5 things to consider when investing in cryptocurrency
Investing isn’t always about complicated charts and impenetrable financial jargon. For most of the time, it’s actually more about developing an approach to achieve your goals and keeping your head.
Below are a few key considerations for planning your crypto investment journey. Remember, there is no guarantee that an investment strategy will deliver the desired results, and the below is merely a guide to managing the risks involved in cryptocurrency investing.
Do your own research
Any investment plan starts with proper research, whether you’re buying a house, shares in a company, or investing in cryptocurrency.
What exactly should I be researching?
There are a few things to look for when doing research on a cryptocurrency project, but it’s important to note that checking all of the below boxes doesn’t necessarily mean a project will succeed. And if it doesn’t check one or a few of the below criteria, it doesn’t mean it’s not legitimate. The below is more of a general guide.
Read the white paper
White papers are often filled with complex details. You don’t necessarily need to worry about understanding all of the technicalities, but the paper will likely provide valuable insights into the cryptocurrency’s use case, the problem it aims to solve and its investment potential.
The Bitcoin white paper detailed a new form of digital money that could be sent between different parties without the need for a bank or another intermediary. That’s a legitimate and revolutionary use case, which is one of the reasons why it’s the leading crypto by market cap.
Look for clear and concise explanations, as well as a well-defined road map for future development.
Team and advisers
Research the team behind the project, including their backgrounds, experience, and track record. Look for credible advisers who are well-known in the industry and have a good reputation.
Adoption and partnerships
Growing adoption and partnerships with reputable, established companies and organisations are good indicators of the project’s viability and potential for future growth.
Legal and regulatory environment
Look for compliance with existing laws and regulations, as well as a commitment to transparency and accountability.
Review the project’s financial health, including its token economics, token distribution, and funding sources. Look for a sustainable financial model that supports the long-term viability of the protocol. Coingecko is a good source for this kind of information.
Learn with Luno
- Daily Briefing – Our reader-friendly daily review breaks down the movements in the cryptocurrency industry. This includes key numbers and metrics investors use to gauge market sentiment.
- Learning portal – Whether you’re a beginner or expert, we’ve got you covered with detailed articles about cryptocurrency, blockchain and investing.
Dollar cost averaging (DCA)
Dollar cost averaging is an easy entry into cryptocurrency investing, as it removes a lot of the uncertainty involved in trying to time the market.
By dollar cost averaging investments, you invest a fixed amount at regular intervals, with the eye on long-term investing. By investing regularly, an investor buys more crypto when the price drops and less crypto when the price increases. Over time the cost of the investment averages out. DCA encourages habitual saving and has the potential to turn market volatility into an opportunity. It’s also a way of spreading the risk on an investment, as it averages out market volatility over a period of time.
- Alice wants to invest $100 in Bitcoin.
- Instead of buying $100 worth of Bitcoin at a price of $25,000 per Bitcoin, she invested $10 every month for 10 months.
- During this time, the price of Bitcoin fluctuated between $16,000 and $25,000, but by averaging her purchase price over 10 months, she was able to buy more Bitcoin than if she had attempted to time the market and invested the entire amount at once.
- The same principle applies if Alice continues to DCA. By investing the same amount at the same intervals, she can even out the ups and downs throughout her investment journey.
DCA with Luno
Setting up a repeat buy with Luno allows you to automatically buy crypto at regular intervals – monthly, weekly or daily. Repeat buy is accessible to all levels of investors.
Instead of putting all your eggs in one basket, you could consider investing in a mix of established cryptocurrencies. This will help spread your risk across a few cryptocurrencies.
- Bob invests $100 into a cryptocurrency – let’s call it Crypto A. Its value halves overnight, leaving Bob with an investment portfolio worth $50.
- Alice also invests $100, BUT she spreads her investment evenly across three cryptocurrencies: A, B and C.
- While the price of Crypto A has halved, Crypto B has stayed the same and Crypto C has doubled.
- This means Alice’s investment portfolio is still worth $100 as any Crypto A losses have been offset by her investment into the other cryptocurrencies.
Diversify with Luno
Our multi-buy option allows you to buy all our most popular cryptocurrencies, or all our cryptocurrencies, in one buy.
Or you can decide which coins you want to buy and the amount will be evenly distributed across the selected cryptocurrencies. In doing this, you help spread the risk across on your crypto investments.
Don’t panic buy, and don’t panic sell
One of the biggest mistakes new investors make is buying or selling based on short-term market fluctuations. This is known as “panic buying” and “panic selling”.
When panic selling, investors run the risk of selling a share or a cryptocurrency at a lower price than what they initially paid for it. On the other hand, when panic buying, investors often buy an asset when it’s overpriced, also known as buying the top. You can minimise the risk of panic buying and selling by investing with a long-term plan and by applying DCA.
Think of compound interest as interest on interest earned on the initial amount invested. The longer you hold onto your investments, the more your returns will compound and grow. This means that even if you start with a small investment, over time it can grow into a substantial sum if you stay patient and disciplined.
- Alice invests $1,000 and earns an average of, say, 5% interest compounded over 10 years.
- At the end of the first year, the amount would be $1,050.
- At the end of the second year, the amount would be $1,102.50.
- And so on, until the end of the 10th year, the amount would be roughly $1,629.
How to earn rewards with crypto?
Similar to investing in company shares, you don’t earn interest on direct cryptocurrency investments, but you can put your crypto to work by staking it in cryptocurrency networks that use proof of stake to secure the network and confirm transactions. By helping secure the network, you earn rewards on the amount staked.
Staked coins are held in a special kind of wallet that helps secure and validate transactions in a cryptocurrency network. You can stake coins individually or participate using staking pools, where many people combine coins to have a bigger impact on the network.