1. Crypto is incredibly volatile
You have to understand that cryptocurrencies are ridiculously volatile. At one point, a small cryptocurrency called SHIBA INU (SHIB) climbed by more than 100,000% in less than a month. This cryptocurrency is blatantly useless; it’s a joke. When was the last time you saw a stock climb by 100,000%? Now, a 100,000% increase doesn’t happen very often, but it’s not too uncommon for a small coin to rise and fall by 80% or for a big coin to increase or drop by 10% day-to-day.
A drop in value of 10% could be a cause of concern in the stock market, but it’s just a part of everyday life in crypto investment circles. Much like a currency can climb by an absurd amount in just a day, so too can it drop by just as much.
“When was the last time you saw a stock climb by 100,000%?”
To combat volatility, investors (crypto or otherwise) will often employ dollar-cost averaging (DCA). I’ve covered DCA in another article of mine, but in short, it’s basically just a fancy way of saying: buy regularly. Instead of purchasing a lot every once in a while, the idea is to buy for the same amount of money weekly, biweekly, or monthly. This way, you’re always buying at market value and protect yourself from volatility.
Some traders try to time the market. Timing the crypto market is almost impossible, however. Not a single person on earth knows how much any cryptocurrency will be worth a week from now. Time in the market beats timing the market.
However, please be aware that while DCA is immensely helpful when investing in crypto, it is by no means a guarantee that you won’t lose money. Any money invested in crypto can be lost.
2. Don’t get emotional
If you get emotional about money, you should definitely stay away from crypto. If you would feel sad, maybe even devastated, if your crypto balance said “-50%,” then do not invest. There may come a day when crypto drops by absurd amounts in a very short time frame.
Take a look at this:
This graph shows the value of Ethereum, the world’s second-largest cryptocurrency, between 2020–05–23 and 2021–05–22. That drop at the end is about a 40% drop in less than seven days, which was also preceded by an absurd rise in value.
Now take a look at this:
This graph shows the value of Bitcoin, the world’s largest cryptocurrency, from when it was worth practically nothing in 2013 to its value today. There’s a hump in December of 2017. Do you see it? If you had purchased Bitcoin at that 2017 peak, you would have a negative balance in your account until late December of 2020. That’s three years. For the next few months after that, your balance would have exploded.
Would you have managed to keep your bitcoins for those three years without caving in and selling at a loss? Or maybe a better question: should you have held onto them? It’s easy to be wise in retrospect, but the truth is that no one knew then, and no one knows now, whether or not the value of Bitcoin would have, or will, be worth next to nothing someday.
3. Crypto evaluations are arbitrary
Look, I’ll be the first to say that many publicly listed companies have nonsensical evaluations. Many companies on the stock market have never even made any money, yet they are worth the GDP of a small country.
But if stock evaluations are arbitrary, then crypto evaluations are borderline absurd. The value of any cryptocurrency is all in our heads. What is a reasonable price for one Bitcoin? $1, $100, $10,000, or $1,000,000? It’s all arbitrary. Any of these numbers could be reasonable.
This is crucial to understand. There is absolutely nothing that dictates how a certain coin should be valued. Maybe people will reach the consensus that all cryptocurrencies are overvalued. Or maybe not. No one knows. Whatever you do, don’t just assume that cryptocurrencies will rise in value.
4. Crypto should only be a small percentage of your portfolio
If any at all, that is. Don’t sell your funds or stocks to buy cryptocurrencies. My personal investment portfolio consists of 80% index funds, 10% stocks, and 10% crypto at the time of writing. That 10% of my portfolio that I have invested in crypto is a number that I am fine with losing. Don’t get me wrong: losing money sucks, but I won’t be homeless if I lose it. A vast majority of my portfolio is invested in relatively safe options (though no investment opportunity is ever completely safe).
For you, maybe that number should be even lower. Maybe crypto should only be a few percentages of your portfolio. Make a plan that works for you, and be careful not to over invest. For example, if the crypto market crashes, it might be tempting to open your wallet and buy more crypto when it’s cheaper. However, you have absolutely no idea if your cryptocurrencies will ever climb in value again. Only invest what you’ve told yourself you would invest.
“The value of any cryptocurrency is all in our heads.”
5. Place your crypto in your own wallet
If you end up buying a decent amount of crypto, you’re probably going to want to move it to a wallet of your own. Many of the big crypto exchanges take security seriously, but nonetheless, any crypto that lives on an exchange isn’t actually owned by you, even if it’s on your account.
A crypto wallet is basically just a seed phrase that confirms ownership of certain coins on a blockchain. You can learn more about wallets by Googling a cryptocurrency of your choice and adding the word “wallet” at the end. Any serious cryptocurrency will have information regarding wallets on their official website, and some even offer official wallets of their own.
I don’t want to get too technical in this beginner’s article, but some cryptocurrencies also allow you to take part in a process called staking if you place your coins in a wallet. Just to name an example, suppose you own a cryptocurrency called Algorand, and you put your coins in its official wallet. In that case, you will automatically get more Algorand coins over time as the wallet stakes your coins autonomously. This is not something you need to worry about as a beginner investor, though. Also, just to be clear, the number of coins you gain automatically is usually a small percentage based on what you have in the wallet. Some coins are easier to stake than others (such as Algorand, which is why I used it as an example), but obviously you should never buy a coin simply because it’s easy to stake.
6. Any money you invest can be lost
I really want to emphasize this one more time. You should never, ever invest more than you are willing to lose, no matter how tempting it might be. In fact, it’s best to enter the crypto market with the mindset that you will lose money. Regardless of whether you use DCA or buy in bulk and regardless of whether you invest short-term or long-term, any money invested can be lost.
“You should never, ever invest more than you are willing to lose, no matter how tempting it might be.”
This is true for practically any investment option, sure, but it’s perhaps especially true in a volatile, decentralized marketplace with absolutely arbitrary evaluations.
Be careful.
7. Crypto is more than just Bitcoin
Finally, let me end this piece of text by illustrating the variety of cryptocurrencies. Bitcoin is both the first and the largest cryptocurrency in the world, and hence it has become synonymous with cryptocurrencies. But the reality is that there are thousands of cryptocurrencies, each with its own purpose.
Some currencies have low transaction fees. Some are carbon negative. Some are trying to reinvent infrastructure as we know it. Some are tied to real currencies. And some are just an intentional joke. Different cryptocurrencies have different goals, are built with different programming languages, and are used for different things.
Larger cryptocurrencies are safer to invest in than smaller (though, for the last time, no cryptocurrency is a safe investment), but some smaller cryptocurrencies with great technologies, solid leadership, and noble visions might become market leaders in the future.
As a first-time investor, you’re probably going to want to stick to the big currencies, but as you discover small coins that you truly believe in, you might want to offset a small portion of your portfolio to them.
Some people enter the crypto market with the intention to make money but stay for grander goals.
You might not realize it now, but some cryptocurrencies are actually making a big difference in the world.
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