Cryptocurrencies have enjoyed a massive surge of interest from potential investors. As a result, the total cryptocurrency market has increased its market capitalization to over $2 trillion, having flirted with $3 trillion in late 2021. And with exciting new developments in blockchain, decentralized finance, non-fungible tokens, and the metaverse, the investment opportunities in crypto are more interesting than ever.
At the same time, however, the crypto markets can be overwhelming for novice investors. In 2013, there were around 50 currencies. Today, there are more than 16,000 listed on hundreds of exchanges. Choosing the right currencies and places to buy them may seem like a daunting task. So here are a few tips on how to make a smart opening investment in crypto.
Don’t blindly follow the crowd
History is full of examples of herd investing driving up investment prices only to cause them to come crashing down just as quickly. So new investors must be wary of jumping on the bandwagon just because of news stories about one currency with a skyrocketing price.
DOGE is an excellent cautionary tale for new investors. Ironically, DOGE arose as a meme coin intended to poke a little sarcastic humor at the near insanity surrounding cryptocurrencies due to the massive increase in the valuation of Bitcoin. But DOGE has had its own experience with investor hysteria.
At several points in 2021, DOGE quickly rose in value due solely to tweets from personalities such as Elon Musk and Mark Cuban. For example, in early 2021, Musk tweeted that DOGE was “the people’s crypto,” after which DOGE’s price soared by 60%. Within a week, however, it had fallen below pre-tweet levels. Since mid-2021, DOGE has lost 75% of its value.
Many new investors would be better served to get their feet wet with more stable investments and income opportunities than meme coins.
Understand that new cryptocurrencies may not be the next Bitcoin
Bitcoin (BTC) has made its case as the number one cryptocurrency. It has the largest market cap at nearly $1 trillion, more than twice its nearest competitor Ethereum (ETH). Early BTC investors notoriously made hundreds of millions as it increased in popularity, which is why everyone is looking for the next contender. It’s also found favor with the general public. According to a recent survey, 64% of respondents stated that they believe Bitcoin is a safe investment.
New cryptocurrencies seem to launch daily, and it isn’t easy to discern what makes one crypto skyrocket while others languish. Investors need to thoroughly understand why crypto launched, how it interacts with various blockchains, and what technological advantages it may have that will drive value.
Until investors have a good feel for the markets, they are better off starting with well-accepted and widely traded coins like BTC and ETH. However, they still have to be willing to withstand substantial price volatility (BTC, for example, had two major flash crashes in 2021). They can then begin to expand their portfolio to include up and comers like Solana (SOL), Cardano (ADA), or Polygon (MATIC). The truly adventurous can look towards the new non-fungible token (NFT) markets.
Look for earning opportunities
Some of the most intriguing options for new investors are coming from the rapidly expanding decentralized finance (DeFi) arena. DeFi uses blockchain technology to facilitate investments without involving middlemen like traditional financial institutions.
Among the DeFi applications that offer promise for new investors are staking, lending, yield farming, and liquidity mining. Each gives inventors the chance to generate high returns; indeed, much higher returns than banks. For example, it is not unusual to see returns of over 100% for liquidity pools. Compare this to money market accounts bringing in 0.6% or CDs making 1% or less, and it is easy to see the attraction. And returns can balloon by reinvesting daily interest or mining rewards, creating rapid compounding and increasing portfolio value.
DeFi is not without its risks, and investors need to understand how the various options work before committing their funds. For example, liquidity mining can lead investors to suffer what is known as impermanent loss, where they lose coins as their value changes against other coins. They can regain the coins as values shift, but it can shock investors who weren’t expecting to see their holdings decrease.
HODL or day trade?
One term new crypto investors will quickly learn is HODL (alternately a drunken misspelling of hold or an acronym for hold on for dear life). HODL is a long-term investment strategy for dealing with the volatility of the crypto markets. So, HODLing is a good starting option for new investors just learning how crypto markets work. Prospective HODLers need to understand secure crypto storage options, including how crypto wallets work and interact.
That being said, there are enormous opportunities for knowledgeable investors with nerves of steel who want to leverage crypto market volatility. And there are numerous trading platforms that help investors day trade. But, as with any day trading, it is neither for the uninformed nor the faint of heart.
Crypto markets and blockchains come with some features that surprise many new investors. For example, established chains like Bitcoin and Ethereum often have very high transaction fees that make small-value transactions impractical. New investors should learn how these markets work and carefully look at fees before committing to transactions.
Another major consideration for investors is how crypto factors into their income tax. The IRS continues to evolve its approach to crypto, and the rules for how it treats crypto transactions for tax purposes are complex. Investors must track their transactions carefully, as they will have to report many of them in their tax returns. And many accountants are not yet set up to deal effectively with their clients’ crypto portfolios.
Crypto investing is unquestionably the wave of the future. Crypto can generate much higher returns than traditional investments, and so they are an exciting opportunity for novice investors. But as with any investment, the better-informed investors are, the more likely they will be able to build value securely.
Learn more from Crypto and read Private: Crucial Points to Know if You Work With Cryptocurrency.