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As the online connectivity expands, so does digital technology. One of the biggest developments in this field is the blockchain technology behind cryptocurrency, or crypto for short. Crypto has been a hot topic among tech communities, investors, and financial institutions for its innovation and potentially life-changing insights and applications.
That said, the popularity of cryptocurrency is incongruent with distributed information. While the word “crypto” is thrown around a lot. Only a small handful of people truly knows how it works and how to use it properly. This is a problem, especially for average users and traders interested in investing in cryptocurrency. After all, to make informed decisions, one needs data and backed-up research. And to get there, people need to ask the right questions.
If you are thinking of investing in cryptocurrency, make sure to ask the following questions first.
1. What Are the Basics of Cryptocurrency?
Cryptocurrency is an exceedingly complex field. Hence, before you even consider investing, you need to have a clear breakdown of what it is first. Here is a quick rundown of the basics of cryptocurrency:
- Cryptocurrency is an open-source, decentralized form of digital currency that runs on blockchain technology. Decentralized means that no third-party monitors or maintains it like banks or governments.
- Blockchain technology is the means through which crypto works. It is, in essence, a public ledger that records transactions and prevents double spending.
- There are several different crypto options to choose from on the market, some more volatile than others. Thus, you must do your research properly when choosing which to invest in.
- You can buy and sell cryptos on various trading platforms, depending on the cryptocurrency you choose. There are also digital wallets, like an XMR wallet when dealing in Monero, that were developed to make transactions easier.
- Cryptocurrencies are highly volatile, which means that their value can change significantly in a short period. As such, there is a lot of skepticism when it comes to trading in crypto.
With a good grasp of crypto’s basics, it is now time to move to the next question.
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2. Is Cryptocurrency a Good Fit For Your Portfolio?
Many traders, both new and experienced, ask whether investing in cryptocurrency is worth it. The right question, however, is whether crypto is a good fit for your portfolio. If you wish to invest in crypto, how does it fit your overall financial goals? Moreover, considering how it may take up more of your time, how might it affect the rest of your investments?
In general, experts recommend covering fundamental bases first before going into crypto trading. These include an emergency fund (for at least three months), a conventional retirement plan, and paying off high-interest debts, among other things.
3. Why Do You Want to Invest in Crypto?
Nowadays, cryptocurrency gets a lot of hype. So much so that some people feel convinced that they should also start investing in crypto for fear of missing out. However, as any experienced trader or investor would note, buying into the hype could set you up for losses later on. Some researchers even compared crypto to the gold rush. This refers to the time when people would migrate to areas where they believed there was a lot of gold, then eventually realized it was all speculation.
Thus, you need to carefully re-examine your motivations. Are you looking to diversify your portfolio? Do you wish to support the technology behind crypto? Or are you just buying into the hype, thinking of getting some easy money?
Remember, the crypto industry has a highly volatile market. While many experts note that blockchain technology holds a lot of potential, it is still in its infancy. Hence, if you want to invest in crypto, go in it for the long haul, not a quick buck.
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4. What Is Your Risk Tolerance?
All investments come with a degree of risk. However, as mentioned earlier, the high volatility of cryptocurrency makes it especially risky. The most common advice from financial experts when trading in crypto is to not invest more than what you are willing to lose.
Some professionals have compared crypto trading with going to Vegas. Like gambling, you run the risk of either gaining a significant profit or losing all of your investment entirely. There is also the added risk of the uncertainty of cryptocurrency in select countries, where they might be outlawed in the future.
Hence, it is crucial to be careful when choosing which cryptocurrencies to use and trade in. Financial advisors generally recommend that you allot no more than five percent of your portfolio to cryptocurrency.
5. Which Cryptocurrency Should You Invest In?
As stated earlier, some cryptocurrencies are more volatile than others. From an investor’s perspective, you would typically focus on more stable currencies like Bitcoin. However, there are some benefits to investing in altcoins as well. Each cryptocurrency has unique features that you like or simply catch your interest. For example, if you prioritize privacy, investing in privacy-oriented crypto such as Monero may serve your interests more effectively.
Overall, cryptocurrency is an exciting, developing industry with a lot of ups and downs. Before investing, it is essential to get your facts straight and do in-depth research that will help you make an informed decision. In this manner, you can manage risks better and potentially boost your portfolio in the process.
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