Cryptocurrency is one of the financial asset classes that many fear to pursue. At least for those investors with conservative risk profiles. It’s even scarier for many beginners who have yet to understand the ins and outs of the asset. The technology behind the digital currency, however, is highly secure, immutable, and comes with added security measures, such as an AI smart contract auditor. The scary part comes from external risk factors, most of which you can counteract, even as a beginner.
Is cryptocurrency right for you?
Before investing or trading in anything, the first step is to always understand whether an asset class is the best option for you. Crypto is different from stocks, commodities, and other assets. But they all have their pros and cons.
- Cryptocurrencies offer traders and investors a solid investment option, but they’re not for everyone. Because of the highly volatile nature of the asset, you must be ready to take on the significant risks that come with it.
- Investing in bitcoin and other digital currencies is a good diversification strategy, but sharp swings in the crypto prices can potentially lead to huge losses in just hours.
- It’s one way to protect your portfolio against inflation, but it’s also vulnerable to regulatory changes. This is why experts suggest that no more than 10% of your portfolio should make up high-risk investments, including cryptocurrencies.
- Blockchain is well known for offering security, which is one of the benefits it offers businesses using digital currencies. It’s not entirely immune to hackers, however.
- To truly succeed in cryptocurrencies, long-term investing is the appropriate approach. In terms of trading, a buy-and-hold strategy is a better option than day trading.
There’s upside potential to cryptocurrencies, but you first need to understand the risks involved before you get involved with it. Make sure to research the market and understand the kind of investor or trader you are. In the world of digital currencies, being conservative won’t fly.
How to Choose a Cryptocurrency
There are hundreds of cryptocurrencies to choose from, some of which are headed by big projects. It is easy to think that going with the big guys might be the best option, but less-established crypto products still have potential.
Utility
How a cryptocurrency is used matters and will dictate its potential for investment and trade.
- Bitcoin is popularly used as a payment method or as a store of value, sending and receiving value without going through an intermediary.
- Ethereum is popularly used for smart contracts and decentralized finance applications.
- Smaller tokens or altcoins help keep the market diverse and competitive.
Fundamental Characteristics
Regardless of the size, there are certain characteristics of cryptocurrencies that you should look into when doing your research.
- Token supply, or the number of total coins or tokens in existence
- Network fees required to complete transactions on the blockchain
- Token distribution process
- Inflation or emission rate
- Burn mechanism
Popularity
If you’re interested in trading or investing in less established crypto assets, there are important factors you must consider.
- Project head: Check who’s leading the project. Consider it a green flag if it’s someone well-known in the digital currency world.
- Development: The risk involved is much lower if the currency is already developed. A project still looking to raise money to develop a digital currency could fall through.
- Investors: if there are major investors involved, consider this a positive sign. After all, they’re known to invest in anything with potential.
- Ownership: It’s one thing to just own currency or tokens and another to own part of a company. You have more potential for earnings with the latter.
Cryptocurrency Risks
When it comes to digital currencies, both the project and the market can change quickly, increasing potential downsides. This is why it’s important to be fully risk-aware before trading or investing in cryptocurrencies.
Price Volatility
- Due to market sentiment and speculation, prices of cryptocurrencies can rapidly and unpredictably change. This results in a significant drop in the asset value, which can potentially wipe away gains for many short-term investments.
- While short-term investors make a profit when buying at the right time, they can also lose money if they fail to sell before a crash.
Scams and Frauds
Digital currencies are vulnerable to scams, fraud, and phishing attacks because of their decentralized nature. Unregulated and without government backing, they are ripe for exploitation.
- Phishing as smishing schemes trick unsuspecting victims into clicking links in emails or text messages that contain malware or can lead to ransomware attacks.
- Fake websites and listings are set up to trick victims into paying for goods and services that don’t exist.
- The pump and dump strategy is used to get people to invest in super-hyped cryptocurrency, promising huge returns, but later dump worthless tokens on their victims.
There are other ways that scammers exploit the popularity of cryptocurrencies. As a beginner, it’s important that you learn how to avoid crypto scams and better protect your portfolio. If you want to verify the validity of a smart contract, use Hashlock’s AI Audit Tool.
