To date, the cryptocurrency market is growing in size, and the number of people who are interested in digital assets is growing all the time. But, in order for it to be profitable in this market, you need to know what less than 1% of investors are aware of.
Using the right tools is essential for the best trading experience. Do click here for the best Bitcoin to PayPal USD and other currencies converter. We will look at five golden rules for investing in cryptocurrency.
Investing in Cryptocurrencies Risks: Beware of Volatility!
The market is characterized by strong daily volatility, i.e., the price of cryptocurrencies can fluctuate strongly during short periods of time. In a few hours, the price could increase and decrease by up to 10%.
The strong volatility is due to the fact that being a developing market, it is not yet clear what the anchor value of these new digital assets could be. The economic theory on which most financial modeling is based dictates the assumption that the price of an asset corresponds to the present value of its future cash flows.
In the case of cryptocurrencies, this evaluation is difficult to apply, and, therefore, there is no oscillation around an equilibrium point as occurs for other assets, but the trading price can rise or fall significantly even for an extended period. Because of this, if you are looking for a low-risk investment, I strongly advise against considering crypto.
If, on the other hand, you are looking for an aggressive investment, with all the benefits and risks that derive from it, I will describe to you which strategies to adopt to invest in cryptocurrency, as well as the crucial variables to keep in mind.
The 5 Golden Rules for Investing in Cryptocurrency
Here are the five golden rules for winning investments when deciding to trade cryptocurrencies:
Crypto, unlike other currencies, is not tied to the monetary policies of central banks: their price has no direct relationship with news and events of a monetary nature. So, don’t waste time waiting for news from the central banks.
Above all, keep an eye on the news relating to international regulations on this market. When authorizations or restrictions are enacted, they will have a major impact on the price of digital assets. For example, in January 2018, when the Chinese and Korean governments closed some exchange platforms, Bitcoin lost 10%.
Relying on technical analysis indicators. As previously mentioned, the cryptocurrency market is affected by strong instability, and investors rely on less rational tools than those used for other assets.
Identifying supports, resistances, and the trend of each cryptocurrency of interest will certainly be important to make your investments profitable in the short term. Unlike other markets where large investors have cutting-edge tools and models, technical analysis is undoubtedly the most commonly used valuation with crypto.
Interpret the moods of the market and ride them. At a time when the market has extreme confidence in a cryptocurrency, or when the majority of investors are convinced about a price rise, the price will continue to rise, and you can earn if you can understand and anticipate the general mood.
Diversify your portfolio. My main advice is not to invest all your savings in a single currency but to create a portfolio with multiple cryptocurrencies to reduce the total risk of the positions.
If you have basic knowledge of statistics, you could try to calculate the correlation between the cryptocurrencies you prefer and then select those that have a correlation coefficient as far away from 1, even better if negative.
I will try to explain this concept to those who have no statistical knowledge.
Two digital currencies are correlated when the trend of their price behaves in a similar way: if the price of a cryptocurrency goes up or down, the price of the related will tend to act in the same way.
Assuming that a crypto in your wallet becomes extremely popular over a period of time and its price rises, you will be able to make money even if the other digital currencies perform poorly. Instead, if the currency goes through a negative period, you will cover the losses with the performance of the rest. This strategy is applied by all large investors to take on lower risks.
It is not worth going against the trend. If the price of a cryptocurrency is falling, don’t buy it until the value picks up (the so-called “rebound”).
How to Invest in Cryptocurrencies If the Price Decreases?
If, following your research, you believe that a cryptocurrency will depreciate, you can bet down by buying CFDs. By taking advantage of this tool, it is possible to earn both if the price of the crypto rises and if it falls, as long as the right trend is identified.
Here is an example that describes the potential of this product: if you are convinced that the price of Ethereum will drop in the next month, you can sell (go short) a CFD.
Let’s assume that, at the time of sale, the price of Ethereum is $ 190 and that after just one month, the value drops to $ 150. The position is liquidable for profit, and by doing so, it was possible to bet against the crypto and make money during a bear market.
Beware of how CFDs work since they use leverage.
Is it Convenient to Invest in Cryptocurrencies? Best Cryptocurrencies List
To get an idea of which cryptocurrency to buy, it is necessary to predict the digital currencies that will appreciate over the long term.
This is equivalent to evaluating what technologies and ideas could be that investors of today and tomorrow will have the most confidence in.
An excellent strategy is to insert emerging cryptocurrencies such as the ” new Bitcoin ” or the ” new Ethereum ” in your wallet or to search among the cryptocurrencies traded at low prices, those equipped with technology or underlying logic capable of attracting the attention of large investors.