How to Invest in Cryptocurrencies?
Why Do People Invest in Cryptocurrencies?
Cryptocurrencies rose to stardom in 2017-2018, despite having been around for almost a decade prior to that. Even though the hype of the crypto-rush has passed, they have retained an air of aura about them. The investing world still has fond memories of the huge returns that this exciting asset class delivered back then, and remains a firm favourite with many investors due to their volatility which presents many trading opportunities at any given moment. Crypto investors fall mainly into two main categories. The first group firmly believe in the idea of a decentralised peer-to-peer medium of exchange that will replace the current, old and stale global financial industry. For this group, an investment in cryptocurrencies is an investment in the future of a free and transparent monetary environment.
The other group can collectively be referred to as speculators, whose investment in cryptos is purely for monetary gain. Speculators, including big institutions and retail investors, have been attracted to the crypto space owing to the abnormal returns the asset class has delivered over the years. Depending on their goals and risk appetite, investors can invest directly by buying crypto coins and tokens through crypto exchanges, or indirectly by investing with brokerages offering cryptocurrency CFDs.
The Approaches to Cryptocurrency Investing – How to Choose a Cryptocurrency to Invest In
Initially considered highly risky investment products, cryptocurrencies are now considered legitimate financial assets that can be speculated on using a variety of investing approaches including:
- Dollar-cost Averaging Strategy
If you are a believer in the future of cryptos and their underlying technology, this could be the strategy for you. Dollar-cost averaging is an investment approach that regularly adds a fixed dollar amount to a crypto portfolio. For instance, an investor may commit to invest $100 every month in cryptocurrencies, regardless of the prevailing prices. Dollar-cost averaging is very effective when trading assets as volatile as cryptocurrencies. It is convenient and gives investors the flexibility of gradually building a sizeable crypto portfolio. Trading wise, it completely eliminates the issue of market timing, and it can significantly reduce the overall investment cost of a crypto portfolio if prices decline.
- Value Averaging Strategy
Another alternative approach is value averaging, which allows for the shifting of investment contributions, depending on the overall value of a crypto portfolio. Investors invest more when prices decline and less when prices increase. The goal is to maintain a target value of the portfolio. For instance, an investor targeting a crypto portfolio of $12,000 by the end of 12 months, will invest $1,000 monthly. However, if by the end of the second month, the crypto portfolio is worth $1,500, the investor will contribute only $500; if the portfolio is worth $800, the investor will contribute $1,200. A variation of this strategy can be applied when trading cryptocurrencies. With cryptos capable of abnormal price surges, investors can liquidate or reshuffle some of their crypto holdings when prices are high and only seek to boost the capital when prices drift lower.
- Technical and Fundamental Analysis
Like any financial asset class, technical and fundamental analyses help identify the best crypto coins and tokens to invest in. Technical analysis involves forecasting future prices based on past price behaviour. With cryptocurrencies seemingly capable of abnormal price jumps, technical analysis naturally takes a backseat compared to fundamental analysis. Fundamental analysis of cryptocurrencies involves assessing the market capitalisation of the underlying crypto coin, its whitepaper and tracking its major news releases.
Market capitalisation can simply be determined using the price and number of the coins in supply, but crypto investors assess numerous other factors to comprehensively value a crypto coin or token. The factors include ownership dynamics, mining profitability, trading volume, transaction speed and coin scalability. A coin’s whitepaper also details a project’s goals and roadmap, and it represents a great way to understand a coin’s intrinsic value. Cryptocurrencies are inherently sensitive to major developments in the underlying coin. News, such as hard forks, security and other technological developments or vulnerabilities, can inspire major price movements of the underlying crypto coin.
With cryptos now a financial asset class, there are numerous other investment alternatives investors can use to gain exposure to this space. Crypto ETFs, futures and indices are available at major exchanges as well as crypto CFDs, which are available at AvaTrade, renowned as a reputable online financial assets trading brokerage.
The Risks of Investing in Cryptocurrencies
Here are some of the risk factors when investing in cryptocurrencies:
As valuable digital assets, cryptocurrencies have been the target of sophisticated hacking attacks. Investors that hold cryptocurrencies in crypto exchanges that offer online wallets may be at risk when hackers implement successful attacks.
Governments across the world have always cast a suspicious glance towards cryptocurrencies. Regulatory clampdowns have always delivered a negative sentiment for cryptocurrencies, which consequently triggers massive price losses.
Initial Coin Offerings (ICOs) provide an amazing opportunity for investors to ride a crypto coin’s price rally from the ground floor. While returns can be substantial, investors can be separated from their money even before getting on board. Without due research, it can be easy to fall victim to numerous fake ICOs whose agendas are simply to scam investors.
Final Words – Trade Cryptocurrency CFDs with AvaTrade
The above risks have always limited the potential of investing in cryptocurrencies, with the aim of prices increasing in the future. Alongside other factors, such as a lack of dividends and naturally high volatility, most investors now consider CFDs as the best way to reap maximum benefits from the price movements of cryptocurrencies.
Cryptocurrency CFD trading involves speculating on the price changes of underlying coins, without actually owning them. This essentially means that investors have the unique opportunity of making a profit whether prices rise or fall. As well, when trading cryptocurrency CFDs, investors do not have to worry about some of the risk factors outlined above as they will only be speculating on the price changes (up or down) of their favourite crypto coins and tokens.
As a regulated and reputable global broker, AvaTrade offers cryptocurrency CFDs to all investors. Here are some of the benefits you will enjoy when trading cryptocurrency CFDs with an award-winning broker:
Boost your profit potential when trading cryptocurrency CFDs with leverage of up to . On other asset classes, such as forex, traders can enjoy leverage levels of up to .
- Short Selling.
You do not own the underlying asset when trading cryptocurrency CFDs. This means that you can still generate profits by speculating on prices falling.
- Automated Trading.
AvaTrade platforms are advanced and use superior technology that supports efficient automated trading.
- Low Trading Costs.
With spreads as low as 0.5%, cryptocurrency trading costs at AvaTrade are much lower than commissions charged by crypto exchanges.
Invest in Cryptocurrencies FAQ
- How much should be invested in cryptocurrencies?
In order to maintain a diversified portfolio experts recommend that no more than 10% be invested in cryptocurrencies. This amount is lower than it might otherwise be due to the volatility and uncertainty that surrounds this new asset class. An investor who wishes to be extremely aggressive might consider putting 20% of their capital into cryptocurrencies. The story is different for traders, who only hold assets for a short period of time. As a trader you could feasibly have all your capital in a cryptocurrency trade.
- Is it safe to invest in cryptocurrencies?
Cryptocurrency investing is still considered to be quite risky. Many cryptocurrencies are unproven, and many others have fallen by the wayside over the short time that they’ve been an asset class. Even the oldest and most popular cryptocurrency, Bitcoin, is considered to be quite risky and speculative. In order to keep your capital somewhat safe experts recommend keeping any investment in cryptocurrencies at 10% or less. That can help smooth out the potential volatility, allowing the investor to realize profits when the cryptocurrency is rising, but also limiting potential losses in the event that prices retreat.
- Is now a good time to invest in cryptocurrencies?
There is no way of knowing the best time to invest in asset class. No matter if you’re talking about gold, or stocks, or cryptocurrencies you can’t be sure if it’s a good time to invest and there is always a degree of uncertainty. However, it has been noted that in the case of Bitcoin at least there do seem to be cycles that indicate some times are better to invest than others. For example, Bitcoin has always had a rally in price 12-18 months after its halving event, when the amount of Bitcoin paid to miners for forging blocks is cut in half. The last such halving occurred in May 2020.