How to Minimize Risks When Investing in Crypto

How to Minimize Risks When Investing in Crypto

Want to make money through crypto but are worried about the volatility? Here’s what you need to know to reduce the risks of investing in cryptocurrency.

One of the most well-known things about crypto is its volatility. For instance, despite reaching an all-time high value of US$68,000 in November 2021, Bitcoin fell to US$33,000 in January 2022. The conditions were so bad that investors became concerned about a “crypto winter”, a phenomenon where prices continue to stay low with no rise insight for over a year. 

With such volatility and fears of a crypto winter, it is natural to be concerned about whether making an investment in crypto is a sensible decision for your investment portfolio. Here are a few tips for those who are curious about how you can dive into crypto with the least risk possible.

Invest buffer money

With all the talk of volatility, it must be evident to you that you cannot pour all your resources into crypto. So, when you decide to invest in crypto, make sure you have buffer money. This money should be funds you don’t need to meet your basic needs. Taking a loan to invest in crypto assets is also not advised. Instead, experts advise that you invest a small amount over a long period of time to get the best returns. You don’t have to invest a lot of money altogether, increase your investment as and when you have more resources to spare. 

Investing in companies with crypto holdings

If you are worried about directly jumping into a crypto investment, you could instead invest in companies that have crypto holdings. The companies would then act as a buffer between you and crypto volatility. The level of risk here depends on the amount of crypto the company has on its balance sheet. You can check out the company’s balance sheet to learn more about its crypto holdings. For instance, as of December 31, 2021, Tesla’s Bitcoin holdings are worth US$1.99 billion. It is possible that a rise in Bitcoin’s value could lead to a surge in Tesla’s stock prices too. 

Investing through index funds

Another strategy at your disposal is to invest in crypto through index funds. An index fund refers to a portfolio of stocks designed to mimic the structure of a financial market index. These funds are built on the principle that, in the long run, the market will outperform any investment. Much like investments in traditional financial markets, you can use index funds to invest in crypto as well. For instance, there are crypto index funds, like Crypto10 and Crypto20, which expose buyers to the top 10 and top 20 cryptocurrencies by market capitalization respectively. 

Copy-trading

This strategy simply means you copy the investments of a professional crypto investor. You can seamlessly copy trades on some crypto trading platforms, like eToro, Coinmatics and 3Commas. All you have to do is select a crypto trader based on factors, like previous performance, the number of followers they have and how risky their investments are. Once you select a trader based on these factors, you can link your account to theirs, and then your account will automatically buy and sell the same assets the trader does. 

Investing in crypto platforms

You can also invest in crypto by betting your money on crypto infrastructure. This essentially refers to companies that are directly involved in the crypto industry. This includes crypto trading platforms and mining companies. Some of the public companies operating in the blockchain space include crypto trading platform Coinbase and crypto infrastructure developer Riot Blockchain Inc. 

Hedging

If you are not sure which direction you think the asset will head in, you can hedge your bets. Hedging refers to an investment strategy where you make a primary trade in the direction you expect the market to go in and a secondary trade in the opposite direction. Hedging will prevent you from losing out no matter whether the asset rises or falls in value. Crypto investors can hedge their investments by going long or short in the future market. Going long is a strategy where you agree to buy a cryptocurrency at today’s prices at a predetermined time in the future because you expect it to rise in value. In contrast, going short is a strategy where you agree to sell a cryptocurrency at today’s price at a predetermined time in the future if you think it will fall in value. 

Finally, one of the most important things you can do to reduce risk when investing in cryptocurrency is by thoroughly researching the market. Don’t make investment decisions based on hype (remember the Squid Game Token scam?). Take the time to study the asset you want to invest in and make sure that crypto isn’t the only kind of investment you are making. This will ensure the least loss in case the asset prices are unfavorable at some point in the future.  

Header image courtesy of Pixabay

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