Crypto investing has become extremely popular, and profitable to many.  However, entry into the crypto market can be intimidating for new investors. 

Indeed, crypto investing is not like stock market investing or any other kind of investing.  In fact, I argue that crypto investing shouldn’t be considered an investment, but rather a speculation.  I’ve written more about this opinion here at Stocks Vs Crypto Investing. 

Is Crypto an investment a speculation or a gamble? Why? #BTC #ETH #Crypto #stocks

— JC Keen (@Cash_Keen) February 10, 2021

Before jumping into crypto investing, it is important to understand that when you invest in crypto you are not investing in a company, like you do when you invest in stocks.  In addition, crypto investing does not have the same regulatory protections stock investors are familiar with. 

Finally, crypto investing is highly risky and volatile.  Given all of this, crypto beginner investors must take certain precautions to protect their hard-earned capital.  Without further due, let’s get into 7 essential crypto investing tips for beginners for 2021 and beyond:

TIPS

#1 – Only Invest the Amount You Are Willing to Risk

#2 – Never Borrow Money to Buy Crypto

#3 – Avoid Active Crypto Trading

#4 – Use Dollar Cost Averaging to Buy & Sell Crypto

#5 – Buy from Reputable Cryptocurrency Exchanges

#6 – Understand What You Are Investing In

#7 – Don’t Lose Your Crypto

Tip #1 – Only Invest The Amount You Are Willing to Risk

At times it may appear as if cryptocurrency prices only go up.  This is obviously not the case.  Not only do cryptocurrency prices go down, but also, an overwhelming number of cryptocurrencies fail.  Perhaps you’ve heard the term “dead coins.”  These are cryptocurrency projects that were launched with huge expectations, but ultimately died and left their investors with nothing but losses. 

Related: More than 1,000 coins have failed 

Some of these dead coins were probably scams from the beginning.  Others were probably unserious projects, projects with lack of funding, projects lacking the right management, etc.  In many cases, crypto investors rushed to buy these coins only to see the value of these coins drop to zero. 

The bottom line is that in time, anything could happen to impact the value of even the most popular coins.  By the end of 2018 I had seen the value of my Ethereum investment drop by 96% in just over a year.  The good thing is I held on to my investment and now it has provided me with a 6X return.

Tip #2 – Never Borrow Money to Buy Crypto

As far as I can tell most, if not all, cryptocurrency exchanges allow clients to purchase crypto using margin.  Margin allows the investor to borrow money to purchase additional crypto, while using the investor’s existing balance as collateral.  The problem with this is if the value of the investment goes down a certain percentage, the investor will be forced to sell to cover the loan.  This is called a margin call. 

Below is some language from Coinbase, pertaining the use of margin:

If your loan health falls below 40%, you’ll typically have 72 hours to add BTC collateral or make a payment. In the rare case that your loan health falls below 15% (where the value of BTC drops dramatically), Coinbase will sell off just enough of your BTC collateral to bring your loan health back to 50%, plus 2% of the total transaction, without prior notice. We’ll notify you via email and in-app (when available) if this occurs.

There are multiple other methods of purchasing crypto using borrowed funds, including the use of credit cards, debit cards, PayPal, etc.  In the end, the problem is the same as using margin.  If the value of the borrower’s portfolio goes down, the borrower is at risk of not having sufficient equity to cover the loan.  This may require the borrower to liquidate their position, at the worst possible time, when crypto prices are down. 

Keep in mind that every so often crypto prices will see big prices drops.  This will cause panic selling, which will be exacerbated by investors trying to sell their positions to cover margin calls and/or loans.  At that point the only investors able to hold on to their investment will be the ones that didn’t borrow money to purchase crypto. 

Tip #3 – Avoid Active Crypto Trading

Refrain from actively trading crypto.  Don’t fall into the trap of thinking you can time the market.  You may get away with it a few times, but in the long term that strategy isn’t a good strategy for beginners. A buy and hold strategy usually outperforms an active trading strategy.

To be successful with active trading requires great discipline and incredible emotional maturity.  In terms of discipline, traders must establish strict entry/exit points and must use sophisticated trades to hedge their positions.  Such discipline and sophistication come after many years of trading and often after years of experiencing losses. 

Emotional maturity is even more difficult to master as it also requires contrarian thinking.  Contrarian investors have the courage and conviction to buy when others are fearful and to sell when others are euphoric.  This may sound easy, but trust me, it is extremely difficult. 

I’ve done my share of trading in the stock market and I’ve lost thousands of dollars in the process.  After years of trying to beat the market I finally learned that a buy and hold strategy is much easier and much more profitable.

Finally, many new crypto investors don’t realize they are required to pay taxes on their gains.  If you are constantly buying and selling crypto you’ll need to keep detail records of your gains and losses.  Cryptocurrency exchanges won’t do this for you. 

With all of this, why bother trading crypto?  It is best to just go long on your crypto investments.

Tip #4 – Use Dollar Cost Averaging to Buy & Sell Crypto

Everyone knows that crypto prices are extremely volatile.  Beginner investors tend to be overly optimistic and focus on the upward volatility.  FOMO may drive some to deploy capital into crypto purchases as soon as possible.  The risk is that in doing so, the beginner investor may actually buy at high prices only to see their investments go down in value. 

A better approach is to use the Dollar Cost Averaging (DCA) strategy.  This strategy involves making purchase at regular intervals over certain period.  For example, let’s say that you want to invest $5,000.  One way to invest this amount using the DCA strategy would be to purchase $1,000 each month for a total of 5 months.  In doing so, you are more likely to weather crypto volatility.

The DCA strategy can also be used for selling.  Let’s say you’ve held on to your crypto investment for 5 years and you have some nice gains you’d like to realize.  Perhaps you want to withdraw $50,000.  You could withdraw $10,000 per month for five months instead of withdrawing all $50,000 at once. 

Keep in mind most cryptocurrency exchanges have features to allow investors to purchase crypto on a regular intervals (weekly, monthly, etc).

Related Dollar-Cost Averaging: Building Wealth Over Time

Tip #5 – Buy from Reputable Cryptocurrency Exchanges

There are way too many ways to get scammed.  One way to get scammed is to purchase crypto from private individuals claiming to do it securely and anonymously.  I’ve been approached on twitter by crypto sellers.  Interestingly, the first question they asked was what kind of hard wallet I owned.  On one instance, I had to tell the guy more than once that I wasn’t interested. 

I wouldn’t buy crypto from a person that I don’t know, and you shouldn’t either.  The best way to purchase crypto is through a cryptocurrency exchange.  There are dozens of reputable cryptocurrency exchanges in the market.  My recommendation would be to go with one of the largest ones, as they are more likely to be around in a few years than the smaller exchanges. 

For whatever is worth, I started with Coinbase, but had a terrible experience with them.  I currently use Gemini and so far I have no complaints. 

Tip #6 – Understand What You Are Investing In

This is probably the biggest obstacle for beginner investors.  After all, not very many understand the value of the cryptocurrency they are investing in.  I’ll try to keep this simple by focusing on two elements. 

The first element is store of value.  According to Investorpedia, a store of value is an asset, commodity, or currency that maintains its value without depreciating.  Examples of such assets are gold, silver, and other precious metals. 

You’ve probably heard the claim that bitcoin is a store of value.  This claim has become difficult to refut as bitcoin continues to overperform compared to the US dollar and as bitcoin gains more and more acceptance.

The second element is the technology behind bitcoin, also known as blockchain.  Blockchain technology has the potential of impacting nearly every industry in existence.  In my opinion, bitcoin is only one small example of what blockchain is capable of doing. 

Related: How Will Blockchain Change the World.

Now that we’ve touched on these two elements, it is up for you to decide whether you want to invest in crypto because crypto is a store of value or because of the immense potential of blockchain technology.  In either case, you must understand what you are investing in and must decide for yourself if this investment is for you and why. 

If you decide to invest in crypto due to its store of value nature, then bitcoin is your crypto.  In this case, you’d be interested in things like the devaluation of the US dollar, the spike in national debt, and how bitcoin reacts to these things. 

If you decide to invest in crypto due to the potential of blockchain technology, then you should consider the altcoins (alternatives to bitcoin).  I am currently long Ethereum, as I believe this crypto is at the core of what blockchain is all about.  However, there are many of other coins that will do well as blockchain technology advances.   

Tip #7 – Don’t Lose Your Crypto

You’ve heard the sad stories of people who have lost millions of dollars in crypto because they lost the passwords to their accounts or lost the wallet or computers.  It is easy to think things like this wouldn’t happen to you.  But, have you ever lost a password to something important?  We all have. 

On top of this, there are hackers and scammers taking advantage of the latest technologies to steal your crypto.  Hackers are not only after you, they are also after the crypto exchanges and all other parties involved in crypto. 

One of the benefits of blockchain technology is its decentralized nature.  Cryptocurrencies don’t rely on banks, exchanges, or third parties to exist.  However, we undermine the decentralized nature of crypto when we leave our crypto in the exchanges.  If the exchange disappears overnight, so will your crypto.

For this reason, it is recommended you keep your crypto funds in a hardware wallet, rather than with a centralized entity such as a crypto exchange.  In addition, it is recommended that you are very careful with how you store your recovery phrase.  Among other things, never store your recovery phrase electronically. 

Conclusion

You worked hard for your money. The last thing you want to do is to throw your money at the latest hype and end up losing all your money in the process. As I mentioned earlier, crypto investing isn’t truly investing, it is actually a speculation. Nevertheless, I call it investing in this article, because that’s what people call it these days.

Keep in mind crypto investing is not for everybody. It certainly isn’t for those that don’t have the capital to invest. As discussed, borrowing to buy crypto is not advisable. And it isn’t for those that don’t understand crypto. Finally, crypto investing is not like any other form of investing, including investing in the stock market.

My hope is that these 7 Essential Crypto Investing Tips for Beginners have provided you with a foundation from where to continue researching this amazing market. If you’d like to read more on this, I highly recommend the article Stocks Vs Crypto Investing. 

If you’d like to know my thoughts on a specific crypto speculation, please check out Reasons to Invest in Ravencoin

Finally, please keep in mind I am not a financial advisor, nor a crypto expert. Simply, I am an engineer with a passion for personal finance, investments, etc. As such, please do not consider any of the above as financial advice.

Cheers and happy speculating!

JC Keen