The cryptocurrency market has grown enormously since the adoption of mainstream companies such as Square, Tesla and PayPal. According to data from CoinMarketCap, the total market capitalization of the entire cryptocurrency market has grown fourfold from nearly $500 billion to past $2 trillion, where it stands currently.
Cryptocurrency as an asset class has yielded extraordinarily high gains to investors when compared to the investment in the traditional financial markets. However, given the emerging nature of the asset class and industry, It’s vital to assess the risks associated with investing in cryptocurrency before adding to your portfolio.
Below are five aspects you need to know before delving into cryptocurrency investments:
Take a long-term viewpoint
Cryptocurrency prices are often very volatile and prone to cyclical movements that occur every few years. Even the most established projects like Bitcoin (BTC) and Ethereum (ETH) have seen drawdowns of over 80% in a given cycle.
Given these possible swings, it’s critical to differentiate between investing and trading. Specifically, investing should have a longer time horizon as compared to trading. Taking a longer long-term view enables you to withstand any short-term volatility that affects the market, reducing the chance you will make an emotional decision.
Always measure your crypto allocation percentage
Cryptocurrencies tend to be a highly correlated asset class, meaning they often move together, up or down. Because of this, you should be mindful of the allocation to crypto as a percentage of your overall net worth and investment portfolio.
Specifically, you want to make sure there are parts of your portfolio that won’t fluctuate at the same times and moments crypto does. You can start with allocating a relatively small percentage that helps incentivize you to learn more. Once you have done more research, you may decide to allocate more aggressively, but always keep in mind what percentage crypto represents of your overall portfolio.
History of crypto projects
Before investing in a particular cryptocurrency project or asset, it is important to understand the history and unique risks, including details on the team and its founders. Th (if applicable). The degree of control that a project’s team has on the asset is something particularly important to understand. Anonymous founders with control over projects carry more risk than known founders who possess less control over the project.
Do your own research
Since cryptocurrencies are now widely covered in mainstream media, you should avoid investing purely based on momentum or the fear of missing out (FOMO). It’s very easy to get caught up in the moment in crypto due to the exciting, fast moving and highly volatile nature of the market. Never invest blindly into a project without some prior research.
Despite many very legitimate projects and good actors, unfortunately the crypto market sometimes attracts hacks and scams. If you invest in cryptocurrency, you should take some time to understand the possible security risks and how to protect yourself. For example, when you keep funds on an exchange, you should always have multi-factor authentication – often calledMFA or 2FA – enabled.
Ideally, you should opt for “token based” MFA (e.g. Google Authenticator as opposed to SMS-based (getting a text message to your phone), which is vulnerable to SIM-swap attacks. For self custody wallets, ensure that you have backups of the seed phrases for your crypto stored in multiple secure locations to make you less vulnerable to your devices being hacked, stolen or lost.
Written by Alex Treece, Co-Founder and President of Zabo, a financial technology and data aggregation platform for cryptocurrency accounts.