When you are considering cryptocurrency investing, consider several factors. These factors include risk, utility, and diversification. Depending on your investment goals and risk appetite, you might want to buy a single coin or invest in several different cryptocurrencies. Listed below are some of the most important things to consider when making a crypto investment. Read on to find out more. And remember: there are many advantages and disadvantages to cryptocurrency investing. So, before you invest, consider these points carefully.
Diversification
Investing in several cryptocurrencies can protect you from a single coin falling in value. The cryptocurrency market is a new one and projects may not deliver as promised. Some of them may face regulatory issues and end up closing shop. Keeping your cryptocurrency portfolio diversified will minimize the impact of any single project’s failure. Here are some examples of cryptocurrencies to consider when diversifying your cryptocurrency portfolio. Remember, these examples are for educational purposes only and should not be taken as financial advice.
A low correlation between investments is the best diversification. A positive correlation between investments does not necessarily mean they trade in lockstep. While the investments have low correlation, you can still enjoy the same long-term return with less volatility. According to a GOBankingRates survey, more investors are looking at crypto as a diversification tool. This is because the asset class has no direct ties to traditional markets.
Risk
Digital currencies like bitcoin carry a certain level of risk due to their decentralized nature. They are not backed by a central authority and, as a result, have no physical presence. Although governments have attempted to assert regulatory authority over digital currencies, this does not necessarily mean that the currencies are unregulated. The decentralized nature of these currencies also presents some legal complications. For example, cryptocurrency purveyors could face legal action for allegedly distributing cryptocurrencies to those who do not intend to use them.
As with any other investment, cryptocurrency is risky. The decentralized nature of cryptocurrencies, the varying degrees of transparency and the unregulated nature of the market create additional risk for investors. Inexperienced investors should invest only what they can afford to lose. As such, they should conduct due diligence before making any investment decision. Despite the risks associated with cryptocurrency, this industry has seen rapid growth over the past few years. There are now institutional-grade custody services, as well as a growing number of professional investors gaining access to the tools necessary to manage these assets.
Return
The risk and return characteristics of cryptocurrencies are a mystery to many investors. Cryptocurrencies are akin to gambling because they are exchanged from person to person without any regulation. There is no consistent pattern to the values of cryptocurrencies, and it is impossible to calculate the return as you would with growth stock mutual funds. Even though there are several ways to profit from cryptocurrency investing, there are many things you should know before you invest.
The most important thing to know is how to calculate your ROI. You can do this by subtracting the value of your investment from its present value. Once you have this number, you can multiply the value by 100. However, remember that the ROI does not take into account the time period. For example, if you are holding on to a cryptocurrency for a year, you will get a lower ROI than if you sold it right away.
Utility
To get the best return on investment, utility cryptocurrency investing may be a good option for you. Unlike cryptocurrency that has no intrinsic value, utility tokens are backed by actual companies or services. These companies will be the ones delivering services and therefore, you will be investing in the assets that can help them grow. For example, the filecoin provides access to a decentralized data storage network, while the ethereum token will allow users to use a platform for developers.
Tokens such as Golem (GNT) are one good example of utility cryptocurrency investments. These tokens enable individuals to rent computing power and perform specific tasks. Unlike digital money, these tokens can be used for more than one purpose. Some altcoins even require their users to purchase these tokens in order to complete certain actions. Utility cryptocurrency investing can be a good way to get into the space if you can find a project that will be a good fit for you.
Choosing a cryptocurrency to invest in
A key aspect to consider when choosing a cryptocurrency to invest in is its reputation. The success of any coin can be directly attributed to its followers and support. The greater the community support for a cryptocurrency, the more likely it is that it will increase in value in the future. To determine this, you should research the coin’s popularity on social media, YouTube channels, Reddit forums, Telegram and Twitter. A strong community means that there are a lot of people interested in the coin. A large community can be a major asset for any cryptocurrency.
The number of cryptocurrency projects available is enormous, similar to the number of stocks on the NASDAQ and NYSE. However, it is best to stick with larger, more established projects, such as Bitcoin and Ethereum. While the smaller projects may be tempting, these are more secure investments. Their larger cap sizes mean that they are less volatile than smaller ones, and their upside potential is limited. Choosing a cryptocurrency to invest in can be a complicated process, but following these three steps will help you narrow down the choices and choose a cryptocurrency that fits your investment goals.