7 Things to Know Before Investing in Cryptocurrencies Crypto offers benefits like financial freedom, but there are also many well-known pitfalls. Here's what every crypto investor should know before entering the market.
Opinions expressed by Entrepreneur contributors are their own.
Recent events from around the world, ranging from bank accounts being frozen in Canada to economic sanctions due to the ongoing conflict in Ukraine, have thrust the cryptocurrency market into the spotlight as global economic conditions worsen.
From the simple desire to maintain wealth amidst collapsing fiat currencies to finding a reliable way to transfer value across town or across borders, an increasing percentage of the planet's population now find themselves scrambling to learn more about and gain access to crypto that offers protection from the many raging storms.
Here are seven things you should know before investing in the cryptocurrency market:
1. Understand the mechanism of buying, selling and exchanging cryptocurrencies before investing
Locate platforms that allow to both deposit and withdraw local currency as a way to move funds in and out of the cryptocurrency ecosystem. Understand how to conduct basic buying and selling trades so that the process will be simple when the time is right.
Mainstream adoption of cryptocurrencies for everyday purchases is still a work in progress, so the ability to cash out into local currencies will be key to utilising any profits made.
2. A diversified portfolio is key to long-term success
The urge for tribalism and going all-in on one token is strong in the cryptocurrency market, thanks to multiple factors including die-hard believers and smooth-talking scammers. While stories of half-cent tokens skyrocketing to hundreds of dollars do occasionally occur, the vast majority of projects offer more modest gains or flare out altogether at the first real taste of bear market conditions.
The safest approach in a risky crypto market is diversifying the portfolio to include top projects in popular sectors like DeFi, NFTs, gaming and layer-one protocols. Once those bases are covered, making smaller bets on possible moonshots is not out of the question, but monitoring position size is key to minimising losses.
Related: How Blockchain and Cryptocurrency Can Revolutionize Businesses
3. Do your own research before taking any action
Before investing, spend a decent amount of time looking deeper into projects to determine if it has long-term sustainability as is actually something you are interested in holding.
Never purchase something just because someone you know (or don't really know) told you to, especially if they are promising guaranteed returns or a risk-free experience. If you hear those things, run for the hills. Crypto is inherently risky and 95% of the tokens that exist today will go to zero over the next decade.
4. Compare the roadmap with developer activity
One of the great things about open-source technology is the ability for the average person to check out the latest developer activity to get a better read on the progress of a project.
Any project worth taking a deeper dive into will also provide a link to its GitHub repository that allows an up-to-date look at the latest work being done on a project. If the last GitHub entry was months ago but the roadmap says they have major releases coming in the near future, that's usually a red flag that the project might be trying to scam its way to success before rug-pulling unsuspecting bag holders.
Related: It's Time to Learn About Cryptocurrency and Bitcoin
5. Timing is everything
Despite the best of intentions, most investing in the crypto community is driven by emotions which can lead to poorly timed investments that result in lost value. When a token starts moving in the market, forces tend to conspire to drive the rally higher, sucking in unsuspecting investors who can't resist the Fear of Missing Out (FOMO).
Resist the FOMO feeling and wait for the blow-off top and price consolidation if it's a token you absolutely must have. Otherwise, find another solid project that's been trading flat but shows real promise and then ride its wave higher and take profits when the time is right.
If it's a project you simply want to hold long term, don't let any fear, uncertainty or doubt (FUD) sway you from your resolve.
6. Don't invest more than you can lose
As mentioned early, cryptocurrencies are inherently risky, most tokens will eventually go to zero. Keeping that in mind, never invest more than you can afford to lose.
Funds that are put to work in the crypto market should come from what's left after all of life's expenses are taken care of and a little extra has been set aside in case of emergencies. There is no guarantee the value you put into a token will hold in the long term, and even if it does, it can often take years to regain what was lost once a bear market sets in.
7. Keep the long term in mind
Many get involved in cryptocurrency with a mindset on fast riches. Unfortunately, most of them flare out just as quickly as the path is fraught with scams and pitfalls designed to milk desperate people of what little wealth they do have.
It took a decade for Bitcoin to reach $50,000, and the road was anything but smooth or guaranteed. The same will be true for any token that manages to survive long term with only the most well-informed and steadfast hodler reaping the biggest gains.
Find projects with a real-world use case, a supportive community and a dedicated development team to slowly accumulate over time, keeping in mind the previously-mentioned rules and overarching bull-bear market cycles. Pumpkittens GameFi project on Fantom is a good example. The project had a small team and didn't have any VC backing or investors. But seeing the potential of the creative ideas they introduced, the community started to take part in it. And as a result, it's emerged as one of the best projects on Fantom. So a small team doesn't necessarily mean a bad thing — you just need to look for long-term potential.
Cryptocurrencies and the global adoption of blockchain technology are still in their infancy with decades of growth yet to come. So remember to relax, dial down the FOMO and take a more measured approach to investing in the crypto market in order to ensure your best chance at long-term success.
Related: Updated Crypto Tax Rules and IRS Reporting Requirements