Although digital currencies represent a relatively new financial vehicle compared to traditional assets like equities and gold, their popularity has grown tremendously over the years and the fact that crypto provides unique investment opportunities is no secret to anyone. This has prompted many traders and investors to take the leap and add crypto to their portfolios.

According to Binance, one of the leading cryptocurrency exchanges, the majority of institutional investors are optimistic about crypto’s future, showing that the outlook for digital currencies and their potential as an investment venue remains positive despite the numerous ups and downs they’ve experienced over the years.

However, just because crypto is widely regarded as a profitable activity doesn’t mean one should jump straight into it without doing their due diligence. No one should overlook the challenges and risks that come with navigating the crypto landscape. It’s important to note that while some made fortunes by investing in crypto, others lost them. The extreme volatility of the crypto market coupled with the lack of regulatory clarity and the high degree of complexity that digital assets present can pose numerous problems for users, especially for those who don’t have a solid understanding of this novel asset class.

To make matters even more complicated, there are currently over 20,000 coins in the market, so it’s certainly not easy for newcomers to spot the winners and make sound investment decisions. That’s why it’s necessary to establish a few ground rules from the get-go so you can keep risks to a minimum and increase your chances of success in the highly unpredictable world of cryptocurrencies.

Do your research

Although not yet a mainstream asset class, crypto enjoys immense popularity all over the world which means everyone is familiar with the concept to some degree. What’s more, the majority of people who know a thing or two about digital currencies seem to consider themselves true crypto experts and don’t hesitate to offer unrequited advice to anyone who shows even the slightest interest in the topic.

However, having a rough idea about what crypto is does not make one a specialist in the field. This means that you should never ask for guidance or take investing advice from self-proclaimed experts who’ve done nothing more than read a couple of blogs on the subject. It’s extremely important to do your own research and learn as much as you can about crypto before you dive in. The crypto ecosystem is extremely complex and ever-evolving, so you need to know exactly what you’re getting yourself into.

You also need to keep in mind that not all crypto coins are created equal. Each project functions differently and has unique characteristics that you should be aware of. This means that if you plan to invest in various digital currencies, you should research each and every one thoroughly and adjust your investment strategy accordingly.

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Don’t invest what you can’t afford to lose

This golden rule applies to all types of investments but is all the more important when it comes to crypto because of the high volatility it presents. While you might be able to earn massive returns, you can also lose a lot of money by investing in digital assets, so you have to be prepared for both scenarios.

That’s why you should only invest the exact amount of money that you can afford to lose. Putting all your life’s savings into crypto is not a smart move. Imagine what would happen if things don’t go according to plan and you lose all your capital in one fell swoop. You’d be left with nothing and unable to recover financially because of one reckless decision. It’s also generally recommended to keep your crypto investments under 5% of your total portfolio to minimize the impact of potential losses.

Mind the volatility

As we’ve already mentioned, extreme volatility is crypto’s chief characteristic and that can work for or against you, depending on circumstances. If you think it’s a good idea to invest in a certain coin because the prices have been going up for some time, don’t forget that things can take a 180-degree turn in a matter of seconds.

Crypto’s short history has taught us that a bull market can turn into a bear market and the other way around in a short period of time and mess up investors’ strategies. Given crypto’s unpredictable nature, you should never rely on current trends or past patterns to predict what might happen next. Instead, you should keep track of relevant market metrics such as market cap, the fear & greed index or the relative strength index (RSI) to determine which way the wind is blowing and prepare yourself to deal with surprises.

Don’t let emotions influence your decisions

It’s crucial to keep a clear head and maintain an objective perspective while investing in crypto. Since there’s a constant influx of crypto news on all channels, it can be difficult to process all the information coming your way and you might be tempted to follow the crowd, especially when there’s a lot of hype surrounding a specific crypto project.

However, hype cycles come and go all the time and you should never base your decisions on them, so FOMO and intense emotions are not good advisors. Once you’ve developed an investment strategy you should stick to it no matter what so-called experts and crypto gurus profess. In the face of uncertainty, it’s also important to learn to manage risks. Risk management strategies differ from one investor to another, based on their specific needs. For some, this means holding on to funds and never selling, no matter the price swings or avoiding excessive leverage. For others, this implies setting clear rules on when to sell (stop-loss and take-profit orders), so you need to decide what strategy works best for you.

Final thoughts

Investing in crypto can feel like a roller-coaster, with constant ups and downs and surprises at every corner. So, make sure you stay disciplined and create your own set of rules and guidelines to help you navigate this ecosystem safely and make the most of your investment journey.