Investing in cryptocurrency is not for the faint-hearted – a fact that has become increasingly apparent over recent weeks.
After making some impressive gains at the end of last year, nearly all the major digital currencies have since come crashing down, only to gather momentum once again.
These violent swings have triggered a fresh surge in warnings about investing in digital assets, and the mention of gambling is often hot on the heels of any talk about bitcoin and its peers.
It’s the lack of understanding about what crypto is – and the vagueness about what constitutes its value – that makes investments in these assets seem like a full-blown bet. Clem Chambers, entrepreneur and author, says the risks associated with these assets are huge because nothing is yet “normal”.
Cryptocurrency is extremely risky, but that’s not to say it isn’t worth considering as an investment. So how can you capture the reward of this revolution and minimise the risks of getting badly burnt?
Don’t skimp on research
Cryptocurrencies are different from traditional assets, but that doesn’t mean you should dismiss due diligence. Evaluate each coin before you invest, making sure you ask what the potential market is, what sets it apart from competitors, who is backing the asset, and what factors could cause the price to stumble.
Another big risk factor when investing in digital currency is how easy it is to buy and sell the coins. You don’t want to be invested in an asset with no way of getting out, so find out how many exchanges the coin is on, and what the trading volume looks like.
Iqbal Gandham, UK managing director at one of the largest cryptocurrency retailers, eToro, says: “It’s important to remember that all cryptocurrencies are different. Investors need to take the time to understand the business model behind each coin and decide for themselves which one is a worthwhile investment.”
If you don’t have the time or knowledge to do this, you could consider copying the strategy of an experienced trader, which – as Gandham points out – you can do easily with eToro.
Remove your emotions from the equation
Cryptocurrency exchanges operate on a 24/7 basis, which makes it tempting to watch movements every second of every day. It’s also hard not to panic and want to sell out when you see a third of an asset’s value disappear in one day.
Of course, cryptocurrency investors need to be prepared to ride out huge fluctuations, but one way to prevent your emotions from getting the better of you is to stick to an investment strategy, or set some principles to guide you along the way.
In the same way that you might treat shares in traditional investments, having a stop-loss order in place – which automatically triggers an order to sell if the asset falls below a certain value – will prevent you from suffering catastrophic losses.