Cryptocurrency has become the decade’s top financial disruptor. With billionaires, conglomerates, and governments all joining the crypto fold, these digital tokens have soared in value. Just last November, the crypto market cap hit an all-time high of $3 trillion, with bitcoin leading the way; this has firmly cemented crypto as an in-demand asset. That said, although crypto’s growth and legitimacy has soared, it still remains a risky investment.
As a highly volatile asset, crypto is known for its sudden fluctuations. Case in point: Last January, two major coins bitcoin and ethereum plunged 50% and 20% respectively. While these drastic movements may be off-putting for some investors, such is the nature of cryptocurrency.
Thankfully, despite this, there are some ways in which you can invest in crypto with a reduced risk. Here’s how:
1. Only invest what you can afford to lose
Investing only what you can afford to lose is an age-old investment reminder, but one worth repeating where crypto is concerned. Although crypto is becoming an increasingly recognized asset class, it is still highly speculative. Just as much as you can earn from these tokens, so too can you lose your entire investment. Thus, it’s better to be modest with the money you put in. This way, should prices suddenly drop, you won’t find yourself going bankrupt. To be on the even safer side, you can set aside a specific investment fund for cryptocurrencies. By doing so, you have a set amount you can use to experiment with crypto assets without worrying about impacting your personal finances.
2. Keep updated on regulations
Although crypto is decentralized, it is becoming more regulated worldwide. For instance, trading bitcoin is considered legal tender in El Salvador. Meanwhile, China has outright deemed all crypto transactions as illegal. As each country takes a stance on digital currencies, the overall standing of crypto is affected. Therefore, knowing about global regulations will help you predict potential crypto dips and peaks. An inexpensive way to stay updated on new regulations is to turn on Google alerts or to subscribe to financial newsletters. These have little to no fees but will be able to provide you with domestic and international crypto regulations regularly.
3. Look for regulated trading platforms
Because most cryptocurrency is unregulated, most investors won’t have a safety net. This is why it’s important to find a regulated crypto trading platform. These aren’t necessarily the same as exchanges, but they do provide more safety since they’re required to meet certain requirements. In the US, this is still a relatively new concept. However, in Canada, this is already an established option for local traders who want to buy bitcoin. In such a regulated platform, traders can enjoy the protection of qualified custodians and insurance. By using cold storage and end-to-end monitoring and encryption, these regulated trading platforms can prevent a total loss of assets even if prices dip or a hacking occurs.
4. Consider non-direct crypto investments
If, however, you still feel uncomfortable directly dealing with crypto, you can opt for indirect crypto investments instead. One of the best ways to get you indirect crypto exposure includes investing in companies that have bought tokens themselves. This is the strategy that financial expert Suze Orman observed when she bought Microstrategy stock. Since MicroStrategy holds billions of dollars worth of bitcoin investments, by becoming a stockholder, Orman indirectly diversified her portfolio with crypto. Another advantage of investing in companies with a crypto footprint is that it may be more affordable. While cryptocurrencies are historically expensive, stocks prices may vary across the board.
There’s no doubt that cryptocurrency will only continue to be a hot asset moving forward. But until such a time that crypto is fully regulated, risk will always come part and parcel with these currencies. For investors who want to reap the pros of this asset while avoiding its cons, it’s important to stay updated, discerning, and ready to pivot.
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I just can’t bring myself to consider Crypto currency. My risk aversion tendencies say the best way to reduce my risk is to stick to things I can see and touch, like land PMs, etc. :o)
I’m with you 100%, Lauren. But a lot of people think cryptos are the way forward.