Interested in investing in crypto? Here’s what you need to know
“Because it’s been around for longer people are starting to accept it,” Gavin Smith, Group CEO of crypto investment firm Panxora, told Fintech Zoom Business. “That’s led to professional involvement because now they understand a bit better how to manage the risk,” Gavin Smith, Group CEO of crypto investment firm Panxora, told Fintech Zoom Business. That’s creating more confidence from the general public, he added.
But for new investors in the space, some caution and education is needed, experts say.
Which cryptocurrency should I buy?
There is a wide variety of digital tokens and other crypto-related projects that one could invest in — with more emerging all the time as the so-called decentralized finance (or “DeFi”) movement gains traction.
“Many digital currencies have distinct use cases, and you should understand the value proposition of a potential investment before committing capital,” Grayscale Investments CEO Michael Sonnenshein said in an email.
Bitcoin is also the most liquid cryptocurrency, which should make it easier for investors to buy and sell with relative ease, compared to smaller, more niche coins with less demand, Farrokhnia said.
After starting with the usual suspects, Panxora’s Smith said, invvestors should do some research “then maybe branch out into some of the other tokens that offer specific use cases in decentralized finance … There’s a few tokens out there that are really exciting and quite small at the moment.”
How do you buy it?
Keep it simple.
Stick with well-known, regulated exchanges such as Coinbase, Kraken or Binance, to buy and hold crypto investments — at least to begin with.
“With bitcoin, while it’s on the exchange, you’re quite safe,” Smith said. “Until you get familiar with the technology, I wouldn’t recommend holding in your own wallet.”
One thing to note: Crypto exchanges often have higher transaction fees than many stock trading apps, Farrokhnia said.
As for when to invest, experts advise against trying to time the market or buying a certain token just because the internet is buzzing about it. (FOMO is not a good investment strategy). Instead, many recommend the dollar cost averaging tactic, which entails buying smaller amounts at regular intervals over a set period of time.
“Dollar cost averaging is a great tactic for investors who want to invest and hold digital currencies over the long term,” Smith said.
How risky is it, really?
Cryptocurrency is still quite risky compared with most other asset classes.
“For an average investor with a few thousand dollars of savings, this may not be the best domain to invest your money,” Farrokhnia said.
The price of most mainstream cryptocurrencies isn’t pegged to something specific and observable, in the way that stock prices typically fluctuate with the fundamental performance of a company. That can make it hard to understand or predict the current or future trajectory of a digital coin.
For this reason, experts recommend allocating only a small portion of your total investment portfolio (if any) to crypto.
But for some, the higher risk could be attractive because it may mean higher reward.
“The volatility inherent in the asset class makes crypto a riskier asset than most equities, but it comes with higher potential upside. Many digital currencies, including bitcoin, offer superior risk-adjusted returns over time,” Grayscale’s Sonnenshein said. He added: “Bitcoin may not be for everyone, but everyone should at least consider it.”