Cons of investing in cryptocurrency

Like all types of investments, investing in cryptocurrency has disadvantages.

• Extreme volatility: cryptocurrency can fluctuate at extreme levels because it’s not backed by assets or cash flow. The only thing influencing cryptocurrency prices is speculation driven by sentiment. This means its value is extremely unstable and can change frequently
• No intrinsic value: cryptocurrencies have no intrinsic value, which means they aren’t backed by underlying assets or earnings the way that shares are
• Regulatory risk: one of the most significant drawbacks of investing in cryptocurrency is the lack of regulatory oversight. Cryptocurrency laws and taxes differ from country to country and are often ambiguous or contentious. A lack of regulation can unfortunately lead to fraud and scams.
• Complex: the complexity of the cryptocurrency market can make it difficult to navigate, especially if you’re inexperienced or new to investing  
   

Other things to consider before investing in cryptocurrency

Plan your investment strategy

One of the main things to consider before investing in cryptocurrency is to have a plan. This helps you put into perspective not only your investment goals, but when and how you want to achieve them.

It can also help to remove the likelihood of emotions influencing your investment decisions. There are times where you may feel tempted to change your investment strategy because an area of your portfolio is not doing well, or you received recent news the market is going to plummet.

While these events may cause you to react quickly, it's important to consider your investment strategy. If your approach is intended to be a long-term plan, making decisions based on short-term market fluctuations, may greatly affect what you set out to achieve.

Review your timeframe and risk tolerance

Consider how much time you're giving yourself to build towards your financial goals and how much risk you’re prepared to take on to get there.

For example, an investment plan for retirement may look very different for someone closer to retiring than a person who’s decades away.

If you're looking to access your money in a shorter time frame, remaining invested through ups and downs in the market may be unlikely, so a less risky investment approach may work to your favour.

Consider where to invest your money

You may choose to divvy up your money across a variety of asset classes such as cryptocurrency, shares, cash or property. This will help to diversify your risk so if one of your investments doesn't perform well, your losses may not be as significant.

On the flip side, it does take more effort as you'll need to remain up to date across a variety of markets.

Consider the digital asset not just the share price

If you're investing in cryptocurrency, it's also important to look beyond the price and consider the digital assets you're buying into.

When you own cryptocurrency, it represents ownership in a digital asset.

Ultimately, what you choose to invest in should be based on your interest in the technology and risk appetite.

Here are some factors you may want to consider:

• Investigate the team behind the project and the developer working on the technology
• Find a community of people already investing in the cryptocurrency and gauge their sentiment.

Research the market

It's critical to take the time to research what factors may have an impact on your investments so you can make informed decisions.

Having a good understanding about the cryptocurrency market and the underlying technology you’re interested in will also help you make better decisions.

And don’t forget to always do your own research rather than relying on hype and other peoples’ opinions. Stay informed about developments in the market and the latest news related to the coins you’re interested in.

Steps to get started with investing cryptocurrency

Investing in cryptocurrency follows a very different process to investing in shares. Here’s some simple steps to follow:

Step 1: Select a cryptocurrency exchange

Cryptocurrency must be bought through an exchange—a platform where buyers and sellers meet to trade cryptocurrencies.

When choosing an exchange consider how much security it offers, the fees and any minimum investment requirements as well as the types of cryptocurrency it has available.

As part of this process, you may need to verify your identity and provide personal information. You also need to have funds available in your account which you can set up by linking your bank account or making a payment with your debit/credit card.

Step 2: Choose which cryptocurrency to invest in

Take some time to understand the different and unique characteristics of each cryptocurrency as there are many to choose from.

Step 3: Store your cryptocurrency

Because cryptocurrency is digital, you need to be able to store your coins in a safe environment.

When you buy cryptocurrency, it’s typically stored in a wallet attached to the exchange. But you can move it into a more secure location such as a ‘hot’ wallet—stored online and run through internet connected devices—or a ‘cold’ wallet—external device such as a USB or hard drive.

Step 4: Decide how much to invest

Just like any type of investment, how much you choose to spend on cryptocurrency should depend on a number of factors like your budget, risk tolerance and your investment strategy.

Always focus on the total dollars you want to invest, rather than the number of coins and never invest more than you can afford to lose.

Step 5: Manage your investments

How you manage your cryptocurrency depends on your investing strategy and goals but it’s important to review your portfolio regularly.

As cryptocurrency is extremely volatile, you may need to increase or scale back on some coins, depending on your investment goals.