What’s something Snoop Dogg, Justin Bieber, Ashton Kutcher, and Gwyneth Paltrow all have in common? They’re investing big time in cryptocurrency. Not only that, they’re only among hundreds of celebrities that are doing the same.
It’s hard to deny that a crypto investment is a good one. Just a decade ago, cryptocurrency was “nerd money” that most investors scoffed that. These days, it’s a nearly trillion-dollar industry, and you’re missing out.
Hold your horses, though. Before you sell off your daughter’s dowry, you’ll need some solid crypto investing strategies. You don’t want to be like FTX’s abandoned account holders, clamoring for government redress.
In this guide, we’ll examine 10 key points you should take into consideration as you build crypto investing strategies.
1. Cryptocurrency Is Evolving
Cryptocurrency is very, very young. It first appeared in 2008 as a Bitcoin proof of concept by an unknown developer. Less than two decades after its creation, it has taken the world by storm.
The foundational technology behind cryptocurrency–the blockchain–has remained the same. How we validate the blockchain and fuel it has been ever-evolving. Even now, it’s not set in stone:
Changing Validation Methods
In the beginning, cryptocurrency was proof-of-work. Simply put, computers that solved the blockchain’s complex equations got coin for validating transactions. It was supposed to democratize and decentralize cryptocurrency, but it really just came down to luck.
Plus, proof-of-work ended up centralizing the blockchain more. Supercomputers in China and Russia were out-mining Western cooperatives. Whoever had the biggest, costliest rigs became kings of the Blockchain.
Then there was the energy concern. A single Blockchain transaction under proof-of-work is unacceptably energy-intensive. One transaction is enough to power your home for 50 days.
To solve this, crypto engineers invented proof-of-stake. This gave control of the Blockchain to those who owned more crypto. It was meant to solve the energy and centralization problems.
Instead, proof-of-stake just created different problems. To this day, crypto developers are trying to provide a better solution.
Taking Evolution into Account With Your Crypto Investing Strategies
So, how does this factor into your crypto risk management and strategy? Simply put, embrace change. If frequent change scares you, then cryptocurrency is not for you.
Cryptocurrency is a modern currency for the modern world. It uses encryption and functions independent of financial institutions or governments. Yet as many crypto investors would say, we are in the “early days.”
Every currency in the world had early, rough patches. Whether it was clam shells or Chinese paper vouchers, there were growing pains.
One thing remains certain: cryptocurrency is only increasing in value. More people invest in it every year, not less. The future is bright, but expect a rocky road.
2. Cryptocurrency Is Volatile
If you are new to investing in cryptocurrencies, you’ve probably heard one thing: it’s volatile. It’s often the first con on the list.
Volatility is a concept we don’t hear about in relation to fiat currencies. The dollar, the euro, and other major standards tend to remain very stable. This is due to government influence.
We’ve grown accustomed to having money with consistent value. If your boss pays you with a $2,000 check, it’s still $2,000 when you cash it. A year later, that same $2,000 only suffers a drop of 2-3% with inflation.
Despite the constant, this is not a guarantee. Just look at Venezuela. In response to economic crises, their currency was so worthless people were discarding big bills on the roadside.
Stability is an illusion maintained by governments and markets. It can collapse at any time. Unfortunately, cryptocurrency is still evolving on the stability front, too:
How Volatility Works
Cryptocurrencies do away with centralized manipulation. As a result, they tend to be very volatile. Regular price fluctuations are normal.
One day, a single Bitcoin could be worth $1,000. The next day, $500. A few months later, it could be triple the value.
So, investing in cryptocurrency comes with a ton of volatility. That’s just the name of the game.
Factoring Volatility into Your Crypto Risk Management
With traditional investing, you can rely on long-term investments. Mutual funds, Roth IRAs, they all grow over time and remain stable. Cryptocurrency will force you to be more adaptive.
First, you may have to employ riskier methods like day trading. You will rarely hold onto cryptocurrency for long periods. You may cash it out more frequently than anticipated.
Second, you will need to do thorough market research. Cryptocurrency isn’t like company shares or futures. Performance depends on entirely different metrics.
Finally, it’s much more speculative than regular investing. With stocks, there’s usually some guarantee of year-over-year profits. The same cannot be said for cryptocurrency.
3. Cryptocurrency Always Has Transaction Fees
The benefit of traditional investing if you have a wide array of options. If you don’t like stocks, you can try bonds. If you don’t like mutual funds, you can try ETFs.
Most of these options have transaction fees and maintenance fees. Not all, though. Some only require an initial share buy-in and nothing else.
Cryptocurrency always costs money to trade. The reason for this is a concept known as “gas.”
What Is Cryptocurrency Gas?
Cryptocurrency does not function for free. It requires miners who front costly rigs to run it. As you would expect, they have to get a return on their investment.
Much of their money comes from mining the Blockchain through proof-of-work or proof-of-stake. In addition to this, many currencies operate off of transaction fees. We call this “gas” in the community.
To run the “automobile,” you have to put in some “fuel.” You have to pay the miners and the middlemen their due. That means for every transaction, a portion goes to collectives and exchanges.
There’s always an added cost. That cost can add up quickly, eating into your budget.
It shouldn’t dissuade you from trading. Rather, it should be something that plays a role in how you trade.
Including Fees in Every Crypto Investment
Simply put, always calculate with fees as a given. This will affect your investment maintenance costs. Every portfolio should account for upkeep money, anyway.
Be careful when selling and buying at a higher ratio. Your gas fees will increase commensurately. As long as you don’t forget about them, they shouldn’t usually be a huge bother.
4. Diversification Is Vital
Diversification is a foundational principle in any type of investment. Investors spread out their money across multiple areas. The gains in one place balance out losses in another.
That said, you can get away without a diversified portfolio. For example, when you focus on private equity. The profit comes from restructuring purchased companies, not investing industry-wide.
The Importance of Diversification in Cryptocurrency
Take a look at any crypto exchange. You’ll notice one thing right out: there are thousands of coins. In fact, people are making new coins quite literally every week.
Many of these coins don’t make it big. Some of them are even jokes. But even the joke coins, such as Dogecoin, may become bigger than their creators intended.
Coins are the only way to invest in cryptocurrency directly. Unlike stocks, though, coins are more generalized. There are very few coins that exist for specific purposes or industries.
Developing a Diversified Portfolio
By necessity, you will need to invest in a wide array of coins. Remember, this is a volatile market. That coin you bought last week could tank before you realize it.
There are a number of ways you can diversify your crypto portfolio. Just remember that diversification is a necessity here. Sinking every red cent into one coin is usually inadvisable.
5. Scams Are Plentiful
To be clear, every financial sector is susceptible to scams. Even the greatest investors have become victims of massive swindles. Ponzi schemes, market manipulation, the list goes on.
Unfortunately, there are some bad apples out there. People who would defraud the shirt off your back if it made them a penny. It’s human nature, and you have to account for it:
Cryptocurrency Has a History of Scams
Cryptocurrency is not blameless in this regard. Google “cryptocurrency scam” and you will get millions of hits. The scammers who would sell you false futures simply moved their enterprise to the Blockchain.
We could write an entire article on this topic alone. Suffice it to say, many have fallen victim to elaborate cryptocurrency fraud schemes.
Keep your wits about you and protect your investment. Not everything that shines is gold. If it seems too good to be true, it probably is.
6. Cryptocurrency Isn’t Immune to Government Regulation
Many people in recent years have noticed how their taxes include cryptocurrency. As always, the government finds a way to get its cut. Just because cryptocurrency is decentralized doesn’t mean it’s tax-free:
Don’t Forget to Pay Your Taxes
Your money doesn’t disappear off the grid once you transfer it to Bitcoin. Instead, it’s like you invested in stocks. Capital gains will factor into your tax return next year–and you owe taxes on money earned regardless.
If you fail to pay taxes on your dividends and earnings, the Fed won’t be happy. Do your taxes and avoid unhappy run-ins with the IRS. Strategize knowing you’ll have to pay a percentage on every satoshi of windfall.
7. You Will Need an Exchange
Cryptocurrency exchanges are both a convenience and a risk. They enable you to transform dollars into coins. Aside from gas fees, they are indispensable investment tools.
Many investors may be alarmed by how many exchanges fail. Read the news, and it seems like a new one sinks beneath the waves each year.
Fortunately, the likes of Sam Bankman-Fried and his ilk have put the Fed on high alert. Investors are becoming more wary than ever. The early days of the dangerous, wild cryptocurrency west are coming to a close:
Research Your Exchange
You can prevent a bad ending by doing your research. Don’t work with the first exchange that appears on your Google search. Read about the founders, keep up with the news, and analyze.
If you smell something fishy, clear out. Being a crypto victim could cause you to lose all your money. It’s probably a good idea to invest in multiple exchanges just to be safe, anyway.
8. There’s No FDIC Insurance for Cryptocurrency Investments
Read that again. The government does not provide any insurance for cryptocurrency exchanges whatsoever. Any insurance policy or protection method is proprietary or private.
This is a hard pill to swallow if you’ve come from Fidelity or Charles Schwab. When you trust a robo-investor, you know at least $250,000 of your hard-earned green has government backing. Crypto exchanges do not.
Many companies will make promises of cold storage and reimbursement to back this up. If they go bankrupt, though, those sweet words could turn to ashes when you need them.
Smart risk management is about understanding the inherent risk in every investment. Cryptocurrency’s contemporary weakness is a lack of social safety nets to catch your fall.
Perhaps there will be a Fed parachute for crypto investors in the future. Until then, prepare for rainy days.
9. People Have Gotten Sued Big for Cryptocurrency
We’ve already debunked the myth several times that cryptocurrency is immune to government intervention. So continuing with that theme, know this: cryptocurrency scams come with real-life penalties.
Shaquille O’Neal, Tom Brady, and even Post Malone have paid dearly for scams. We are talking massive lawsuits with million-dollar settlement price tags. Making false claims and deceiving people is still illegal even if crypto isn’t legal tender.
10. Crypto Wallet Security Is on You
Don’t trust your wallet to big companies. They’ve collapsed, suffered hacks, and even had internal employees embezzling money. Unlike bank accounts or credit cards, though, you can manage your own security.
At the end of the day, your crypto wallet security is your responsibility alone. You need to have it backed up in cold storage. Make redundancies, and do not trust it to friends or relatives.
Learn More With FDAR
Crypto investing strategies will have little in common with those you use in the stock market. You have to factor in the inherent qualities of cryptocurrency, like volatility and mining methods. You’ll also have to account for gas fees, government taxes, and the risk of a very-real lawsuit if you play dirty.
FDAR keeps you up to speed with everything crypto. Subscribe to our newsletter and get in touch with us about whatever’s on your mind.