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Cryptocurrencies have become some of the most lucrative investment assets in this century. Since their launching over a decade ago, they have risen to hit a market valuation exceeding $2 trillion.
Some analysts compare them to the era of the gold rush. They represent the biggest wealth transfer in modern times.
This success has made millions of individuals invest in them. However, most investors don’t consider the risks involved. Just like all the traditional assets, investments in cryptocurrency do not guarantee returns.
It is normal for a huge number of investors to lose their investments. The nature of cryptocurrencies makes them high risk high rewarding.
Before investing in cryptocurrencies, below are some of the things you need to know.
They are highly volatile
Volatility is the tendency of an asset to experience huge price movements within a short period. These types of assets need experience and good risk management skills to successfully invest in them.
Before investing in cryptocurrencies, you need to have a well-defined strategy. This acts as a guide on how to approach the market. It helps reduce trading decisions made emotionally or driven by greed.
Emotional trading results in losses as the trader does not make objective market decisions. With volatile assets, Small market triggers cause huge price movements.
As an example, there have been some cryptos like Bitcoin experiencing price movements of up to 70% within a few days.
This amount of volatility makes cryptocurrencies riskier but more rewarding investment assets.
For experienced traders, volatility is an opportunity for higher rewards. However, this requires time to master. You also need a great risk management strategy to trade in volatile markets successfully.
This helps define when to invest and when to stay away. You can also explore other strategies like the use of Stablecoins as hedging tools against high volatility.
Since cryptocurrencies are new financial assets in the world, countries are yet to agree on a uniform regulatory approach. Current regulations are unique to individual countries and cover various aspects of cryptocurrencies these include usage, trading, and taxation.
As an example, some countries have imposed a total ban on all activities on cryptocurrencies whereas there are those with bans on specific currencies.
As an investor, it is necessary to understand the regulatory environment governing cryptocurrencies. This ensures any investment you undertake is within and protected by the law.
Regulations also apply to the brokers that offer investment platforms. Always ensure to a legal broker to avoid falling prey to criminal platforms.
Cryptocurrencies exist for a specific reason. Every crypto is unique in its creation. Below is a breakdown of some of the roles played by cryptocurrencies.
- Transactional currencies
- Money remittance currencies
- Meme coins
As an investor, it is useful to understand the use and technology driving a cryptocurrency before investing in it. This helps evaluate its future viability, a key piece of information needed to assist make an investment decision.
Uses of a specific cryptocurrency are contained in the white paper. This is the document that outlines the technology behind currency creation, its uses, and the sites you can trade in it. Developers release it during the currency launch.
Understanding the crypto use and helps identify the one with the most potential in offering future returns. With thousands of cryptocurrencies in circulation today, it is becoming harder to differentiate genuine from fake ones.
This has created the probability of criminals developing currencies solely meant to fraud gullible investors. They are commonly referred to as Ponzi Currencies.
Cryptocurrencies pricing varies per currency. Bitcoin is currently the most valuable crypto in the market with an average price of $50,000 per coin. As an element of supply, pricing remains a key factor in making investment decisions. This determines the;
- Amount of capital needed to make the investment
- Optimal leverage necessary for making trades
- Risk appetite levels
Pricing and supply
In free markets, pricing is an element of demand and supply. To achieve this, cryptocurrency developers use various approaches to influence their prices. Some have an optimal supply cap whereas others have no caps.
As an example, Bitcoin leads the group of cryptocurrencies with a supply cap of 21 million coins. Such a supply cap will always influence the price.
Contrary, other currencies like Ethereum have an unlimited supply.
Finally, there are cryptocurrencies known as Stablecoins. These are cryptos whose value is based on an existing monetary asset. An example is Tether. Stablecoin price tends to follow that of the pegging asset. By pegging Tether to the dollar, its price closely mimics that of the dollar.
Pricing remains a key factor to evaluate when investing as it helps determine the viability of an investment.
Brokers are the intermediaries that facilitate investing in cryptocurrencies through offering platforms that connect buyers and sellers.
Trading in cryptocurrencies requires you to have an account with a broker. Once the account is ready, the broker provides you with a wallet whereby you top up enabling the placing of market orders.
Opening an account with a broker requires providing your identification documents. These may vary depending on the country.
It is important to choose brokers that are regulated and with a good reputation. This minimizes the risk of giving your information and funds to criminal entities. Due to the nature of the industry, illegal brokerages have popped up with the sole aim of conning the naïve investors.
Brokerage fees add up to the cost of trading. These are fees levied by a broker to facilitate your transactions. Usually, they vary among brokers. Hence, you should only settle for the broker offering the best rates. Fees have a direct effect on the profits. Successful cryptocurrency investment requires maintaining the costs as minimal as possible.
Leverage is the amount of credit the broker extends to allow an investor to make a bigger trade than their capital allows. It is a loan service that brokers offer to their customers. Before settling on a broker, ensure you understand their leverage levels and costs.
This works well if the investment is profitable. However, it also results in bigger losses if the investment is not profitable. Always chose the leverage that you can handle. The amount of leverage given is mainly based on the account capital size.
Investing in cryptocurrencies has its pros and cons. It requires due diligence and a lot of knowledge in the market is becoming a successful investor. These elements are key to becoming a successful cryptocurrency investor.
Today, the cryptocurrency market offers more opportunities than ever before. As we continue to understand them and governments strengthen the regulations, it is inevitable more investors will take notice and jump in making the market bigger and more lucrative.