Subscribe to Entrepreneur for $5
Subscribe

5 Things to Know Before You Invest in Cryptocurrency

Before one invests, there is a due diligence checklist.

By
Opinions expressed by Entrepreneur contributors are their own.

Cryptocurrency has been adopted by the mainstream in recent years. Not a day goes by without some headline-making metaverse purchase or cryptic tweet on dogecoin (Elon Musk, we're talking about you). Hype aside, the crypto market is no fad. 300 million worldwide users see its long-term potential and an increasing number of global giants now accommodate it as a payment method. Yet, the crypto world is still a nascent market (just like cannabis and genomics) that attracts promoters, scammers and dreamers. Ergo, despite this growth and exuberance, the decision to buy crypto is not one to take lightly. Due to their speculative nature, blockchain-derived investments are inherently volatile and unpredictable.

Before you jump onto the cryptocurrency bandwagon, it's crucial to do your research, just as you would with any other investment, to eliminate fraudsters and safeguard against the inherent risks and possible surprises. Here are the five things you should ask yourself before you invest in cryptocurrency.

1. Have I done due diligence on principals and white papers?

It may sound obvious, but knowing exactly what it is you're investing in is paramount. Some even argue that cryptocurrency is not an investment, but rather a gamble. Others attribute value to the coin's perceived and empirical utility, and actually transact in the crypto universe. These are often people that seek out a hedge against fiat currencies or choose to hedge against the legacy banking system in their respective country. When considering a crypto investment, you should peruse the coin's white paper — a document that all legitimate coins will have. With a detailed outline of the project's principles, purpose and technology, this document will help you determine whether or not you should invest. Make sure you read the document diligently. No data or project specifics is definitely a red flag.

To put it simply, follow this rule: No details, no investment.

2. Are they selling coins or security tokens?

Crypto is about more than buying Bitcoin. In fact, as of January 2022, there are more than 8,000 cryptocurrencies in existence — and more are being minted as we speak. Different investments can serve very different purposes within the crypto world. Coins, for example, are very different from tokens. Where the former has a purely monetary, transactional value, the latter can be linked to securities and utilities, such as shares, services and preferential treatment.

Knowing what you're buying is vital. You need to figure out what it is exactly that you're trying to gain from the investment, and how you're going to get there.

Related: 3 Things To Do Before You Buy Crypto

3. Is the token anchored in anything other than promotion?

Getting sucked into the grips of the big names (e.g., Bitcoin, Shiba Inu and Tether) may be your first pitfall. While legitimacy should always be the top priority, a close second is the prospective investment's potential, unless you are pursuing another agenda. In other words, you should always choose your coin or token based on its merit, rather than any clever gimmicks or marketing — or even the coin's hegemonic position, which may be temporary.

Related: 4 Ways To Smartly Invest In Cryptocurrencies

4. How do I exit, and can I afford to lose everything?

Investing in crypto and waking up a multi-millionaire is an enticing notion. However, it's also an incredibly illusory one. Far from conventional stock-market investments, investing in crypto is arguably a game of speculation. Unfortunately, for every overnight win, there are many overnight losses. Since this type of investment is often based on sentiment and perceived scarcity, its outcome is unpredictable. As such, just like any other gamble, you should only put in what you're willing to lose.

Once you know how to enter the market, it's just as crucial to know how to exit it. The main exit is selling into the market, and then cashing out into a stable coin that tracks fiat currency or converting into fiat currency and withdrawing the funds into your bank account. Many speculators buy Bitcoin or other crypto coins when they drop and attempt to sell them when they spike.

5. Am I an active participant in the project or a passive gambler?

This notion is the proverbial game-changer. If you are launching your own product or are somehow on the "inside", you are most likely not an arms-length investor, but rather an entrepreneur launching a cryptocurrency business. Some believe that you are still investing your sweat equity, know-how and money. You must contemplate the level of involvement you want in your investment or project.

If you are buying a large position in some new ICO (initial coin offering), you may want to be on the board of directors or have some meaningful role in the metaverse. Do you want to be hands-on and actively participate in the success of the project? Or rather are you hoping to put in some money, sit back and let the market do its thing? Defining success early on will help you to set your goals. These two routes have very different trajectories. Ergo, make sure you do your homework and figure out which one's for you.

It's in our nature to want to fast-track everything we do. Yet in this market, it's the long game that wins. To give yourself the best chance of success, you need to take the time to truly understand the crypto market and its trajectory. Everyone wants a slice of the crypto pie, but only the savviest or lucky will get it.

Related: AMC Begins Accepting Crypto

Entrepreneur Editors' Picks