Investing In Cryptocurrency: 5 Tips For Beginners

Cryptocurrencies are enormously volatile, but that volatility can create opportunities for profit if you’re looking to invest in these digital assets. Cryptos such as Bitcoin and Ethereum have risen a lot since their debut — but they’ve also experienced tremendous boom-bust cycles along the way. Experienced traders have been speculating on cryptocurrencies for years, but how can you get started if you’re new to the crypto market?

First things first, if you’re looking to invest in crypto, you need to have all your finances in order. That means having an emergency fund in place, a manageable level of debt and ideally, a diversified portfolio of investments. Your crypto investments can become one more part of your portfolio, one that helps raise your total returns, hopefully.

Pay attention to these five key things as you’re starting to invest in cryptocurrencies.

1. Understand what you’re potentially investing in

As you would for any investment, understand exactly what you’re investing in. If you’re buying stocks, it’s important to read the annual report and other SEC filings to analyze the companies thoroughly. Plan to do the same with any cryptocurrencies. Since there are literally thousands of them, they all function differently and new ones are being created every day. You need to understand the investment case for each trade.

In the case of many cryptocurrencies, they’re backed by nothing at all, neither hard assets nor cash flow of an underlying entity. That’s the case for Bitcoin, for example, where investors rely exclusively on someone paying more for the asset than they paid for it. In other words, unlike stock, where a company can grow its profits and drive returns for you that way, many crypto assets must rely on the market becoming more optimistic and bullish for you to profit.

Some of the most popular coins include Bitcoin, Ethereum, Solana, Dogecoin and Tether (a stablecoin). So before investing, understand the potential upside and downside. If your financial investment is not backed by an asset or cash flow, it could end up being worth nothing.

2. Remember, past performance does not guarantee future results

A mistake that many new investors make is looking at the past and extrapolating that to the future. Yes, Bitcoin used to be worth pennies, but now is worth much more. The key question, however, is “Will that growth continue into the future, even if it’s not at quite that meteoric rate?”

Investors look to the future, not to what an asset has done in the past. What will drive future returns? Traders buying a cryptocurrency today need tomorrow’s gains, not yesterday’s.

3. Expect high volatility

The prices of cryptocurrencies are about as volatile as an asset can get. They could drop quickly in seconds on nothing more than a rumor that ends up proving baseless. That can be great for sophisticated investors who can execute trades rapidly or who have a solid grasp of the market’s fundamentals, how the market is trending and where it could go. For new investors without these skills — or the high-powered algorithms that direct these trades — it’s a minefield.

Volatility is a game for high-powered Wall Street traders, each of whom is trying to outgun other deep-pocketed investors. A new investor, or those who are more risk-averse, can easily get crushed or spooked by the volatility.

That’s because volatility shakes out traders, especially beginners, who get scared. Meanwhile, other traders may step in and buy on the cheap. In short, volatility can help sophisticated traders “buy low and sell high” while inexperienced investors “buy high and sell low.”

4. Manage your risk carefully

If you’re trading any asset on a short-term basis, you need to manage your risk, and that can be especially true with volatile assets such as cryptocurrency. So as a newer trader, you’ll need to understand how best to manage risk and develop a process that helps you mitigate losses. And that process can vary from individual to individual:

• Risk management for a long-term investor might simply be never selling, regardless of the price. The long-term mentality allows the investor to stick with the position.
• Risk management for a short-term trader, however, might be setting strict rules on when to sell, such as when an investment has fallen 10 percent. The trader then strictly follows the rule so that a relatively small decline doesn’t become a crushing loss later.

Newer traders should consider setting aside a certain amount of trading money and then using only a portion of it, at least at first. If a position moves against them, they’ll still have money in reserve to trade with later. The ultimate point is that you can’t trade if you don’t have any money. So keeping some cash in reserve means you’ll always have a bankroll to fund your trading.

It’s important to manage risk, but that will come at an emotional cost. Selling a losing position hurts, but doing so can help you avoid worse losses later.

5. Don’t invest more than you can afford to lose

Finally, it’s important to avoid putting money that you need into speculative assets. If you can’t afford to lose it — all of it — you can’t afford to put it into risky assets such as cryptocurrency, or other speculative assets, for that matter.

Whether it’s a down payment for a house or an important upcoming purchase, money that you need in the next few years should be kept in safe accounts so that it’s there when you need it. And if you’re looking for an absolutely sure return, your best option is to pay off high-interest debt. You’re guaranteed to earn (or save) whatever interest rate you’re paying on the debt. You can’t lose there.

Finally, don’t overlook the security of any exchange or broker you’re using. You may own the assets legally, but someone still has to secure them, and their security needs to be tight. If they don’t think their cryptocurrency is properly secured, some traders choose to invest in a crypto wallet to hold their coins offline so they’re inaccessible to hackers or others.

Remember that investing in cryptocurrency can be part of a broader investment strategy, but shouldn’t be your only one.

Other ways to invest in cryptocurrency

While investing directly in cryptocurrency is popular, traders have other ways to get into the crypto game, some more directly than others.

• Crypto futures: Futures are another way to wager on the price swings in Bitcoin, and futures allow you to use the power of leverage to generate massive returns (or losses). Futures are a fast-moving market and exacerbate the already volatile moves in crypto.
• Bitcoin or Ethereum ETFs: Spot Bitcoin and Ethereum ETFs are available through most online brokers who offer traditional securities like stocks and bonds. So these ETFs can be an easy way to buy crypto through a fund-like product. (These are the best Ethereum and Bitcoin ETFs.)
• Crypto exchange or broker stocks: Buying stock in a company that’s poised to profit on the rise of cryptocurrency regardless of the winner could be an interesting option, too. And that’s the potential in an exchange such as Coinbase or a broker such as Robinhood, which derives a huge chunk of its revenues from crypto trading.
• Blockchain ETFs: A blockchain ETF allows you to invest in the companies that may profit from the emergence of blockchain technology. The top blockchain ETFs give you exposure to some of the key publicly traded companies in the space. But it’s important to note that these companies often do much more than crypto-related business, meaning your exposure to cryptocurrency is diluted, reducing your potential upside and downside.

Each of these methods varies in its riskiness and exposure to cryptocurrency, so you’ll want to understand exactly what you’re buying and whether it fits your needs.

Crypto investing FAQs

Bottom line

Cryptocurrency is a highly speculative area of the market, and many smart investors have decided to put their money elsewhere. For beginners who want to get started trading crypto, however, the best advice is to start small and only use money that you can afford to lose.

— Bankrate’s Brian Baker contributed to an update of this story.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.