While relatively new compared to other types of investments like stocks and bonds, cryptocurrencies have quickly gained traction among investors. These digital currencies — which are secured by cryptography and based on networks of blockchain technology — saw huge capital inflow in recent years up to 2021 but were dealt a critical hit in 2022 due to the sector’s largely unregulated and experimental nature.
However, the early months of this year indicate that the crypto market is steadily making a comeback, with a strong rebound in the trading prices of popular currencies. For instance, Bitcoin prices are up nearly 7% and have crossed the $30,000 mark, with this particular renewal attributed to the end of aggressive hikes in interest rates. This means that now is a good time to adopt cryptocurrencies as your virtual assets. But like any other investment, there are things you must consider before getting a stake in crypto — here are some of them.
Conduct market research
It’s crucial not to jump into the recent hype around cryptocurrencies and take stock of why you’re investing in the market in the first place. In this case, perform due diligence and research on the ins and outs of crypto — from its use of blockchain technology for decentralization to its wide range of investments, each with its own platform and function.
As this emerging financial ecosystem continues to evolve, so does the regulatory environment surrounding it. Make an effort to read up on crypto news and government regulations that set the framework for trading practices and potential risks. This way, you can decide whether to invest in crypto for the long haul or simply explore it for portfolio diversification.
Prepare for volatility
Consider how the market went through a boom-and-bust cycle in just a few years, and ask yourself whether this volatility aligns with your tolerance for risk. Buying and selling prices also tend to change very quickly, meaning traders have to be comfortable with a discrepancy between an order’s expected price and the price at which it was executed.
While this slippage is more common among beginners, understanding market spreads in crypto trading can help you iron out some of the unpredictability. Spread refers to the difference between the lowest ask offer and the highest bid offer in a trade, with trading platforms allowing you to view the exact spread of trading instruments live, whether it’s a stable or dynamic spread. A good trading platform also guarantees no slippage, provided your pending orders are executed in normal market conditions and at least 3 hours after an instrument opens for trading.
Invest in cybersecurity
One important aspect of cryptocurrency is securing your private keys, as these codes grant you control and access over all the digital assets associated with a specific cryptocurrency address. Unfortunately, there have been cases where Bitcoin ATMs were hacked, and private keys were compromised, leading to crypto theft and owners losing access to their funds permanently.
Although Bitcoin ATM operators can do their part in keeping their servers secure through firewalls and VPNs, individual crypto owners also have the responsibility to prioritize crypto cybersecurity. Beginners can benefit from a reputable custody provider who can secure the asset themselves, while the more proactive traders can look into transferring their holdings offline to a private cold wallet. Compared to hot wallets, which are convenient but also vulnerable to hacking, cold wallets use a hardware device for crypto storage and are thus more secure.
Ultimately, whether or not crypto is the right investment for you depends on your investment goals, your level of risk tolerance, and your ability to comply with cybersecurity protocols. As with all types of investment, strategic planning and risk management can help you ward off unwanted surprises and huge losses.
Image Courtesy: Pexels
