Investing in Cryptocurrencies: Reducing the Risks
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March 10, 2021

And so you have finally decided to invest in cryptocurrencies but are still scared to do something wrong? Don’t worry we got you covered.

Surely you already know how thrilling, yet unpredictable the world of cryptocurrency can be. Always on top of global news headlines, digital currencies made many enthusiasts rich, but also bankrupt. Is it a new Russian roulette of the 21st century?

The rapid growth of the cryptocurrency interested investors from all spheres, who were hoping for the same kind of returns as the first wave of lucky enthusiasts. We are not here to teach how to become instantly rich - on the contrary, we will try to keep you away from this venture.

Obviously we’re not against you becoming rich, but it is much more reasonable to set rational and achievable goals. Investment is a complicated process, requiring a lot of patience. If you’re patient enough, you win this game. It is extremely important to cope with the fear of missing your chance - especially in the world of digital currencies, where disinformation and fake news are so common.

Keep in mind the golden rule of investment: never invest more than you can afford to lose.

Diversify your investments and don’t take risks

Unfortunately some are convinced that it is enough to buy only Bitcoins (EXANTE: Bitcoin). However, this bizarre idea is based solely on feelings and misconceptions, and not on real facts.

Top 5 Important Cryptocurrencies besides Bitcoin

Bitcoin is, of course, the first and most popular cryptocurrency and has the status of the first-born, supported by an extensive network of miners. However, from the point of view of technologies or its functions, Bitcoin lags behind its analogs. This does not mean that you should completely abandon it - just do not forget about the existence of other cryptocurrencies.

It would be wise to reduce the risk to a minimum by investing only in the most popular tokens, for example, in the top 10 by market capitalization.

It’s the idea that matters

Blockchain technology has grown to a level where tokens can perform not only the functions of currency. There are platforms of smart contracts, such as Ethereum, NEO and Qtum, and decentralized file networks such as Storj, Sia Coin and Filecoin, as well as decentralized exchange platforms like Waves, Bitshares, etc.

Instead of buying one from each, it is reasonable to choose several currencies within one category - this will allow you to reduce the risk. In the cryptoworld, a technical problem or even a split in the development team can lead to a price collapse, regardless of the prospects of the project or technology, as in the example of Tezos.

Hedging

Experienced investors are well aware of how high the risk in the market of alternative currencies is. The entire cryptocurrency system can collapse if there is a serious security problem or state governments just decide to ban it. Of course, the probability of these scenarios is small, but it exists.

Some companies offer crypto-investment funds, in which investments in tokens are combined with the purchase of other assets, such as real estate for instance. The founder and CEO of Caviar, Kirill Bensonoff states:

“We found a couple of major issues with crypto-asset investing, namely, it’s difficult and time consuming, and all assets are highly correlated. There is no ‘safety’ asset that also produces an income. We also see a movement towards having crypto be backed by traditional assets, such as gold, real estate and others, and we are addressing this head on.”

Liquidity

You can buy a cryptocurrency, wait for its growth and face the fact that any attempt to sell it leads to a price collapse. The reason for this is low liquidity. If the trading volume is low, you should be prepared for significant price fluctuations.

To reduce the risk you can avoid cryptocurrencies with low trading volumes. If this option does not work for some reason, keep in mind the risk you are taking. The CryptoCompare website allows you to analyze various characteristics of the portfolio, including volatility, liquidity and risk. CryptoCompare CEO Charles Haiter says:

“We want to make it easy for users to track how well they're doing. Crypto is risky in the extreme and we want to help people understand where these risks lie and how to quantify them.”

Growth Potential

It is important to remember that not all approaches in this article are well-matched with each other, some are more risky than the others, and this one especially. So what does "growth potential" mean?

Cryptocurrencies with low market capitalization have more room to grow, than the ones with high caps. The idea is that the cryptocurrency can become popular, and its capitalization will jump.

Think about which exact crypto assets you want to see in your portfolio. Do additional research; check the objectives of each project, team, read the white paper, understand the technology. Do everything in your power so that the investment does not disappear without a trace.

Technical analysis

For many, the price graphics remain a mystery. Not everyone can understand how technical analysis works, but studying its fundamentals can help with the investments in cryptocurrencies. Jonathan Hobs is a certified financial analyst and author of the book "Stop Saving Start Investing: Ten Simple Rules for Effectively Investing in Funds." He says:

“Any good investment strategy needs rules. Technical Analysis (or “TA”) uses rules to look for price and volume patterns in charts to try and predict what’s going to happen next. It helps investors choose when to buy or sell. One example of TA is the Simple Moving Average (or “SMA”). The 50-day SMA, for instance, is the average price over the last 50 days, which changes or ‘moves’ each day. When an investment starts trading above its SMA, this is could be a bullish sign. Since TA can also protect the downside, it’s a good risk management tool for volatile investments like cryptocurrencies.”

Proof-of-Stake Mining

Many would be interested in investing in mining of cryptocurrency, but at this stage, real results are given only by multimillion-dollar projects. Mining has become the fiefdom of large players with large financial reserves, modern equipment and access to cheap electricity. There are some alternatives to traditional mining, and Proof-of-Stake (PoS) is the most common.

PoS allows users to mine coins without additional equipment. In this algorithm, the number of coins you have determines the amount of compensation. Most PoS-cryptocurrencies require that the wallet program runs constantly, with some implementations such as Waves and Lisk allowing owners to earn interest by leasing or delegating their coins.

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