4 Essential Questions to Ask Yourself Before Investing in Crypto
With an uptick in institutional interest in crypto due in large part to pandemic-related monetary policy and volatility, there is a renewed interest in cryptocurrencies. Major gains made during the close of 2020 have turned a significant amount of market attention to Crypto. If you are one of the millions who are no doubt intrigued by this flurry of activity and the potential to catch the upward trend, with fortunes being made sometimes overnight, below are essential questions to ask yourself before putting money in crypto.
What Wallet Features Are Important to You?
Your crypto wallet is essentially a digital bank account dedicated entirely to storing, receiving and sending cryptocurrencies. They are stored on computers, smartphones, tablets and even, in some cases, on paper. Some wallets allow you to hold one kind of coin, while others let you manage several from one place. Some even allow conversion from one coin into a variety of others from within the wallet.
Ask yourself what features are essential to your investing and management needs before choosing any particular wallet. Consult wallet guides that will break down the advantages and disadvantages of each so that you choose the right tool.
What is my Risk Appetite?
Investment professionals and money managers often refer to how risk-averse an investor is as their “risk appetite,” which is to say, the amount of risk they are comfortable with. Before investing in anything, you have to know how much risk you are willing to accept. Some asset classes come with a considerably higher amount of risk than others, with the upside, of course, being much larger gains.
Cryptocurrencies are complex financial instruments and the cryptocurrency market, like all currency markets, is affected by a range of equally complex, disparate and volatile factors that can change by the day and even hour. Any money you put into cryptocurrencies could be subject to significant losses. Are you willing to accept these risks in exchange for potentially life-changing gains?
What Kind of Investment am I looking for?
Before investing money anywhere you should always have a clear purpose. Some people invest for short term gains. They put capital into riskier ventures that can lose or win big in days or weeks. Others are looking for sustained long-term cash flow. They invest in storied, stable companies with a history of success and consistent dividend or interest payments.
Before putting money into cryptocurrencies, consider what you are looking to get out of the investment. Do you believe in the fundamentals of blockchain and the undeniability of alternatives to fiat currencies and plan to hold any currency investments long-term? Or do you see the potential to ride a wave that will, at some point in the near future, crash?
Am I Sufficiently Educated?
As previously touched on, cryptocurrencies are complex financial assets. The technology that underpins them is complex, the markets where they are traded are complex, and the current events and industry news affecting their value are constant. There is always the potential for unknowledgeable investors to get lucky, and it is that fact that keeps so many first-time investors coming back to financial markets.
But do you really know enough about crypto to be putting money that you can’t stand to lose into it? Are you investing from a place of knowledge and understanding, or because of FOMO and word of mouth? The market is never 100 percent knowable or predictable for any asset class, but keep in mind that the people who consistently make money are always the most knowledgeable.
Cryptocurrencies represent an authentic financial revolution and we could very well see them widely used and accepted by perhaps even the majority of mainstream business and financial institutions over the coming years. While it is tempting to get into burgeoning new coins and crypto stocks before they skyrocket, as with any investment, there are questions to ask yourself to ensure you are making the right decisions with your money.