1. Learn about the currency
First of all, it is important to learn about the cryptocurrency that one is considering investing in.
It may sound obvious, but virtual currencies are not required to disclose information to investors unlike listed companies. This means investors must actively do their own research.
Even for those without a technical background, it is important to know what the crypto is, and how it is used.
2. Learn the basics of the crypto
It is also important to learn the basics of virtual currency.
Before investing money in any cryptocurrency, make sure you know the basics of the structure of Bitcoin, block generation, proof of work (PoW), and why blockchain is tamper resistant.
There are many types of virtual currencies that can be invested in, but not knowing the basics can lead to confusion when choosing what to invest in.
For example, even if there is something claiming to be "a new coin that has the same features as Bitcoin, but features higher remittance power", it may come at the cost of security being sacrificed.
Once you have a grasp on the basics, it increases your possibility of catching these issues.
3. Start with small amounts
Virtual currency can be divided into very small amounts.
Even if 1 BTC is at around 8 000 EUR, bitFlyer lets you buy in decimal units. You can hold Bitcoin even in units as small as 1 EUR. This means that you can gradually learn to become familiar with cryptocurrencies with small amounts if you are a new investor.
4. Don't be misled by suspicious influencers
There are a lot of investors that use social media like Twitter to spread information on virtual currency. There can be useful information, but you must be careful.
This is because there are a lot of suspicious accounts saying “this coin is going up”, “join this chat room for investment information”, “guaranteed profit”, and other suspicious claims. These often tend to be sellers trying to force a market price and sell out.
If it sounds too good to be true, it probably is.
5. Create a portfolio
Our fifth point is to create a portfolio.
Bitcoin has the largest market capitalization among cryptocurrencies, but has high volatility. Other smaller-scale virtual currencies have an even higher volatility than that. Some have a 90% loss in six months. If you had invested 10 000 EUR in only that one, you would lose 9 000 EUR in just six months.
This can be mitigated by having a portfolio and having an investment strategy.
Also, one thing that can be helpful in terms of building a portfolio is the dominance of major players in the overall cryptocurrency market. As of May 2020, Bitcoin and Ethereum combined hold over 70% of the market capitalization of the entire virtual currency market.
In other words, a flat investment in the cryptocurrency market would be a portfolio that allocates about 70% to Bitcoin and Ethereum. On top of that, if you feel that there is a particular potential for a specific virtual currency, you may consider cutting into that Bitcoin and Ethereum investment a little and increasing the ratio of the other one.
There are many ways to build a portfolio, but it is very important to build a portfolio.
What do you think?
There are many things to be aware of when investing in cryptocurrencies, but there is still a lot of potential. If you have not invested in crypto yet and are interested in getting into it, please ensure that you have a sufficient amount of risk management.