Following the 2022 crypto winter, cryptocurrencies suffered a major fall from grace as an investment and trading vehicle. But after two long years of doubt and uncertainty, digital assets are finally back in the green and shining brighter than ever.
With the Bitcoin price hitting new records and the approval of spot Bitcoin exchange-traded funds (ETFs) by the U.S. Securities and Exchange Commission increasing institutional participation and giving crypto more legitimacy, digital currencies are once again regarded as a viable and profitable investment option.
As expected, crypto’s latest resurgence sparked a lot of excitement and enthusiasm in the crypto community and beyond, so much so that some people are ready to throw caution to the wind and jump into crypto head first, eager to take advantage of this rising trend.
However, just because Bitcoin is rallying and the outlook for crypto is largely positive at the moment doesn’t mean investing in crypto is automatically a good idea for everyone and we should all collectively start pouring our money into digital assets.
At least, not without taking the time to conduct the necessary research, understand the context, and know what crypto investing actually entails.
So, let’s see why it’s important to take a step back and assess everything with a clear mind before you decide to add crypto to your portfolio.
Volatility
Everyone who’s at least remotely familiar with investing knows there’s no such thing as a risk-free investment. While some asset classes are safer than others, every type of investment is accompanied by a certain degree of risk that investors have to take into account when devising their strategies and making decisions.
In crypto’s case, the risk is greatly exacerbated by their infamous volatility.
Ever since their emergence, digital currencies have been experiencing wild price swings owing to their novelty and the numerous factors that influence their value such as supply and demand, market sentiment, regulatory changes, media coverage, and so on.
Even if it’s been 15 years since Bitcoin was invented and the market has expanded and developed considerably in the meantime, volatility remains one of crypto’s most defining features.
For example, after Bitcoin jumped 4% and topped its previous all-time high on March 5, it immediately fell by 10% over the following hours and then went on to gain 11% and reach a new record of $71,627 in less than a week.
This type of unpredictable behavior is common for all digital currencies, not just Bitcoin, and explains why people should tread carefully when investing in crypto.
Despite its earning potential, crypto remains a highly speculative investment whose value can change at any time. Some skeptics have gone as far as comparing crypto investing to gambling.
Although this comparison might be a bit far-fetched, there’s no denying crypto’s speculative nature which could result in substantial gains but could also backfire and cause major losses.
FOMO
People invest in crypto for all kinds of reasons. Some want to diversify their portfolio while others are attracted by crypto’s innovative character and trust its potential as a financial tool. Unfortunately, a large percentage of crypto traders and investors are motivated by less rational reasons as they let the fear of missing out (FOMO) influence their decisions.
FOMO is a common phenomenon among crypto investors where market participants experience angst and anxiety as they feel they might be missing out on profitable investment opportunities and therefore make impulsive trading decisions without thinking things through.
For a lucky few, this approach pays off and helps them score gains, but in most cases the outcomes are disastrous.
Basing your investment decisions on emotions rather than logic and research is no different than taking a shot in the dark and hoping to hit the target. Therefore, taking the rational route instead and doing your due diligence can help you block FOMO and all the noise and risks associated with it.
Diversification Opportunities
When it comes to cryptocurrency investments, Bitcoin is the asset of choice for most investors, being the most established and valuable crypto in the market, with the longest track record of success. However, despite its numerous benefits and obvious allure, Bitcoin is not the only coin available.
There are over 10,000 different crypto projects out there and some of them have really promising prospects. But in order to discover them, you have to do a bit of digging and learn about their pros and cons.
Looking beyond the crypto king and scouring the market for other digital currencies that could fit your requirements is a good idea from a portfolio diversification perspective.
Spreading your crypto investments across various assets instead of putting your money on just one coin will help you reduce risks and shield you against large losses in case one investment performs poorly. At the same time, this will increase your return potential as you’ll be able to achieve more consistent earnings over time.
Making Informed Decisions
Ultimately, knowledge is key to successful investments. The more you know about a crypto project, the easier it is to weigh the pros and the cons, assess its profitability, and therefore make smart investment decisions.
As a crypto investor, much of your effort should be centered around understanding the fundamentals of the crypto projects that you intend to invest in, cutting through the hype, separating the wheat from the chaff, and minimizing risks as much as possible. This will obviously require time, due diligence, and a lot of practice but it’s definitely a much smarter approach than relying on instinct and investing on a whim.
So, even if the market is overwhelmingly positive right now, you should never underestimate the importance of proper and thorough preparation. Investment opportunities are not going to vanish into thin air if you don’t hurry up, so it’s best to be patient and cautious and allocate time for research if you want to invest in crypto.
