Bitcoin is often described as ‘digital gold’ and for good reason. Just like gold, Bitcoin is scarce, divisible, fungible, durable, and just as gold, during economic turmoil Bitcoin has been seen to act as a ‘safe haven’ to protect wealth.
Perhaps you’ve reached a point where you may want to invest in Bitcoin, or any of the other cryptocurrencies, but you’re unsure about much money you should put in.
It depends, of course, on many things, including how much risk you’re able to bear and how familiar you are with crypto.
While we cannot give you financial advice, here are some basic pointers to think about as you make your decision.
Don’t invest more than you’re willing to lose
This is a basic guiding principle that every investor is familiar with. Investing in cryptocurrency can be profitable, but the volatility of crypto also means you could make big losses. If you want to be on the safe side, start with a small investment, and as you learn more about the price movements of the coin you’re invested in, you can choose to invest more.
Diversify your portfolio
One of the best ways to preserve, or even grow your wealth, is by diversifying your portfolio. This means putting your money in several places where it is exposed to different markets.
Some people spread their money across currencies, such as the US dollar, the Euro and the Japanese Yen. Others may include commodities, such as gold. Some investors put a portion of their money in the stock market. And others may want to invest in real estate.
Cryptocurrencies, or digital assets, should be seen as another asset class that exists alongside these traditional assets. Allocating some of your funds to crypto is a way to diversify your portfolio, and even within this asset class – meaning crypto – you can spread your funds across different cryptocurrencies.
In order to do this in the best way, you’ll want to learn more about how or if asset prices are correlated – in other words, how markets relate to one another.
Keep an eye on the news and keep learning
Price movements – although determined by the forces of supply and demand – are influenced by major events. When you’re invested in crypto, you should read the news regularly, not just for price analyses, but also for developments in the industry around regulation, partnerships, acquisitions, updates, events, and wider political developments that may influence market sentiment.
In addition, it’s good to learn more about the coins you may want to invest in. What type of blockchain underpins them; how are the coins or tokens used in daily life – if at all; do you think they offer use cases in the long term? In other words, you will need to gain a deeper understanding of what gives cryptocurrencies value.
Learn how to conduct technical analysis
Some traders believe that there is a mathematical logic to the market as well and that based on past performance, it is possible to anticipate what is likely to happen in the future.
This could potentially help you make the best decision about when you want to enter the market, but it could also help you gain some insight into how markets relate to one another.
If technical analysis proves too complex, the basic take away here is to get deeply acquainted with an asset’s price movements – study how the price moves over the course of days, but also over the course of months, and you may be able to detect some patterns.
Think about your on and off-ramps
When you invest in crypto, you’ll want to think ahead of time and find out what you will do when you want to exit the market.
If you’re invested in Bitcoin and feel it’s time to exit your position, you could trade into a stablecoin – this is a cryptocurrency pegged to another asset, such as the US dollar.
You could also sell your crypto through an OTC, move your funds to a platform able to transfer money to your bank account, or withdraw cash at a Bitcoin ATM. Whichever option you go for, make sure to get a good overview of the fees you’ll have to pay.
How much should you invest?
Exactly how much you should invest is something you’ll have to decide for yourself. There are interesting reports available online which deal with portfolio diversification where historical performance is taken into account to give some indication as to what type of gains you might expect, depending on the exact percentage of your allocation.
At AAX, we believe allocating 1-2% of your portfolio to digital assets is reasonable if your goal is to balance risk exposure with the opportunities offered by digital assets. But in the end, it is a decision that only you can make.