5 golden rules of crypto investing

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These tips can help you build long-term wealth.


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Key points

  • If you only invest money you can afford to lose, and crypto only makes up a small percentage of your portfolio, a crypto crash is unlikely to destroy your finances.
  • Keep an eye on your investments for the long term and take the time to research any cryptocurrency before buying it.

Last year, it seemed like cryptocurrency prices would only move in one direction, and investors can’t be wrong. Even a trading hamster was able to pick a winning cryptocurrency. But today, many cryptocurrencies are down 80% or more from their all-time highs. This is a stark reminder that this is a risky investment that can go up as well as down.

Many of the golden rules of crypto investing revolve around the idea of ​​minimizing risk. If you are going to buy cryptocurrencies, the ideal scenario is that you will make a profit if the prices of cryptocurrencies skyrocket, but not face financial disaster if the market crashes. These five rules will help you with this.

1. Invest only money you can afford to lose.

When you see predictions that Bitcoin (BTC) could hit $1 million, it is tempting to invest every penny available in the cryptocurrency king in hopes of big wins. Problem? You can lose all this money. If you only invest money that you are comfortable losing, you won’t go broke if the industry goes bad.

Investing in cryptocurrencies is risky. There is a chance that blockchain will revolutionize how we manage money, or even become the future currency of the Internet. But this may not be the case. Many projects will fail and the entire industry may collapse completely. Whether it’s regulation, the introduction of central bank digital currencies (also known as Gov Coins), or the development of even newer technologies, there are a number of major hurdles to overcome.

2. Cover other financial bases first

If you want to invest in cryptocurrencies, it is important to start by building a solid financial foundation. This means having a reserve fund to cover three to six months of living expenses in addition to pension contributions. If you are trying to pay off debt, give preference to any crypto investments.

If you run into a financial emergency next week, an emergency fund can help you cover it without getting into debt or selling assets, which can lead to losses. Imagine you spent $2,000 in bitcoin last November instead of putting it into an emergency fund. Today it can cost as little as $600. While it may recover in the long run, it won’t help you if you are forced to sell today. How would you feel if you lost your job this week or faced a medical crisis and your financial cushion was in bitcoin instead of banks?

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3. Diversify your investments

Diversification comes in many forms – the types of assets you buy and the individual assets in each class. Most experts recommend investing only a small part of your total portfolio in cryptocurrencies. The rest should be invested in low-risk assets such as real estate or stocks. The exact amount depends on your risk tolerance, your belief in cryptocurrencies, and your financial situation. If you have several decades ahead of you before you plan to retire, you may be more inclined to expose yourself to more cryptocurrencies because you will have more time to recover if things go wrong.

It is also good to diversify your crypto portfolio. Some people choose to only invest in Bitcoin and Ethereum (ETH), which makes sense as they are the most established cryptocurrencies and have the best chance of surviving in the long run. But if you want to buy smaller altcoins, don’t buy one or two.

Consider a mix of crypto sectors depending on which ones you see as promising. For example, my portfolio is heavily focused on smart contract cryptocurrencies, as this is an area that I have studied extensively and I love that many other cryptocurrencies are built on top of these blockchains. I have some affinity for game and metaverse tokens and avoid privacy tokens entirely. Other investors are likely to have different priorities and areas of expertise.

4. Think long term

One way to survive cryptocurrency volatility is to invest with a 10-20 year mindset. Trying to time the market with short-term trades is next to impossible, and many investors lose money doing so. Instead, look for projects with strong leadership and good utility that can perform well in the coming decades.

It’s not always easy to think long term because it’s too early for the industry and we don’t know much about its evolution. But it is an approach that will help you look ahead even to long downturns and avoid making emotional decisions. For example, if you had bought each of the top 50 cryptocurrencies five years ago, you would have seen growth of around 700%, despite the fact that many projects did not survive the 2018 crypto winter.

5. Research

Never buy a cryptocurrency that you have not thoroughly researched. We all live busy lives and it can be tempting to invest a small amount of money in an altcoin you have heard about online. But it’s your money, and there’s a lot of misinformation out there. Only you know your investment strategies and goals. Research does not guarantee success, but it greatly reduces the risk of being scammed or buying a cryptocurrency that does not have good long-term potential.

At the end of the line

Cryptocurrency is a relatively new asset class. In the last year, some people have felt the need to buy cryptocurrencies in order to participate early in the next big deal. They bought crypto for fear of missing out—in some cases, the money they needed in the short term at the expense of other financial goals. If you are considering buying cryptocurrency, it is important to first consolidate your finances and study the industry. Thus, another collapse of cryptocurrencies will be disappointing, but not devastating.

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