Is cryptocurrency a good investment?

Investing in cryptocurrency can be an incredibly lucrative pursuit, but as is always the case with any investment strategy, it has its risks. A profit is never guaranteed, and it’s just as easy to lose money as it is to make it — especially if you don’t take the right approach. However, we can minimize our exposure to risk by following some simple best practices for crypto investing.

This includes taking the right precautions before putting capital into anything, carrying out the necessary research, and having a solid investment plan. In this AAG Academy guide, we’ll cover what to consider before investing your own money into cryptocurrency, how to research projects that catch your interest, and the benefits and risks of cryptocurrency investment.

Before we get into all that, however, let’s tackle the question that this article poses: Is cryptocurrency a good investment? The answer to that isn’t a straightforward one because no one can really tell you what is a good investment and what is a bad one. It all depends on your personal investment strategy, what your goals are, and your tolerance for risk.

What we can tell you is that cryptocurrencies can be a potentially profitable investment option — if you approach them in the right way. The purpose of this guide is to give you the skills and knowledge you’ll need to start investing in cryptocurrency for the first time, or to improve your strategy if you’ve had a bad experience with cryptocurrency investments in the past.

What to consider before investing in cryptocurrency

Let’s first look at what you’ll need to consider before putting your capital into cryptocurrency projects. There’s quite a bit to cover here, so we’ll break it down into easily digestible sections:

Learn how to buy, sell, and exchange cryptocurrencies
The first thing you’ll need for any kind of cryptocurrency investment is an understanding of how it all works, specifically how to buy, sell, and exchange cryptocurrencies. The process depends on what kind of exchange you will be using and which cryptocurrencies you want to invest in and trade, so we recommend that you decide on these things first.

The biggest and most popular cryptocurrencies, like Bitcoin and Ethereum, are available from centralized exchanges (CEX) that accept debit cards in many countries and provide you with a wallet as standard. However, if you want to buy tokens from smaller projects, you will need to use a decentralized exchange (DEX), which requires you to set up your own wallet.

We highly recommend MetaOne wallet from AAG, which is the most advanced and most secure decentralized wallet available today. It is built from the ground up with usability in mind, and in addition to offering access to all the DApps you might want to use, it does away with complicated and insecure seed phrases used by other DEX wallet options.

It’s important to note that to use a DEX to acquire smaller cryptocurrencies, you will first need to acquire another cryptocurrency of some kind that you can exchange. Decentralized exchanges do not accept debit cards and other traditional payment methods, so you’ll first need to acquire something like Ethereum that you can then swap for what you really want.

Do your own research
“Do your own research” is a term you will hear a lot when it comes to investing in any kind of asset. There are a number of reasons for that. Firstly, as we mentioned above, what might be a good opportunity for one investor may not be a good opportunity for another. Secondly, when you carry out your own research, you cannot be hit by potentially nasty surprises later.

It’s important to properly understand the projects you’re interested in investing in before you put any capital into them — especially if they are new to the market. Find out how they operate, what their roadmap looks like, how active they are and what kind of potential they have, and, most importantly, whether they can be trusted. No one wants to be duped by crypto scams.

Don’t invest more than you can afford to lose
Every investment has the potential to fail, no matter how promising it may seem. That’s just the way investing works. With that in mind, it is critical that you only invest what you can afford to lose. It is never a good idea to invest money that you may need for more important things later. See our guide to budgeting and financial planning for help with working out your finances.

Have a solid investment plan
Once you have worked out how much you can afford to invest into cryptocurrency, it’s a great idea to put together an investment strategy. Throwing capital into different assets at random may earn you a profit here and there if you’re really lucky, but it’s not the best approach. A proper investment plan can help you maximize your profits while also minimizing your risk.

Diversify your portfolio
Part of your investment strategy should be a diverse portfolio of assets. If you only invest in one cryptocurrency and it crashes, you lose everything you’ve put into it. However, if you divide your capital among multiple coins and tokens, you greatly reduce that risk — and allow for the possibility that while one or two may be falling in price, others could be rising.

Stay safe
Digital assets can be incredibly valuable, so it is important to secure them. In addition to picking the right wallet, it is vital that you safely store and protect anything that goes along with it, such as your seed phrase or private key if necessary. You won’t need to worry about seed phrases if you use MetaOne wallet, but you will if you use another decentralized option.

One thing that is immensely important to be aware of is that if you lose access to any other decentralized wallet, or it is compromised and you lose your assets, there is no way to recover them. Be mindful of which websites and DApps you connect your wallet to — not all are safe — and never share your seed phrase or login details with anyone else.

How to research crypto projects and why it’s important

As we touched on above, research is a fundamental part of investing. Carrying out the right due diligence before parting with your cash can greatly minimize your risk of incurring a loss. Avoid relying on “tips” and hype from others that are all too frequently found online. It’s better to discover projects you’re interested in and then find out whether they’re worth your investment.

We have an in-depth guide on how to properly research cryptocurrency projects if you’re interested in learning more, but these are the key things that every investor should look into:

• The team or creators behind a project
• How the project operates
• The project’s mission or roadmap
• Price history and trading volume
• Activity or popularity of the project
• Project news and developments

What are the benefits of investing in cryptocurrency?

Investing in cryptocurrency has a number of benefits over traditional investment options, such as its accessibility. There are no barriers to cryptocurrency; all you need is a device that’s capable of accessing the internet and the funds to get started. There’s no need to prove who you are if you stick to decentralized exchanges, and no need for a bank account.

Here are some other key advantages:

Decentralization
Most cryptocurrencies are not controlled or governed by a centralized entity like traditional assets. They are completely decentralized and powered by blockchain technology. This not only brings some security benefits, but it also means that things like token supply and token distribution are totally transparent and predictable.

Diversification
Cryptocurrencies are great for diversifying your investment portfolio if you also put capital into things like stocks and bonds. They don’t tend to follow traditional markets very closely, so by combining different kinds of assets, you can more effectively minimize your risk and enjoy more stable returns overall — and hedge against losses from other assets.

Inflation protection
Cryptocurrencies are also a great way to protect against inflation since they aren’t affected by it in the same way fiat currencies are. Some cryptocurrencies, like Bitcoin, have a finite supply, which means that its value cannot be reduced by excess supply. Other cryptocurrencies are deflationary, which means the number of tokens in circulation actually decreases over time.

Affordability
The fees associated with acquiring and using cryptocurrency tend to be incredibly low, largely due to the fact that there’s no need to worry about middlemen like banks, brokerage firms, or even payment processing platforms. That means that the vast majority of your capital can go into cryptocurrencies themselves, as opposed to paying investment costs.

Opportunity
Cryptocurrencies are considerably more volatile than most other tradable assets. While many investors consider this to be a downside, others relish the opportunity to take greater risks in the hope of greater rewards. While stock prices tend to move by as much as 1% per day, it’s not uncommon for cryptocurrencies to move 10% or more.

What are the risks of investing in cryptocurrency?

Of course, there are risks associated with investing in cryptocurrency as well, and it’s important to be aware of these before you get started. Here are the key disadvantages to be aware of:

Volatility
We mentioned volatility above, and it’s crucial to note that while some investors embrace this, others see it as unnecessary risk. While cryptocurrency does offer the potential to earn sizable profits in a relatively short period of time, it’s just as easy to incur sizable losses. There are certainly less risky investment options, but none are guaranteed to earn you money.

Lack of support
Due to the decentralized nature of the cryptocurrency industry, there is very little support available for those who need it. Most have to rely on assistance from the community because there are usually no official support channels, particularly when it comes to decentralized projects and exchanges. However, support is available from most centralized exchanges.

Scams and attacks
As cryptocurrency has become more widespread, the threat of scams and attacks has only increased. Investors must be mindful of this and ensure that they only use trusted exchanges, wallets, and DApps. As we mentioned above, there is usually no way to recover lost assets, and cryptocurrency transactions can be incredibly difficult to track.

In addition, the lack of official support channels has led to a surge in scammers posing as “support staff.” They will often reach out to users who are seeking assistance online, then convince them to connect their wallets to malicious applications that steal their assets, or to hand over their wallet seed phrases or login information.

Bitcoin vs. Ethereum: Which is the best investment?

Bitcoin and Ethereum are the biggest, most valuable cryptocurrencies on the planet, which makes them attractive options for any cryptocurrency investor. Because of their size and popularity, both tend to move in much the same direction and set trends for the rest of the cryptocurrency industry. When Bitcoin is down, Ethereum is usually down, too, and vice-versa.

Both have their advantages and disadvantages, but deciding on which is “best” depends on your personal investment strategy. We recommend researching both projects if you’re unfamiliar with them, paying close attention to how they operate, what they were built for, and what their objectives are, before making a decision on which one better aligns with your own goals.

The key difference between the two is that Bitcoin was primarily designed for payments as an alternative to fiat currencies, and it uses the proof-of-work (PoW) consensus mechanism. Ethereum, on the other hand, is a decentralized network that hosts applications, processes transactions, and more, and it uses the proof-of-stake (PoS) consensus mechanism.

Check out our in-depth guides on Bitcoin and Ethereum to learn more.

References

• What you must know investing crypto
• Buying crypto
• 7 things to know before investing in cryptocurrencies
• Advantages of cryptocurrency