Cryptocurrencies have taken the world by storm, attracting many investors who want to get on board and learn how to build their wealth by leveraging these assets. And that only makes sense, given their high potential as an investment. If you’ve been contemplating whether you should jump on the crypto bandwagon and buy Ethereum or any other asset with real-world utility and value, you should, however, know that this asset class is very volatile, meaning that just as there’s an opportunity to earn a profit, you could also lose your money if you aren’t careful.
Compared to other asset classes, crypto hasn’t been around for a long time, and the regulatory framework around it is still uncertain. So, it’s obviously not a good idea to just get started with crypto because of the hype and news you’ve read about people who’ve gotten rich from it. Instead, you want to take the time to reflect on a few fundamental questions.
Do You Understand The Crypto Landscape?
You shouldn’t invest in an asset class that you don’t understand. When you hear about crypto, do you know what it really is about? At first glance, it may seem like another singular asset, like a bond or a stock, but it is not. It works entirely differently, encompassing a range of investments with various purposes, from the most well-established ones to some that are untested and don’t have such a long history. Before you buy your first crypto, take the time to understand the ins and outs of the industry. You should look into different concepts, such as blockchain technology and decentralization, NFTs, Web3, and more. Furthermore, if you’re considering buying Bitcoin, for example, you should understand why mining and cryptographic hashes are critical to its function.
Besides the fundamentals, stay on top of the latest crypto news. In a fast-paced market like crypto, new developments emerge almost daily, and governments also evolve, and each new decision can impact the industry. Once you understand how crypto works, be honest with yourself: do you believe in the long-term potential of this asset class? Your answer will play an essential role in determining whether or not crypto is the right investment for you.
Can You Handle The Volatility?
It’s no secret that cryptocurrencies are highly volatile, and before entering the market, it’s essential to consider whether you are comfortable with the risks involved. Even Bitcoin, which is the largest and oldest crypto asset by market cap, sees massive price fluctuations, with double-digit drops and double-digit rallies, sometimes within a week only. Ethereum is just as volatile as seen throughout its history, and tracking metrics like the ETH to HUF (ETH HUF-ra) price can help Hungarian investors stay informed and make smarter choices.. Beyond these two crypto giants, the volatility becomes even more significant and may scare those who aren’t prepared for it, leading to impulsive decisions that could end up being very costly.
Dogecoin’s price history, for instance, consists of massive price swings, as by June 2022, its price saw a 90% decline from the all-time high it previously achieved. While it’s true that some investors have profited from this volatility in time, many have also seen substantial losses. Only time will tell if cryptocurrencies will become less volatile at some point, but for now, it’s important to expect this volatility to be part of the journey and ask yourself if you can stomach it and still keep your focus even when the market drastically changes directions.
Do You Have A Plan To Manage The Risks?
Given the unpredictability of the crypto market, it’s always a good idea to have a plan in place. While there can definitely be a lot of upside in this industry, the downsides can be sharp and unexpected. Furthermore, there are no guarantees over the value of cryptocurrencies in the long term, which is why you should only allocate the money you can afford to lose to this asset class.
As a rule of thumb, you should diversify your portfolio and rely solely on cryptocurrencies to grow your wealth, as this will provide more safety in the long term. Besides including safe bets in your investment portfolio, such as Ethereum and Bitcoin, consider also adding bonds, stocks, and anything else that may fit you as an investor. Before you decide on which asset classes to invest your money, take the time to weigh all the different options available; if needed, consider discussing with a financial professional who can help you make an informed decision that will best fit your risk tolerance and align with your goals.
Do You Know How To Safeguard Your Crypto Funds?
One of the critical aspects of buying cryptocurrencies is storing them safely. Suppose you aren’t willing to deal with the complexities of crypto cybersecurity. In that case, you can always choose a trusted custody provider to keep your coins safe, as they generally have strong security measures in place, giving you peace of mind.
But there’s also the option to custody and secure cryptos yourself, which essentially involves buying an asset on a crypto exchange and then transferring your holdings to your crypto wallet (ideally, a cold wallet, as it is the safest option). This route can offer more flexibility, but you should keep in mind that there won’t be any customer service for you to handle any issues that arise. In other words, if your exchange or private accounts get hacked, if the crypto platform goes bankrupt, or if you send the coins to the wrong wallet address, you will lose access to your funds, and there won’t be any way to get them back. So, it’s important to take full responsibility for your crypto funds and do what it takes to keep them secure.
The Bottom Line
Crypto is an exciting asset class that has gained mainstream attention, but despite the opportunities it offers, it also has a volatile nature. It isn’t protected by the regulations that apply to registered securities, and it involves certain risks you need to be aware of if you want to navigate the market with success. Before you buy crypto, make sure you understand what you’re getting yourself into, and keep risk management at the forefront of your strategy, as this will minimize losses and stress in the short and long term.
