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When it comes to cryptocurrencies, one of the biggest challenges for investors is not getting caught up in the hype. Digital currencies have quickly risen to prominence in the portfolios of many retail and institutional investors. At the same time, analysts have continued to caution investors about the volatile nature and unpredictability of cryptocurrencies.
If you’ve decided to invest in the cryptocurrency market, it’s important, as with any other investment, to do your research. Below, we’ll explore what you should know before you invest.
Consider Why You Are Investing in Cryptocurrency
Perhaps the most fundamental question you should ask yourself before making a cryptocurrency investment is why you’re doing it. There are myriad investment vehicles available, many of which offer greater stability and less risk than digital currencies.
Are you interested simply because of cryptocurrency’s trendiness? Or is there a more compelling reason for an investment in one or more specific digital tokens? Of course, different investors have various personal investment goals, and exploring the cryptocurrency space may make more sense for some individuals than for others.
Get a Feel for the Industry
It’s essential for investors—particularly those who are new to digital currencies—to develop a sense of how the digital currency world works before investing. Take time to learn about the different currencies offered. With hundreds of different coins and tokens available, it’s crucial to look beyond the biggest names, like Bitcoin, Ether, and Ripple.
In addition, it’s important to explore blockchain technology to get a sense of how this aspect of the cryptocurrency world works.
If you don’t have a computer science or coding background, some aspects of blockchain technology likely will be a challenge for you to parse out. There are many primers on blockchain technology that are written for laypeople.
Once you’ve identified the cryptocurrency (or cryptocurrencies) for investment, look into how those tokens make use of blockchain technology and whether they provide any innovations that differentiate them from the rest. By better understanding cryptocurrencies and blockchain technology, you’ll be more fully equipped to determine whether a potential investment opportunity is worthwhile.
Join an Online Community of Cryptocurrency Enthusiasts
Because the digital currency space is such a trendy area, things tend to change and develop quickly. Part of the reason is that a robust and very active community of digital currency investors and enthusiasts are communicating around the clock.
Get plugged into this community to learn about the buzz in the cryptocurrency world. Reddit has become a central hub for digital currency enthusiasts. There are also many other online communities with active discussions going at all times.
Read Cryptocurrency White Papers
More important than word of mouth, though, are the specifics of a digital currency itself. When you’re considering an investment, take the time to find the project’s white paper. Every cryptocurrency project should have one, and it should be easily accessible
Read the white paper carefully; it should tell you everything about what the developers of the project intend for their work, including a time frame, a general overview, and specifics about the project. If the white paper does not contain data and specific details about the project, that is generally seen as a negative. The white paper is a development team’s chance to lay out the who, what, when, and why of their project. If the white paper feels incomplete or misleading, then it might speak to fundamental issues with the project itself.
Timing Is Key
After diligent research, you have likely developed a feel for the cryptocurrency industry and may have determined one or more projects in which to invest. The next step is to time your investment. The digital currency world moves quickly and is known for being highly volatile.
On one hand, buying into a hot new currency before it explodes in popularity and value may prompt investors to move equally quickly. In actuality, though, you’re more likely to see success if you monitor the industry before making a move. Cryptocurrencies tend to follow particular price patterns. Bitcoin often leads the way among digital currencies, which tend to follow its general trajectory. News of an exchange hack, fraud, or price manipulation can send shock waves through the cryptocurrency sphere, so it’s important to watch out for what’s going on in the space more broadly.
Finally, remember that digital currencies are highly speculative. For every overnight bitcoin millionaire, many other investors have poured money into the virtual-token realm only to see that money disappear. Investing in this space means taking a risk. By doing your homework before making an investment, you help give yourself the best chance of success.