Investing in cryptocurrencies share many similarities (but also differences) from investing in any other type of asset. There are a wide range of cryptocurrencies that perform a number of different functions for the networks they are part of. When investing in cryptocurrencies you should think about your appetite for risk, and the length of your investment horizon.
Investing in Bitcoin and other cryptocurrencies is a great way to diversify your investments, but it also involves high risk. So before you jump in, it’s essential to understand some basic concepts and principles. There’s more to it than just buying some crypto and hoping for the best.
Investing in Bitcoin or Altcoins
For newcomers to crypto, Bitcoin is usually the first stop when it comes to investing. It’s the most famous blockchain project and the largest cryptocurrency by market capitalization.
However, there are thousands of different cryptocurrencies (altcoins) out there. Some altcoins have their own blockchain, while others use a pre-existing network (for example Ethereum). Every project has a different proposal, each with its own potential risks and benefits.
Whether you want to invest in BTC only or multiple cryptoassets is totally up to you. Some prefer to stick to BTC; others prefer to diversify their holdings with altcoins.
On the one hand, asset diversification removes the risks of investing in only one project. If you have multiple assets, you are less likely to lose significant amounts if one of them fails. On the other hand, altcoin investments can be risky and, unfortunately, there are many scams around. So it’s very important to do your own research before taking risks.
With the massive amount of coins available, it’s hard to know where to start. You need to have a clear recognition to invest instead of going with investing flow blindly.
Trading or Investing
Investing involves picking assets that you believe in and holding over a longer time. Such a strategy involves a less active time commitment and usually carries much less risk. In contrast, trading aims to make short or medium-term gains through regular buying and selling. Becoming a good trader takes a lot of time and practice. A trader needs to develop more complex strategies, dedicate more time to analyzing markets and trading platforms, and handle more risk. They also need to consider the money spent on trading and transaction fees.
Keep in mind that cryptocurrency markets sometimes present more volatility than traditional ones. While traders need volatility to make profits, high levels of volatility may also bring high risk.
For beginners, investing is by far the easiest and safest option. Investors are usually thinking in terms of years, so short-term price changes aren’t that important. A decision to invest is based more on the fundamentals of a coin (how solid is the project and how likely it is to succeed in the long run).
Some prefer to invest and not worry about short-term fluctuations. Others prefer to trade often in an attempt to maximize profits. Some even do both at the same time. It all depends on your strategy, profile, and risk tolerance.
Again, the decision is yours, but you should never invest or trade with funds that you cannot afford to lose.
Fundamental analysis vs. technical analysis
Deciding on what will make a good investment needs some analysis work. The type of analysis will depend primarily on investing or trading, but both fundamental and technical analyses can be useful.
As mentioned, short to medium-term price changes aren’t so important when investing (or HODLing). In general, long-term investment is more concerned with the intrinsic value of a coin or project, which relates to fundamental analysis (FA).
Fundamental analysis involves assessing the potential of an asset based on the project as a whole, including its utility, team, whitepaper, development, marketing, management, reputation, long-term goals, and other factors.
In contrast, technical analysis (TA) considers previous price action and volume data to try and predict future price movements. The technique usually involves candlestick charts and TA indicators, such as moving averages and trend lines.
What should I do with my cryptocurrency?
Buying, selling, and holding crypto are some of the strategies you can use when investing or trading crypto. When it comes to long-term holding, you can choose to keep your cryptocurrencies in your Binance account or transfer them to an external cryptocurrency wallet.
What you should think about when choosing what to invest in?
First and foremost, it’s important to understand your appetite for risk. While 2020 has seen Bitcoin’s volatility stabilize, it’s still well above what you’d see in other asset classes and stocks.
But the good news is that the levels of sophistication around investing in crypto have come on significantly in the last 12 months.
While many crypto investors choose to buy and hold a single cryptocurrency in a wallet, there are now institutional investment grade products and services that can shield you from direct exposure to an asset’s performance, hedge the performance of one cryptocurrency with another, and even allow you to earn interest for taking part in a network, something we’ll be exploring in part two of our investment guide.
Improving your knowledge is a good way of reducing your overall investment risk, leading to more informed decisions. It's easy to panic-sell an asset based on emotion, but the chances of this happening are much lower when you study up on investment and trading.