Crypto investing is popular and can be thrilling, but it’s essential to understand that cryptocurrencies are highly volatile. Prices can swing drastically, and while there’s potential for gains, risks are equally high. Here’s a look at four guiding principles—or “commandments”—for those new to crypto investing, aimed at keeping your investment journey smoother and more informed.
1. Only Use Money You Can Afford to Lose
Cryptocurrencies, unlike stocks or real estate, don’t have underlying assets or cash flows to support their prices. For instance, Bitcoin’s value doesn’t rely on any company’s earnings or physical assets—it depends largely on market demand and investor interest. Because of this, crypto prices can be influenced by factors like regulatory changes, economic news, and even rumors.
Here’s an example: In 2021, Bitcoin’s price dropped by more than 50% within a few months following a mix of regulatory announcements and interest rate concerns. So, only invest money that won’t impact your financial well-being if lost. Think of crypto as an asset with high upsides but equally high risks.
2. Choose Established Coins
In crypto, some coins have a larger “market cap” (total value of the coin’s supply in circulation) than others. Larger coins, such as Bitcoin and Ethereum, often have stronger track records and wider acceptance, making them more stable options in a volatile market. According to recent data, Bitcoin and Ethereum account for over 60% of the crypto market value, highlighting their popularity and relative stability compared to smaller, newer coins.
Larger coins usually have better liquidity (ease of buying and selling) and security, often resulting in lower risk. Choosing popular coins can help balance the high-risk nature of crypto with a bit more predictability.
3. Keep a Diversified Portfolio
Crypto is one asset class, but putting all your money in crypto can expose you to significant risk. In general, diversification—spreading investments across different asset types like stocks, bonds, and crypto—can reduce the potential for loss. Treat crypto like any other asset in your portfolio: a part of a bigger plan aimed at achieving long-term goals.
For example, if your portfolio includes 60% stocks, 30% bonds, and 10% crypto, you’re better protected against severe losses than if 100% was in crypto. Diversification can be especially useful for beginners, reducing the emotional stress that comes from big market swings.
4. Consider Crypto ETFs for Easier Access
A spot Bitcoin or Ethereum ETF (exchange-traded fund) is a regulated investment option that provides crypto exposure without directly owning coins. ETFs pool money from investors to buy crypto assets and list these funds on traditional stock exchanges, allowing you to access crypto within a familiar framework.
For instance, spot Bitcoin ETFs are structured to make crypto more accessible and potentially less risky. They’re overseen by investment firms and follow specific regulatory standards, offering a safer alternative for investors wary of direct crypto trading and storing private keys. However, availability varies by country, so check if these options are accessible in your location.
Final Thoughts
Investing in crypto requires caution and planning. Make sure you’re only using money that you won’t miss if the market goes down, stick with well-known coins for a safer entry, and always keep crypto as just one part of a diversified portfolio. If you’re new to this space, crypto ETFs offer a more accessible way to enter the market.
Finally, stay informed on legal requirements to avoid unexpected tax issues. Crypto can be a rewarding but volatile journey, so having these guiding principles in mind can make a difference in achieving a smoother investment experience.
