If 2020 has taught us anything, it’s that the future is wildly unpredictable and you often never know what’s coming next. Well, so is indeed the case when we talk about the crypto market and the risks and rewards associated with the same.
In this article, we are going to be talking about some of the factors that can influence your Bitcoin (or any other cryptocurrency) investments – should you intend to make them in the near future.
However, what most people who are interested in the crypto market end up doing instead of starting to invest is that they read and research a lot about cryptocurrencies but never actually start investing, usually out of fear of losing all of their money.
Been there, done that.
- “Is Bitcoin even a good investment in the first place or should I opt for something safer?”
- “How much money should I invest in Bitcoin?”
- “What’s the best way to invest in Bitcoin?”
Questions like above have visited pretty much everyone’s mind once in a while. Oftentimes, it is questions like these that confuse people so much so to the point where they fear making the first move.
Surely, some of us are lucky enough to have mentors who can guide us and help make the right decisions, but so is not the case for everyone.
That’s why, we are here to help. Here are 5 factors / things to consider and keep in mind when investing in Bitcoin or any other cryptocurrency in general:
1. Risk Tolerance
The most basic rule of investing in cryptocurrency (or anything, really) is to only invest the amount that you are comfortable losing i.e. the amount that, if lost, won’t negatively affect your life too much or cause any major inconvenience.
Some people, in the heat of the moment, often end up investing way more than they are comfortable losing and sometimes even borrow money only for the purpose of investing. Needless to say, this is a very bad idea and can result in you losing big time and incurring some very heavy debts.
The right way to go about investing in the crypto market is to first calculate how much of your disposable income can you actually “throw away” as opposed to how much of your income can you actively use to make even more money.
The time at which you invest is just as essential as the amount you invest, if not more so. You may hear a lot of people talk much about Bitcoin when its prices rise and the exact opposite in the times of recession.
You may think that it’s a good idea to invest when the prices are going up but that might not turn out to be such a profitable decision after all because when the prices are already high, there isn’t much “value” left to be exploited.
The whole mechanism of investing works on the principle of buying at low prices and selling at high. But if you only invest when the prices are up, you are risking your investment for a potential fall of price since the digital monetary system operates on repeated cycles.
The sweet spot is to predict the next rise in price before it actually happens. That way, you can buy when the prices are low and sell when they increase – according to your research – making for a profit. Some people also like to play the long road i.e. hold their Bitcoin instead of actively trading them.
Investing in Bitcoin comes with its own pros and cons. Since Bitcoin is not a centralized government-owned currency and is not considered as a legal tender, it has suffered a bad rep among some groups of people and is even banned in some countries. A currency is only as valuable as the price people are willing to pay for it.
For example, no matter how many Bitcoins you own, your local grocery store probably won’t accept any in exchange for the veggies. So as long as you can find a way to convert your Bitcoin into spendable units, its intrinsic value will be pretty much non-existent.
There is also obviously the fear of investing in crypto born out of the headlines of how criminals use Bitcoin for illicit activities like money laundering since cryptocurrencies are pseudonymous and don’t require any personal information to make transactions. However, headlines like these are often directed more so towards increasing website engagement rather than delivering actual information.
In fact, only about 0.5% of all Bitcoin transactions has been spent on the dark web. Furthermore, intergovernmental bodies like the FATF are constantly working together with countries all over the world to try and minimize such criminal activities – leaving the general public with room to transact safely and securely.
4. Returns Tolerance
Just like risk tolerance, you need to learn how to manage your returns as well. The idea here is to not invest the amount that you’re emotionally attached to i.e. not to spend so much so that will draw a strong emotional reaction out of you.
For example, back in late 2017 at the time when cryptocurrency was booming and was reaching record highs, a lot of investors became millionaires because they invested their life savings. Now, even though this sounds like investment well done, it’s not.
Why? Because firstly, a lifesaving is not something you use as an investment in a market as unstable as crypto, and secondly, most of those people who became millionaires didn’t just sell their Bitcoins and took away the profits, but instead reinvested the same into the crypto market and lost their income just as quickly as they gained it.
This is the part that most people seem to overlook. Before enjoying the potential success, you need to take into account the potential distress that you may experience if you lose the money you earned by reinvesting and whether or not you are ready for it.
Any mature investor will tell you a golden rule of investing that applies for everyone at any time: never put all your eggs in one basket. Unlike stocks and gold which are correlated assets, cryptocurrencies are uncorrelated assets i.e. they do not have any connection to stocks, bonds, etc. and move on their own.
This quality is what makes Bitcoin a good investment. But at the same time, Bitcoin and other cryptocurrencies are very volatile which increases your financial risk greatly.
To reduce this risk, you’d need to diversify your investments and allocate your capital to different investment vehicles like real estate, stocks, and gold. You can even leave out some money at your bank to earn small interests just for the purpose of securing your portfolio.
Thank you for reading this article. We hope we were able to help you gain some valuable insight in your investment journey via the points mentioned above. Happy investing!