5 Golden Rules of Crypto Investing

5 Golden Rules of Crypto Investing


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These tips can help you build long-term wealth.



Key points

  • If you only invest money you can afford to lose, and crypto only makes up a small percentage of your portfolio, a crypto crash is less likely to derail your finances.
  • Keep a long-term perspective on your investments and take the time to research any crypto before buying it.

Last year, it felt like crypto prices would only go in one direction and investors couldn’t be wrong. Even a trading hamster was able to pick winning cryptos. But today, many cryptos are down 80% or more from their all-time highs. It’s a stark reminder that these are risky investments that can go down as well as up.

Many of the golden rules of crypto investing revolve around the idea of ​​minimizing risk. If you are going to buy crypto, the ideal scenario is that you will profit if crypto prices skyrocket, but not face financial disaster if the market crashes. These five rules will help you do just that.

1. Only invest money you can afford to lose

When you see predictions that Bitcoin (BTC) could hit $1 million, the temptation is to put every available penny into the king of crypto in hopes of big wins. The problem? You could lose all that money. If you only invest money you’re comfortable losing, you won’t be broke if the industry goes bad.

Investing in crypto is risky. There is a chance that blockchain will revolutionize the way we manage money or even become the future currency of the internet. But that may not be the case. Many projects will fail and the whole industry could collapse completely. Whether it’s regulation, the introduction of central bank digital currencies (also known as Gov Coins) or the evolution of even newer technology, there are a number of significant hurdles to overcome.

2. Cover other financial bases first

If you want to invest in crypto, it is important to start by establishing a solid financial foundation. This means having an emergency fund to cover three to six months of living expenses, while in addition to your retirement contributions. If you are trying to pay off debt, prioritize any crypto investment.

If you face a financial emergency next week, an emergency fund will help you cover it without going into debt or having to sell assets, potentially at a loss. Imagine you spent $2,000 in Bitcoin last November instead of putting it into an emergency fund. It could be worth as little as $600 today. While it may recover in the long run, it wouldn’t help if you were forced to sell today. How would you feel if you lost your job this week or faced a medical crisis and your financial cushion was in Bitcoin rather than banking?

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3. Diversify your investments

Diversification comes in many forms – the types of assets you buy and the individual assets within each class. Most experts recommend putting only a small portion of your total portfolio into crypto. The rest should be invested in low-risk assets such as real estate or stocks. The exact amount depends on your risk tolerance, your belief in crypto, and your financial situation. If you have decades ahead of you before planning your retirement, you might be more willing to expose yourself to more cryptocurrencies because you’ll have more time to recover if things go wrong.

It is also good to diversify within your crypto portfolio. Some people choose to invest only in Bitcoin and Ethereum (ETH), which makes sense because they are the most established cryptos and have the best chance of surviving in the long term. But if you want to buy smaller altcoins, don’t go for one or two.

Consider a mix of crypto sectors depending on which ones you find promising. For example, my portfolio is heavily focused on smart contract cryptos, as this is an area that I have studied extensively and I love that many other cryptos are built on top of these blockchains. I have some exposure to gaming and metaverse tokens, and I completely avoid privacy tokens. Other investors will likely have different priorities and areas of knowledge.

4. Think long term

One way to survive crypto volatility is to invest with a 10-20 year mindset. Trying to time the market through short-term trades is nearly impossible to do – and many investors lose money this way. Instead, look for projects with strong leadership and good utility that could perform well in decades to come.

It’s not always easy to think long term because it’s still too early for the industry and we don’t know a lot about its evolution. But it’s an approach that will help keep even prolonged declines in perspective and avoid making emotional decisions. For example, if you had bought each of the top 50 cryptos five years ago, you would have seen an increase of around 700%, despite the fact that many projects did not survive the crypto winter of 2018.

5. Research

Never buy a cryptocurrency that you haven’t thoroughly researched. We all live busy lives, and it can be tempting to put a small amount of money into an altcoin you’ve heard about online. But it’s your money and there’s a lot of misinformation out there. Only you know your investment strategies and objectives. Research does not guarantee success, but it greatly reduces the risk of being scammed or buying crypto that does not have good long-term potential.

At the end of the line

Crypto is a relatively new asset class. Last year, some people felt compelled to buy crypto so they could get in on the next big deal early. They bought crypto for fear of missing out — in some cases with the money they needed in the short term, at the expense of other financial goals. If you are considering buying crypto, it is essential to consolidate your finances and research the industry first. This way, another crypto crash will be disappointing but not devastating.

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