without having to worry about volatility or price fluctuations. According to data from CoinMarketCap, Tether has a market cap of over $70 billion and is one of the most widely used stablecoins on the market.
USD Coin: Another popular stable coin, USD Coin is also designed to maintain a steady value of $1 USD per coin. It's backed by a mix of cash and short-term U.S. Treasury bonds, which helps to maintain its stability. USD Coin has a market cap of over $43 billion and has seen significant growth in recent years, according to CoinMarketCap
Investing in stablecoins like Tether or USD Coin can be a good option for those who want to avoid the volatility of other cryptocurrencies. However, it's important to keep in mind that even stablecoins aren't completely immune to risk – there's always the possibility that something could happen to disrupt their stability. As with any investment, it's important to do your research and make an informed decision based on your individual needs and preferences.
5. Risk Management Strategies
Diversifying your portfolio by investing across multiple asset classes can help reduce overall risk when investing in cryptocurrency markets. This includes traditional stocks, bonds, commodities, real estate, and various types of cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), and others. Investing across multiple asset classes helps spread out risk while still allowing investors access to potential gains from each individual asset class they hold within their portfolio.
Another proven method of managing investments that include volatile assets is dollar-cost averaging, which involves investing a fixed amount of money at regular intervals over a specific period of time. For example, an investor might choose to invest $100 in Bitcoin every week for a year. This approach can help reduce the impact of market volatility on the overall investment, as the fixed investment amount means the investor buys more shares when prices are low and fewer shares when prices are high.
Hedging is another popular risk management strategy in which an investor takes a position that will offset potential losses to another investment. For example, an investor might short-sell Bitcoin futures contracts to hedge against a potential decline in the price of Bitcoin. While hedging can limit potential losses, it also limits potential gains, so it's important to carefully consider the risks and benefits before implementing this strategy.
6. Security Issues When Investing in Crypto
In 2020, the cryptocurrency exchange KuCoin was hacked, resulting in the theft of over $200 million worth of cryptocurrencies. According to the blockchain analytics firm Chainalysis, around $1.4 billion was lost due to breaches in 2022.
These incidents highlight the need for caution when investing in cryptocurrencies and the importance of choosing a reputable exchange with strong security measures in place. It's always a good idea to stay informed about potential security risks and to do your own research before making any investment decisions.
In order to protect yourself from potential scams or fraud when investing in cryptocurrency, it's important to take a proactive approach to your own security. One of the first steps is to gain a better understanding of how cryptocurrency works, including the technology behind it such as blockchain and decentralization. This can help you better understand the risks and benefits of investing in different types of cryptocurrencies.
In addition to these steps, educating yourself on basic security principles can also help you stay safe when investing in cryptocurrency. This includes practices such as using strong and unique passwords, enabling two-factor authentication, and avoiding public Wi-Fi networks when accessing your cryptocurrency accounts.
By taking these steps and remaining vigilant, you can help protect yourself from falling victim to scams or fraud when investing in cryptocurrency.
7. With Returns Come Risks—Do Your Research
However smart and knowledgeable you are, please do not ever forget: With high returns, you are faced with high risks. Cryptocurrency is no different. The decentralized ledger technology of blockchain provides an immutable system that enables transactions between parties without intermediaries, making it an attractive option for investors. With advancements like smart contracts, cryptocurrencies have opened up enormous opportunities for businesses and developers. For example, Ethereum allows developers to create their own tokens using its platform, giving users access to digital assets without relying on third parties. Another example is decentralized finance (DeFi), which uses blockchain technology to create a range of financial products and services, including lending, borrowing, and trading, all without the need for traditional financial institutions. Another is non-fungible tokens (NFTs), unique digital assets that have taken the art world by storm in recent years.
All this means that whether many, including authorities, may like it or not, the continued development of blockchain technology and the exciting new applications and products it enables, cryptocurrencies are likely to remain a fascinating and innovative area for investment and development.
Just ensure you are drawing a line on how much you can afford to lose.