The five questions to ask yourself before you buy crypto
With crypto officially hitting the mainstream, talk of it is everywhere now.
You’ve probably seen it in the news, or perhaps had a chat with someone about cryptocurrencies or NFTs over Christmas lunch, and were swayed to try investing for yourself.
If that’s you, you’re not alone, nearly half of Australians currently invested in crypto did so due to encouragement from friends, family, or colleagues, and nearly the same amount also expressed that media hype drove them to buy.
Purchasing a cryptocurrency is the first-ever investment for many people. Not only is there is an overwhelming amount of cryptocurrencies (CoinMarketCap says 16,000+) there is a lot of information and hype too.
So, before you commit to buying, here are some questions to ask yourself to make sure buying crypto is the right move.
Disclaimer before we begin: This is NOT financial advice, the author, and CryptoVista’s staff do not know your personal financial situation. The questions are for education to help guide you in your own decision on whether to invest. Any product mentioned is for demonstration or example purposes only. CryptoVista does not endorse any product mentioned or referenced within this article.
Do not take financial advice from an article. Do your own research, and speak to a financial advisor before making any investment decisions.
Why am I investing?
Are you only buying crypto because of FOMO, or do you believe that blockchain technology will revolutionise money as we know it? Maybe you have a financial goal like buying a house or a new car?
Whatever your “why”, you need to keep it in mind. The crypto market is extremely volatile, prone to scams, and profit isn’t guaranteed. This question, along with the ones below, will form your investment strategy.
What can I afford to lose?
Whilst nearly 90 per cent of Australians have either made money or have broken even from crypto in 2021, there’s 10 per cent who didn’t. Past performance is not an indicator of future performance, so what if that percentage of people who lost out on crypto grows next year, and you’re a part of that statistic?
Whilst it’s very unlikely that you could lose all of your money, it’s not impossible. You need to think what your financial situation would be in the worst-case scenario. If you’re the victim of a scam, or the crypto you buy loses value for months, years, or even forever, what does that leave you with?
This comes into your risk profile, and what risks you’re willing to subject yourself to for potential financial gains. Cryptocurrencies are inherently risky investments, with basically all the currencies or tokens tied to projects still under active development. Which leads to…
Have I done my research?
DYOR is a commonly used acronym in the crypto community, meaning “Do Your Own Research”. Are you investing in crypto just because your friend told you about it at dinner, or because you read about it on Twitter?
Reading about a cryptocurrency and then deciding that it sounded like an interesting investment isn’t a bad thing, but putting your real money into something you don’t fully understand might not be a wise decision, and leaves you wide open to crypto scams.
Before any of your hard-earned cash gets allocated to a crypto investment, ask yourself a few questions:
- Who are the developers behind the coin? If they’re anonymous, or unknown, why is that?
- What function does this asset or project serve? Is it a stablecoin? Or a reward token for service, like an exchange? Is it a “memecoin”?
- Have I read the white paper for the project?
- Do I believe in the project?
To put it simply, if you can’t explain what it is you’re investing in, you probably shouldn’t invest in it.
What is my timeline for investing?
Your timeline will determine how prepared you are for the volatility of the market. Historically, shorter-term investments have been riskier due to significant price swings that take place over the shorter term, with longer-term investments possibly giving you more time to recover from a mistake.
Your timeline for investing would also form how you invest. Take crypto staking for example. If that forms part of your strategy, you would have to “lock-up” your crypto for a period of up to three months, potentially gaining a larger return than if you were to only hold it. This is significantly riskier, but it could form a part of your short-term strategy.
In your research, you might have come across a few suggestions for how long to invest in some projects. Whilst researching for this article, the PDS for a product I found had a minimum suggested timeframe for holding the investment set to seven years. Obviously, not something you’d want for a shorter-term investment.
Will your crypto investment be short-lived, spanning only a few weeks, or months? Are you planning a longer-term investment for a few years away, maybe even retirement way down the road? Does your strategy make sense from a timing point of view?
When will I take from my investment?
Hypothetically, let’s say you’ve invested, and you’re in the lucky percentage of people who have made a profit. Great! Now what?
Will you take profits along the way? Withdrawing “X” amount of dollars whenever you profit that amount?
Maybe you’ll sell it all when you reach a pre-determined amount, or at a particular percentage gain? Are you waiting for a particular time, such as when you start looking at buying a house?
What if it goes the other way, and you’re watching your investment shrink? Will you leave it and hope it recovers? Or will you have a stop point, where you’ll withdraw your money from the investment even if it’s at a loss?
Plan in advance, because whichever way your investment goes, it’s only on paper until you withdraw it.
Investing in crypto, like any other form of investment, can be an exciting path to profits and financial independence. However, as with any form of investment, knowledge is power, and those that don’t do their due diligence and exhaustive research before deciding where to park their money are the ones putting their financial situation at risk.