The FOMO sentiment that currently characterizes the crypto markets has proven hard to resist for many new investors, especially when big names and big companies appear to be so firmly behind some of the coins. But it is never wise to jump on a bandwagon when you didn’t see it coming and don’t know where it’s going. Below are 5 considerations to make before investing in digital assets.
If you are going to trade and store cryptocurrencies, you are going to need a wallet. A wallet is a digital storage for your coins and they come with a variety of features. Some are in the form of hardware wallets which offer added protection in a market where hacking and cybersecurity are major issues. Some wallets are proprietary and only let you store and trade one kind of cryptocurrency, while others allow storage and trading of multiple coins. Consider your needs and intentions and do some research into the various kinds of wallets available before getting started.
The consideration at the top of your list any time you invest money must necessarily be, without exception, how much risk are you willing to accept. Cryptocurrencies have progressed leaps and bounds since the early 2010s in terms of mainstream recognition and acceptance, with institutions like the Bank of Singapore asserting that cryptocurrencies such as Bitcoin could replace traditional stores of value (e.g., gold) in the near future. That, however, does not make them less risky assets.
A lot is still up in the air with cryptocurrencies. India has recently decided to ban cryptocurrencies. Much is riding on widespread government acceptance of them and the ability of the exchanges to safeguard investor assets against the army of hackers and thieves constantly pounding on the gates. Digital assets aren’t insurable for the time being and what’s lost is lost for good. What’s more, if you aren’t in it for the long haul and are looking to make money off daily and short term swings, crypto is still highly volatile, unpredictable and often frustratingly illiquid.
Understanding of a Particular Asset (fundamentals, history, white paper)
Do you know what a particular coin is all about? That is to say, do you know its market history? Do you have a firm grasp of the fundamentals (of a particular coin and of blockchain in general)? Have you read the creator’s whitepaper and are you aware of what major institutions and investors think about a given asset? These are all questions of understanding and while getting into any investment, in any asset, without the requisite understanding to safely and confidently invest is a bad idea, with digital assets, it is playing with fire.
It’s institutional interest and mainstream acceptance
Bitcoin undoubtedly started the digital asset revolution, and despite being the largest coin by market cap, and the one with the most mainstream buzz and acceptance, there are now a plethora of cryptocurrencies you can trade and invest in. Dogecoin, for instance, which a Foreign Policy article recently described as something that started as a joke and became a scam, is an example of a coin that garnered a significant amount of attention and caused a flurry of investor activity on the back of euphoria and excitement rather than fundamentals.
Bitcoin, on the other hand, has recently received a tremendous amount of positive mainstream attention (with a $1.5 billion investment from Tesla), and seen steady growth in the number of large, reputable companies indicating their belief in and support of the asset, in addition to putting their money where their mouth is by accepting it as payment.
Cryptocurrencies have a well-recognized liquidity problem. That is to say, once you are in possession of a particular coin, selling it can be an issue–enough of one that it could end up costing you a significant amount of money. There are thousands of tokens spread out across hundreds of different exchanges, all with varying interfaces, fees, and processes. There are high spreads, high slippage, difficulties finding a trading partner and often the need for multiple accounts on different exchanges to make it work.
Cryptocurrencies are a daunting asset class for beginners, and for good reason. The technology that underpins them is complex, it can be difficult to conceptualize the abstract nature of a non-physical asset, there are a lot of constantly and rapidly changing variables to keep in mind when investing and a relatively high degree of digital literacy is needed to navigate the technology required to trade it. Keep the above considerations at the forefront of any decision making and you stand the best chance of making smart choices with your money.