The Dos and Don'ts of Cryptocurrency Investing

20 April 2021
Cryptocurrency is a relatively new investment product and with it comes a whole new market to trade in. If you are thinking of investing in this new asset class, first it may be a good idea to get your head around the dos and don’ts of crypto investing.

While some of the more obscure cryptoassets have niche followings or low trading volumes, some enjoy immense popularity among dedicated ‘cypherpunks’, Wall Street pros, and everyday Joes and Janes alike.

As prices of various cryptoassets continue to swing, it’s important for investors to understand the most note-worthy lessons in order to invest responsibly and benefit from the recent surge in the market.

Do keep your crypto portfolio balanced

When it comes to investing in the world of crypto, it’s important to ensure your portfolio is balanced with a good mix of volatile coins such as Bitcoin or Dash, and stablecoins like Tether.

Not only will this protect your portfolio against systematic or idiosyncratic risks, but it will also offer you a level of stability in a shaky market. Unlike volatile coins that can increase or decrease by double digits in just a single day, stablecoins have a fixed value relative to the underlying asset, such as the US dollar or gold.

Some investors choose to take advantage of the higher returns that can be made with volatile coins, and offset it with stablecoins to invest long term with potentially lower risk.

Do stick to a strategy to maximise profits and hedge against risk

Similar to how the stock market operates through the buying and selling of company stocks, the same rule applies for crypto.
In order to make any profit from crypto, investors need to know how to get the best price when buying and selling their coins.
Find a long-term strategy that suits your risk appetite. For example, you may see quick returns by buying and selling quickly, but it’s also likely you’ll realise holding on to investments for a longer period  has the potential to drive higher profit margins.

Tip: set KPIs (key performance indicators) or investment targets so you have a clear idea of when you want to buy and sell, and your investment decisions aren’t emotionally (or for some people, anxiety) driven, especially during times of high volatility. For example, if you buy a coin at $10 and you set your target to reach 10 time your investment, regardless of market speculation or emotional state, you should sell when your investment hits it’s target. Make sure to learn how to let go at the right time and make a profit.

Do understand what you’re investing in

Simply, do your research and due diligence on the cryptoasset you’re investing in. It might seem like a no-brainer, however, you may be surprised by how many people invest in cryptocurrency with very little knowledge of what it is.

When looking into the cryptoassets you’re considering buying into, ensure you understand what type of token it is, it’s performance to date, the demand for the coin, and its expected longevity. You may want to read the whitepaper behind the project and also look into the founding team to determine credibility.

A coin without high activity and low liquidity is probably going to be useless and can depreciate in value quickly.

Do make sure your investments are working for you

When investing in crypto, it’s critical to pick a platform or exchange that provides you with opportunities to put your digital assets to work. For example, secure wallet or platform that allows you to earn interest on your crypto, access loans and actually pay for things.

Don’t get over overconfident

Don’t become one of the many cautionary tales of crypto investors that got overly confident and lost everything. While the crypto market is one that invokes a lot of passion, it’s important to keep your emotions at bay and take a calculated approach when investing.

Learn the ins and outs of crypto, understand the coins you’re interested in buying, diversify your portfolio and know how to react to the market, especially during volatile spikes. Invest with your head, not your heart.

Don’t buy into the hype: Make level-headed investments

The fear of missing out (FOMO) has led many investors to disaster. It might seem tempting to jump into crypto that’s skyrocketing and imagine the huge profits that you could possibly rake in. However, it’s important to not act on impulse and buy into the hype off a whim, as you could end up with more pain down the track than profits. If you want to jump onto an emerging asset, think about the reasons behind its rapid growth and whether you think this growth is sustainable. What goes up, must come down eventually.

Don’t put all your eggs in one basket

Diversification is the aim of the game. Try to find a crypto platform or exchange that offers the ability to buy and sell a variety of cryptoassets and products. It’s likely you won’t want to be tied to a platform or exchange that offers no option to expand your cryptoasset portfolio. Keep in mind that transferring values from one platform or exchange to another can be costly, so try to find an all-in-one platform instead.

Don’t pick platforms without local support

It’s advisable to not invest in platforms or exchanges that don’t offer local customer support or have local licenses. In the case that something goes south, you want to make sure that your investments are protected by local laws, and you have the adequate around-the-clock support from local customer support teams. Unlike other financial products, cryptocurrency is decentralized, meaning there is no single organization or authority that governs or protects the market.

If your crypto goes missing due to a personal error, a technical problem, fraud or a scam, it’s unlikely that you’ll see that investment again, especially if you’re using hard-to-contact international providers. While each scenario is different, if you’re using an Australian product, you’ll at least be able to speak to someone locally to get help and avoid costly pitfalls.

If you’re comparing online share trading companies, the comparison table below displays some of the companies available on Canstar’s database with links to providers’ websites. The information displayed is based on an average of six trades per month. Please note the table is sorted by Star Rating (highest to lowest), followed by provider name (alphabetical). Use Canstar’s Online Share Trading comparison selector to view a wider range of online share trading companies.

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This content was reviewed by Content Producer Marissa Hayden as part of our fact-checking process.

Mena Theodorou is a digital currency veteran, accomplished IT professional and co-founder of Australia cryptocurrency exchange Coinstash.

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