We use digital markets every time we purchase something online, and we use digital assets every time we scan through our photos saved in cloud data storage. We are comfortable with these types of digital technologies because they are familiar and carry little risk.
Cryptocurrencies, on the other hand, can be confusing, as many people are unsure whether they can safely be navigated as part of a diversified and useful investment portfolio. While there are certainly risks involved, there are ways to use cryptocurrency and potentially grow your financial assets safely.
What strategies and risks should a potential cryptocurrency investor consider? And how can you be prepared to understand the value of your investment?
Understand the Basics-Defining Cryptocurrency and Blockchain Technology
Cryptocurrency refers to digital assets that can be used as money to complete a transaction where the value of the currency is not verified or maintained by a centralised authority, such as the Australian government. Cryptocurrency providers use cryptography, or coding, to maintain their records of ownership of the cryptocurrencies, allowing these assets to be valued on their own merit, and not necessarily with any physical asset backing them.
Because cryptocurrencies are not inherently backed by a physical asset, they must be stored in digital wallets and the value of your cryptocurrency can fluctuate wildly and quickly. To prevent theft and establish cryptocurrencies as legitimate monies, many providers use technology such as blockchain to keep track of who has the digital asset and who has the right to its value.
Blockchain technologies are like unique puzzle pieces that allow transactions using cryptocurrency to connect only in a unique way that shows who currently has the right to make a transaction with the digital asset. This means that each transaction using the cryptocurrency is digitally marked and verified to fit into the blockchain, adding a level of security to the transaction.
Cryptocurrency Investment Strategies that Work
Because the value of cryptocurrency is established in a decentralised environment, how much it’s worth can fluctuate rapidly. This makes it an investment opportunity that can deliver high yields. Some of the most effective cryptocurrency investment strategies include making both long-term and short-term investments, and practising dollar-cost-averaging over a period of time. Let’s examine what this means.
Dollar-Cost-Averaging (DCA)
If you choose to pursue a long-term investment in a reputable or promising cryptocurrency, you may choose to create your investment in a way of starting with a smaller amount of the total you would like to invest and slowly grow your investment to its total sum over time. This incremental approach to cryptocurrency investment allows you to make sure the cryptocurrencies you choose feel secure, and you can watch the longer-term value increase without seeing large losses or gains in the short term.
Buy and Hold Investments
Coupling DCA investing with a buy-and-hold strategy allows you to choose a few reputable or promising long-term investments that will likely result in profits when decentralised cryptocurrencies eventually become even more mainstream in the future.
This type of investing is inherently hands-off, as after you do your research and select your investments, you expect to wait a long period of time before participating in trading, which allows you to see the value increase as the popularity and widespread usage of cryptocurrencies becomes reality.
This type of investment makes the most sense with established companies that are likely to survive the ups and downs of a new technology, or for a very promising business arrangement that has the capital to survive into the coming digital future.
Swing trading
For an investment trader who would like to be more hands-on with their investment and possibly pull a profit in the foreseeable future, swing trading is an ideal strategy. Swing trading works well where there is volatility, as you can watch the common patterns associated with a cryptocurrency, and use these patterns to judge when you buy and sell over a period of a few days or weeks.
Day trading
If you have an amount you want to invest and see a turnaround very quickly, you can explore day trading. This type of cryptocurrency investment involves watching for new crypto purchasing opportunities to show up and trying to use the volatility inside a single day to guess when you can sell your investment at its highest yield. While it is time and research-intensive, it can produce high profits in a short period of time. It also carries a huge amount of risk, as the value of your investment may only peak for a small amount of time, or completely fall through without you ever seeing the benefit.
Risks Associated with Cryptocurrency Investment
Cryptocurrency investments are inherently risky because the value of these assets is not assigned by any centralised authority. This means that there is no security or authority you can turn to make sure that your assets maintain their value or are usable to you, and they are also inherently volatile.
Cryptocurrencies’ value can change quickly, from gaining value quickly thanks to social media hype, to losing value because of issues with the provider or security fears.
You can lose your physical assets pursuing a quick return on a cryptocurrency purchase, and you may have nothing to show for the stress your investment costs you.
Mitigating the Risks: Making Cryptocurrency Work for You
You can mitigate the risks of cryptocurrency investments by creating a diverse portfolio and by putting effort into thoroughly researching your investment options.
Choosing to invest in established cryptocurrency organisations with well-maintained and secure wallet storage options can give you the confidence you need to enter this fast-moving market.
Supporting the crypto future by using cryptocurrency when it is available for a transaction may also help spur returns on your investment in the long term.
The Value of a Diversified Cryptocurrency Investment Portfolio
Creating a diverse cryptocurrency portfolio offers you the best chance of seeing your investment return to you with a profit. Watching the trends of buying and selling can help you build your confidence in your ability to pursue a profit through an investment in digital assets.
Choosing to invest both in established organisations and newer and promising technologies can provide multiple avenues for revenue over the life of your investments.
Investing in cryptocurrency can be a useful addition to a financially sound investment portfolio. Using strategies that work with your comfort level and understanding of the cryptocurrency market can help you make wise choices and potentially see profits over time.
As you continue to make sense of exciting investment opportunities and seek to make the best possible financial decisions for your unique lifestyle and circumstances, use your assets, like a financial advisor to help guide you through the options. We are excited to work with you, contact us today!
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