You may have heard that crypto is highly volatile, or that crypto crashes can cause investors to lose all their money. But you might be wondering exactly what that means, or how you can protect yourself as a first-time crypto investor from these crashes.
The world of crypto can feel overwhelming at first, but once you understand the basics of volatility and investment, you will have a less complex investor journey and be able to make smarter decisions.
What Is Crypto Volatility?
Volatility measures how much the price of an asset, in this case a specific cryptocurrency, has increased or decreased over time. Usually, the more volatile an asset is (so the more the price fluctuates), the riskier the investment is, and the more potential it has to deliver significant returns or losses in shorter time periods compared to less volatile assets.
Cryptocurrencies are relatively new and are therefore considered to be quite volatile, with significant price movements. Compared to bonds, which are considered a low-volatility asset, crypto can be extremely risky for new investors.
Experienced investors are often willing to take the risk and invest in highly volatile cryptocurrencies if they believe the high returns will be worth it. To overcome this volatility, it’s recommended to spread the risk and invest across a wide range of assets, even within the crypto sector. For example, you can invest in Bitcoin (BTC), which has been fairly reliable, along with riskier meme coins or new crypto projects.
Another more daring strategy some traders explore is crypto leverage trading. This strategy can offer potentially high, instant returns, but should be done by experienced traders who are willing to take on the volatility or beginners who are willing to risk it all for potential gains.
Crypto volatility can be impacted by external factors, like news coverage, earnings reports, and supply and demand.
What Beginner Crypto Investors Should Know
Now that you have a better understanding of crypto volatility, you are set to make smarter choices when it comes to crypto investing.
First, it’s important that you decide whether you want to actively trade cryptocurrencies are become an investor. Investors buy crypto and then hold it for extended time periods, in the hope that the value will increase, before eventually selling their assets. Traders are constantly tracking prices and take a short-term approach to investing. They’re constantly buying and selling cryptos to capitalize on volatile prices.
Secondly, beginners should only invest what they’re willing to lose. With prices fluctuating in the hundreds of dollars over the course of a day, you should make sure that you’re not investing money you need for daily expenses, just in case you lose it all.
It’s best to start small and set aside a strict investing or trading budget for your crypto portfolio. That means that if there’s a bad trade or the asset’s price suddenly drops, you won’t be put out too much.
Buying crypto on a crypto exchange will expose you to fees, and some platforms have hidden costs that can impact your bottom line. For example, one platform may charge a flat fee for each transaction, while others take a set percentage of your trades. These fee structures can quickly add up, so it is important to read the platform’s policies before you start trading. By comparing fee structures on various exchanges before you open an account, you can save money in the long run.
Once you buy your crypto, you need to be able to store it in a safe place. There are two main options:
- Crypto exchange
- Crypto wallet
Keeping your crypto in an exchange is convenient if you plan on regularly trading. However, if anything happens to the exchange, like if it is hacked or the platform experiences a system failure, you could lose access to your assets.
Crypto wallets can be online or offline, using private keys, and are a secure way to store your coins. This method is ideal for investors who plan on holding their cryptocurrencies for longer durations.
Finally, always keep an eye out for scams. According to the FBI, Americans lose billions of dollars each year to crypto scams and financial fraud, so only purchase coins from reputable exchanges and leave the speculative trading to the experts.
