On this page, we will explain some vital considerations before investing. We will also cover potential pitfalls to watch out for and provide you with valuable resources to help you invest responsibly.
What should be considered before investing?
You can never be too sure about your investments. That’s why it’s crucial to weigh investment decisions carefully before carrying them out. Here are a few points to consider:
Budgeting
Like any other financial undertaking, you must have a budget for your crypto investments. This plan allows you to cover your essential needs while building your portfolio.
Remember, the crypto market is highly volatile, and you can always lose all of your money. So, it’s prudent to invest what you are comfortable losing. Only increase your crypto allocation after thoroughly reassessing your needs and financial situation.
It’s also important to clarify whether you’re in for the long haul or the short term only. That will guard against locking up funds you may need shortly while you’ve invested them over the long term.
Moreover, avoid investing your whole crypto budget in one project or asset. Doing so could lock you out of better opportunities that may arise later.
Don’t invest mindlessly, either. Instead, have a strategy for when and how often to invest. This way, you can size your different holdings appropriately.
Research
A common mantra among traditional investors is to only invest in what you know. This thinking couldn’t resonate better with crypto investments. So, understand what you’re getting into before making that jump.
Your starting point should be where a particular asset derives its fundamental value. Consider its utility, token distribution, and the quality of the development team. Again, consider its attractiveness to renowned investors and profitability within its niche.
The project’s website and whitepaper should adequately cover most of that information. Alternatively, you can find it on BanklessTimes’ coverage of particular assets, data aggregation sites like CoinMarketCap, and project reports.
Building your knowledge of the basic crypto concepts is a big boost for your investment journey. That’s because mastering topics like crypto basics, using exchanges, wallets, white papers, etc, improves your overall grasp of the sector’s workings. In turn, this helps you make informed investment decisions.
The good thing is that there are many sites with extensive coverage of that material. These include Investopedia and education pages of leading crypto exchanges such as Coinbase and Binance. You can also dig into our articles on crypto exchanges, wallets, and brokers.
Once you’re ready to proceed, buy your crypto from trustworthy platforms only. Store it safely and exercise utmost care when transacting.
Time
Another aspect that you must consider as you embark on your investment journey is time. Crypto trading can be involving. So you need a good balance of the time you’ll need to grow your holdings vs meeting your other needs.
First, you must dedicate ample time to researching the different aspects we’ve mentioned above. Similarly, set aside enough time to familiarize yourself with your trading platform of choice through virtual trading.
Consider the different investment strategies you could use and how much time they would require. Recognize that some processes and methods, like day trading in contrast to holding, will demand more time.
Expectations
One aspect that will work for you when investing is tapering your expectations. The media is awash with sensational reports of overnight crypto millionaires/billionaires, which can be misleading. Yes, some crypto assets have registered remarkable gains, but that’s often after years. Others have either stagnated or lost value with no hope of recovery.
That calls for proper planning before committing your funds to any crypto project. Know your reason for entering the space and craft a viable exit plan. Crucially, set realistic timeframes for your holdings.
What to be mindful of?
The crypto sector is still young, with many regulatory gray areas. As such, there are many pitfalls that can derail your investments if you are not careful. Some of the common ones include:
Rapid fluctuations or changes in the market
Volatility is second nature to the crypto markets, so brace yourself for frequent and significant price swings. Just as it’s easy for you to make a killing in a few minutes, you can lose it all in an instant.
These price swings can fill you with either hype or FOMO. But you must control these emotions because they can blind your decision-making. Take all the hype about a coin or project with a pinch of salt, and only commit funds after doing your due diligence.
News, economic factors, and celebrity comments on an asset can dramatically shift its value. So, keep abreast of these happenings. This unpredictable nature of the crypto market underscores the need for investment plans and exit plans. So, determine your ideal profit margins. Again, don’t gamble or let FOMO take hold of you.
Putting all your eggs in one basket
A common mistake in traditional investing is putting everything in one basket. That’s even costlier in the crypto space, where the risks are significantly higher. This understanding makes seasoned traders intentionally distribute their funds across projects and sectors.
By diversifying, you hedge against potential losses in some of your holdings. If one or several fail, another or others will do well, shoring up your portfolio. You can put your funds in different crypto sectors such as smart contracts, DeFi, Web 3.0, Gaming, CeFi, Payments, and Oracles.
Another aspect to consider is how you store your crypto assets. Cold storage can be ideal for investors who are confident about keeping their seed phrases safe. Alternatively, you can hold your coins on multiple platforms or apps to mitigate hacks and other crypto scams.
Scammers
The proliferation of scams is a leading cause of many people’s misgivings about the sector. This reality calls for vigilance in all transactions to avoid falling victim to common crypto scams.
Be cautious about celebrity-endorsed crypto projects, as some popular figures use them for personal gain. These work in cahoots with fraudsters to push dubious projects/assets for money. Con artists can also steal the public profiles of renowned personalities to lure their unsuspecting fans to scam investments.
Additionally, look out for fake ICOs. Ensure an actual project is behind the offering before committing your funds. Otherwise, you might end up being a victim of rug-pulling. Again, guard against phishing attempts by only transacting on authentic apps and sites. Cybercriminals have advanced in cloning sites, so be careful about what links you open. Similarly, check that the emails you receive are from verified platform addresses.
Avoid falling for hype, which is good fodder for pump-and-dump schemes. And be watchful that you don’t fall prey to Ponzi schemes. You can do so by ascertaining a project’s authenticity before investing your money.
Unregulated exchanges or brokers
As we’ve stated earlier, the crypto space is still in its infancy. So, it isn’t uncommon to find unregulated platforms offering investment services, a major red flag for any security-conscious investor.
Some unregulated platforms employ dodgy practices, such as frontrunning. Others, like Mt. Gox and QuadrigaCX, have vanished with depositors’ funds. Therefore, use regulated platforms only, as these fall under the ambit of investment regulators where they operate. These regulations help shield you from potential fraudulent activity.
ICOs (Initial Coin Offerings)
ICOs are the lifeblood of many crypto projects, allowing them to raise much-needed funds. Snapping up an ICO offer can be lucrative but it isn’t without its risks.
These investment vehicles are typically unregulated. They may lack sound management, be underfunded, or be outright scams. To stem these risks, you should know the ins and outs of any project before deciding to participate in it. Additionally, the coin might underperform once it starts trading. Thus, only invest the much you’re comfortable losing.
Private keys
Your private keys are a key component of your ownership and management of crypto assets. Therefore, their security is of utmost importance.
Keep your private keys private. Understand that no genuine project will ask you to send them via email or other online means. Store them and your seed phrases in a secure place where only you can access them.
Transaction Testing
It’s good practice to test your transactions with small amounts first. Send the minimum account opening deposit and top that up after confirming the platform’s legitimacy.
Doing the same for every transaction might seem taxing, but it’ll save you the agony of sending large sums to the wrong recipients.
Investing with assets you don’t have
Crypto investments mirror traditional finance in many ways. For instance, you can use leverage to buy assets just as you’d use it to acquire stocks. But be careful not to take on unmanageable debt.
Exercise similar prudence when margin trading and shorting. Whereas these strategies can increase your profitability, they are very risky. You could lose your funds, leaving you in debt. Therefore, only resort to them when you fully grasp their downsides.
To guard against potential losses, use your platform’s risk management tools, such as take profits, stop losses, and protect your negative balance.
Mental effects of investing
All investments are mental. Expect your crypto journey to impact you psychologically. Realizing that you could lose your investments may cause you distress that increases when you finally do. That’s why we insist that you invest within your risk profile.
Additionally, the volatility of the crypto market can upset your emotional balance. You could get overly anxious by constantly tracking price movements. In this situation, choose an investment strategy that frees you from regular monitoring, such as hodling.
Besides, crypto trading can be arduous and eat into your time for other critical engagements. With this realization, you must balance your investment activity and other pressing things. Vary your strategies when you find that trading interferes with other facets of your life.
Remember to guard your mental frame and seek advice and support when overwhelmed.
Additional resources and help
The following resources may prove handy should you need further information and guidance:
