One of the most important issues to address in investing is risk tolerance. Among investors, risk tolerance varies according to investing timeline, ultimate goals, and overall comfort with the possibility of losing money. People with high risk tolerance accept that possibility for the chance to increase their money significantly.
One of the investment opportunities currently available to investors with extremely high risk and chance of reward is cryptocurrency. If you decide to invest in cryptocurrency, you need to do so strategically to minimize the risk involved. However, you also need to recognize that the risk is still very high despite a strategic approach. Some tips to consider as you invest in cryptocurrency include:
1. Understand the investment you are making.
One of the biggest mistakes that people make when they invest in cryptocurrency is purchasing coins that they do not completely understand. Usually, this happens because people get swayed by the media and other trends to make impulse decisions. Rather than act impulsively, take the time to understand what makes a particular coin special. Doing this will help you judge whether it has a long-term future or rather will only show a short spike in value.
All cryptocurrency companies publish white papers that situate their product among others on the market. At the very least, read through these white papers and try to understand the thinking and motivation behind the coin you are interested in. Be sure you can articulate how that particular coin operates and how the company plans to make money. If these questions are not clearly answered in the white paper, that is a red flag.
2. Set up a cold wallet for your cryptocurrencies.
When you purchase cryptocurrency, you need a digital wallet to store the coins. Many investors do not understand that there are two different types of digital wallets: hot and cold. The default wallet is a hot one. This type of wallet stores cryptocurrency online so that it is immediately accessible for your needs.
Beginning investors often choose to make use of a hot wallet, but as time goes by they should start to consider a cold wallet, which stores the coins offline. The benefit of offline storage is that the coins then remain completely protected from hackers—provided that the wallet is set up correctly. You should store the majority of your cryptocurrency in a cold wallet to keep it protected. Any cryptocurrency you might use regularly can go in a hot wallet, but you should recognize that there is some risk involved in this.
3. Prepare yourself mentally to encounter volatility.
Cryptocurrency has received criticism for being a fad. While all the signs point to cryptocurrency remaining a major focus of investors, the industry is expected to remain volatile for the near future. Many investors react emotionally to volatility and thus take rash actions that they later regret.
You can avoid doing this by expecting that volatility. With this expectation in place, you can take a step back and think about your strategy moving forward. In some cases, you will want to hold until the value is restored. In other cases, you should liquidate because the coin is folding. Whichever the case may be, it is important to think about it rationally rather than emotionally.
4. Diversify your portfolio of cryptocurrency.
Just as with every investment portfolio, diversification is key when it comes to cryptocurrency. If you invested in just a single type of coin, then you could lose big if something happens to cause that coin to fold. As you consider cryptocurrency diversification, it is important to recognize that more is involved in the strategy than just purchasing a variety of different coins. There are different fundamental categories of cryptocurrency.
Each of these categories, such as stablecoin, comes with their own unique risks and potential for growth. Think about combining coins from these different categories to create a portfolio consistent with your overall risk tolerance and investment goals. Some coins have less growth potential but will also likely maintain their value. These coins can minimize some of the volatility of your portfolio.
5. Change your investment strategy when necessary.
If you have followed the cryptocurrency market, you have likely seen that even a nuanced investment strategy does not always produce the best results. This is because the cryptocurrency market is constantly changing and evolving. In other words, the strategy that works today will not necessarily work tomorrow.
The investors who make the most money from cryptocurrency investments are those who focus less on developing the perfect strategy and more on understanding the market. Importantly, no one can understand and predict the market perfectly, so be easy on yourself if you make a mistake. Continue to follow the market and make the adjustments necessary to get yourself back on track.
Julio Herrera Velutini 