With the rapid rise of use and trading of cryptocurrencies, there are many searching for ways on how to invest in cryptocurrency and how to reduce the risks associated with getting involved in this kind of digital investment.
Like any kind of investment, there are risks involved when investing in cryptocurrency. The higher the risk, the higher the gains. Banks offer checking, savings and time-deposit accounts that have very low risk of loss—only if it declares bankruptcy will depositors be at a risk of loss—yet very low interest rates.
Even during bankruptcy, if the bank is covered by the Federal Deposit Insurance Corporation (FDIC), clients may still get their money back. This is why the reward is also very low because it is considered a safe investment. Banks generate income from deposit accounts by lending out money at a higher interest rate to clients and by investing it at a higher risk in stocks or bonds.
Now, with cryptocurrency, there is a high risk due to the volatile nature of its price. However, digital currencies cannot and should not be considered the same as stocks, bonds, gold and other precious metals and gems.
For instance, the value of stocks and bonds fell during the start of the COVID-19 pandemic. However, the price of digital currencies shot up as people looked for other ways to earn from investments. And because everything can be facilitated online, it boomed during the pandemic when people were advised to stay at home.
The high risk in investing in cryptocurrencies can best be illustrated when the price of BTC crashed in May this year to more than half its price at $30,001.51 since its peak of $64,829 in April, wiping off $365 billion from the digital currency market.
In this case, although many investors may have incurred losses, if they did not sell their BTC and waited for the price to rise up again, like what happened last October, then losses could be mitigated and the potential to earn remains high. However, their money would have been stuck in BTC for almost half a year until they can finally sell off their coins at a higher price.
In this case, reducing the risk means to use only money that one can afford to not touch if it may mean waiting for the price to go back up before selling. Another strategy is to not put everything in one digital currency.
“The question investors need to answer isn’t what strategy worked yesterday but what strategy will work tomorrow. When you’re trying to reduce risk in your portfolio, you want diversified assets that aren’t closely correlated,” Glen Broomfield, General Manager of crypto-to-crypto trading platform Fabriik Weave, explained.
Diversifying digital asset investment is key to reducing risk of loss. For instance, an investor may have lost a lot if they put all their money in BTC and needed to convert it to cash for some important reason. But if they bought other digital currencies and assets, such as NFTs, they could choose which ones that will incur lower losses or even some that may have higher returns to liquidate.
At the end of the day, investing in cryptocurrency is something that requires a lot of research and know-how. It is best to read a lot about it, ask friends and colleagues and check out legit digital currency exchanges.