Five Things to Consider Before Investing in Cryptocurrency

When it comes to cryptocurrencies, one of the toughest challenges for most potential investors is avoiding being caught up in the hype. Cryptocurrencies have rapidly scaled to a zone of prominence in many websites, even as experts have warned investors about their volatile and unpredictable nature.  

Many people are investing in digital currencies and it is becoming increasingly evident that it is not just a fading trend. Additionally, it is also evident that the cryptocurrency space is potentially lucrative, although accompanied by some risks. Therefore, before investing in cryptocurrency, it is advisable to be objective and only invest what you can afford to lose as Warren Buffet phrases it.

The current hype and hoopla engulfing cryptocurrencies are adequate to make potential investors wonder if they should venture into it. Well, why not? After all, cryptocurrency is the future of money, so why should you be left behind? Nevertheless, you ought to realize that there is a big difference, almost a yawning gap, between fiat currency and digital currencies. For now, we will not dig into the differences between the two but, we will provide you five commandments to consider before investing in cryptocurrencies.

1.   Understand the Risks You are Venturing Into

Ensure you comprehend the intrinsic risks of the venture you are entering when investing in cryptocurrency. 

·        When you buy an Initial Coin Offering (ICO), you are investing in a start-up. Many start-ups fail to achieve their goals.

·        Most digital currencies (particularly tokens that are yet to be used because the project has not been launched or is in its infancy stages) are illiquid and more vulnerable to manipulation compared to securities. 

·        Cryptocurrency tokens (bar security tokens) do not offer bonuses.

·        The crypto markets are not regulated; hence, some ‘big fish’ might corner the market at the expense of others.

Besides, what is stated in the Whitepaper is hardly mirrored in the Smart Contract, and the worst thing is, the founders of the project at times keep the back door unlocked to allow future amendment of the Smart Contract for their benefit. For instance, they consent themselves to alter the distribution of a coin after the ICO; or the Whitepaper highlights a lockup phase but, the Smart Contract does not have any logic which locks up the founders’ tokens.

2.   Be Choosy

A deep market correction (not forgetting the crypto correction) can flatten everything: for both good and bad tokens. Considering that you are lying within the exposure zone, you have set for yourself, investing during a severe market correction implies you have a chance to acquire good tokens at discounted prices.

Consider the drivers that hold the value of a token.

Prioritize in those tokens with a strong, basic demand for the blockchain they back. For example, you purchase computation power on the Ethereum blockchain by paying for Ether (ETH). Developing a Smart Contract on the Ethereum blockchain costs ETH; implementing smart contract logic costs ETH and so on. Since Ethereum is the favourable blockchain to run Smart Contracts at a time when the world is heading to full automation and decentralization, one can invest in ETH anticipating that its demand will be high.  

Search for big economic moats.

Economic moat in this context implies a degree of competition an issuer encounter. Some business models are more challenging to compete with compared to others. For instance, it is almost impossible to copy the brand loyalty of Apple. On the other hand, it is much easier to develop an Android phone and rival Samsung.

3.   Don’t be Silly

Do not just hear a certain cryptocurrency skyrocketing overnight and you invest all your money there just before dawn. The crypto world is full of risks, remember the reasons we discussed earlier. Begin with small investments and keep on investing as you learn the markets.

Besides, spread your crypto investments, particularly in a property class that greatly relies on the assumption that a certain DLT platform will be popular. The more you diversify your investments, the more likely you will gain from them.

4.   Don’t be Lazy

If you are highly interested in investing in ICOs, you must do extensive research. More than 600 ICOs were released into the crypto market in the first six months of 2018 (excluding those that did not reach their soft cap.) Honestly speaking, that is a lot of whitepapers to examine. However, hard work is not the only requirement:  

·        You must ensure you are excellent at discriminating good projects from bad ones.

·        You must examine the founders of that project, their skills, and experience in the crypto world.

·        Find whether certain giant establishments are supporting the project or not.

Alternatively, you can seek the services of a crypto advisor to gain more insights into what you are about to venture.

5.   Do Some Technical Evaluation 

In a situation where dividends are not paid, and salaries are not ascribed to projects, it is challenging to establish the honest value of a cryptocurrency. Technical evaluation is of help in such circumstances, though it is not a perfect method.

Technical evaluation is an examination of how the psychology of the market is displayed in how a chart for an asset appears. For instance, when crypto prices are swelling, and volumes dry up, you must be very keen with that trend since it suggests that a tiny portion of the market is taking part in the value appreciation. Equally, when there is a market correction escorted with big volumes in that digital currency, then it implies that the correction is backed by a comparatively big percentage of the market.

Technical evaluation is essential since it helps dodge catching a falling machete or investing at the top.  

Conclusion

If you want to keep a level head and properly manage your investment risks, then don’t let the above five commandments depart from your mouth. Cryptocurrency investment can be advantageous for you. Remember, whether the digital currency is a good investment for you is based purely on how you speculate the future crypto world, and not what the past growth of cryptocurrency has been.