While cryptocurrencies can be a lucrative opportunity for investors looking to make huge profits, there is a substantial risk involved in this kind of investment/trading, especially for new investors who have little idea about how cryptocurrencies work.
Cryptocurrencies are highly volatile assets, especially because they are not regulated or governed by centralized entities and generally have no physical assets to back their values. Moreover, the risk of a new cryptocurrency turning out to be a scam is quite high these days, which is why all investors must do their due diligence before investing in cryptocurrencies. Here are a few things to get you started.
Not all cryptocurrencies have a real value
In fact, most of the digital currencies out there are exactly that - virtual currencies with no real physical value. The value of these cryptocurrencies is purely driven by user sentiment and market demand. So, be very careful when you select cryptocurrencies for investment.
Stablecoins are a good alternative for people looking to invest in low-risk cryptocurrencies. Mr Mint, for example, is an asset-backed token - a mining token whose value is backed by real physical assets and carries significantly lower risk than many other cryptocurrencies.
Crypto markets are always operational
Unlike traditional markets that operate under fixed timings and generally on weekdays, crypto markets are always operational, 24 hours a day, 7 days a week and all days of the year. This is a good thing because it means you can trade digital currencies at any time and “buy the dip” as and when it happens rather than having to wait for the market to open the next day.
Cryptocurrencies are not legal everywhere
There are countries like El Salvador that have accepted bitcoin as a legal currency or medium for payments. Then there are countries that have outrightly banned cryptocurrencies and do not support the use and trading of these digital currencies. So, make sure to find out whether your country allows crypto trading and what your options are. For example, depending on your location, you may or may not be allowed to buy crypto using fiat money.
Beware of Scammers
Cryptocurrencies and ICOs (Initial coin offerings) have very soon become a very popular means for startups and companies looking to raise funds for their projects. This has also attracted many scammers who try to leverage this fundraising tool to loot investors through ponzi schemes. So, be aware of such scam projects and avoid investing in cryptocurrencies that seem too good to be true.
Have an investment strategy
An ideal investor would always have an investment strategy in place. This should include things like how much money you can safely invest, how much risk you can take, when you should exit, etc. Setting a limit order on your crypto trades is another good part of an investment strategy. Also, try and diversify your portfolio across multiple asset classes, including cryptocurrencies, equity and debt to avoid losing all your money when one asset class fails to perform.
Do your own research
Everybody knows it, but most investors still fail to do adequate research before jumping into the crypto-wagon, and as a result, they end up either losing all their money or being scammed in a ponzi scheme. Cryptocurrencies are an extremely risky asset class, and one should always research and invest in good, valid & genuine projects.