Cryptocurrencies constantly make headlines. With Bitcoin, Ethereum, and other major coins reaching all-time highs, it’s natural to want to get in on the action.
But before you start buying up cryptos, it’s essential to ask yourself a few questions. Cryptocurrencies are volatile and risky, so you must ensure you’re doing it for the right reasons and that you’re prepared for the potential downside.
Here are four questions to ask yourself before you start trading cryptocurrencies.
1. Why Are You Investing in Cryptocurrency?
If you’re considering investing in cryptocurrency—whether you’re simply purchasing coins or mining cryptocurrencies—do it for the right reasons. Are you doing it because you believe in the technology and think it has long-term potential? Or are you doing it because you think you can make a quick buck?
The most successful crypto investors are passionate about the underlying technology. They follow Bitcoin, Ethereum, and emergent crypto providers on Hacker News and Twitter, and they enjoy the thrill of trying to anticipate market trends while knowing it is an unpredictable space.
Savvy crypto investors will study cryptocurrency teams’ white papers and road maps and hypothesize whether the digital currency has potential. If you think demand will increase in the coming months and years, the investment may be worth it. But that time spent doing the research and making that judgment call must also be worth it to you.
For the record: If you’re in it for the money, that’s perfectly fine. Just understand the risks before hopping on board.
2. What Can You Afford to Lose?
Cryptocurrencies are volatile and widely considered a high-risk investment opportunity. In fact, half of Bitcoin investors are “in the red,” according to an interview published on CNN Money.
The risk is so great that many credit card issuers won’t even allow cardholders to purchase cryptocurrencies with their credit cards—or they discourage doing so with lofty fees. Few cards on the market allow Bitcoin purchases, and most first-time crypto investors will be limited to the cash they have on hand to invest.
Since cryptocurrency prices can go up and down very rapidly, you need to be prepared for the possibility of losing some or all of your investment. Bear that in mind as you consider the amount of money you’re willing to put into crypto.
If you’re investing a large amount of money, spread it out over several coins (see our guide to investing in Ethereum as a next step) to diversify your risk. And don’t invest more than you can afford to lose. Remember, there’s always a chance that prices could crash overnight and never recover.
3. What’s Your Investment Strategy?
Consider how cryptocurrency will fit into your overall investment strategy. For example, are you buying cryptocurrency as an investment or as a speculative bet? There’s a big difference between the two approaches.
An investor is someone who buys with the intention of holding onto their position for the long term; they believe in the underlying technology and think prices will eventually rise again (albeit perhaps after some ups and downs).
A speculator is someone trying to make quick profits by timing market movements perfectly. They’ll buy when prices are low and then sell as soon as they’ve increased by even a small amount.
Cryptocurrency speculation has become increasingly popular, especially among people without experience investing in financial markets. Unfortunately, this often leads to bad decision-making; investors get caught up in FOMO (fear of missing out) and start buying without having a clear understanding of what they’re doing.
If you want to speculate on cryptocurrency, that’s fine—just make sure you know what you’re doing and don’t invest more money than you can afford to lose. And if you decide to go down this route, remember that the most successful speculators are those who take a methodical approach and have a solid plan. They buy when prices are low and then sell as soon as they reach their target profit margin.
4. What’s Your Exit Strategy?
Investing is easy, but selling can be hard. When the time comes to sell your cryptocurrencies, will you be able to do it? Your exit strategy, or plans for cashing out of your investment at some point in the future, is an important consideration before any investment venture; however, the wildly fluctuating costs of crypto make the formal exit plan that much more vital.
If your goal is simply to purchase coins and hold onto them long-term, then your exit strategy may be fairly straightforward: You’ll sell when (and if) prices rise high enough that you feel comfortable cashing out.
Exit plans are slightly trickier with speculative trading, however. You’ll want to sell quickly if prices start falling. You can sell directly to another person, trade on a cryptocurrency exchange, or use a peer-to-peer trading platform, such as LocalBitcoins, to cash out your crypto investments.
Each exit method has its pros and cons; for example, selling directly to another person is often the quickest way to get cash in hand, but you must find someone willing to buy your coins at the current market price. Trading on an exchange usually takes longer but gives you more flexibility regarding the price you’re willing to accept. Whichever method you choose, make sure you have a plan in place before investing any money so you know how—and when—you’ll exit your position.
Crypto Trading Isn’t For Everyone
Whether it’s financial investments or fashion, popular trends come and go; no single craze is appealing to everyone. Not every investment opportunity is a worthwhile opportunity for every person.
Some people are more risk-averse than others and don’t want to put their money into something that could potentially lose all of its value overnight. Others simply don’t have the time or patience to track crypto prices day in and day out. And then some just aren’t interested in the underlying technology enough to make informed investing decisions. If anything in this paragraph describes you, it’s probably best to steer clear of cryptocurrency altogether.
The bottom line is that there’s no shame in admitting cryptocurrency isn’t for you. It doesn’t make you any less intelligent or financially savvy; it just means this particular investment opportunity doesn’t fit your goals or interests. However, if cryptocurrency excites you and you love the idea of investing more of your time and money in understanding its trends, then hop aboard the crypto bandwagon with confidence.