Things You Can Do To Minimize Risks When Investing In Cryptocurrencies
The introduction of cryptocurrency has opened the door to a new world of potential for many investors. However, although the currency markets are gaining in popularity and acceptance, they still remain a relatively new financial phenomenon.
As cryptocurrency becomes more popular, there are plenty of ways to invest in it. But many people don’t know how to go about investing in it safely. Here are some tips on how you can minimize your risk when investing in cryptocurrencies. Continue reading to learn more!
Invest buffer money
The buffer is a very important aspect of a portfolio. It protects you from sudden losses, especially in the short term. In the long-term, it may also help to mitigate volatility and reduce stress levels by smoothing out price fluctuations.
The amount of buffer money you should have depends on your personal preferences, but it is recommended having at least 10% of your portfolio invested in crypto assets as a general rule of thumb. This means that if one asset loses all its value due to an unexpected event (e.g., hacking), then 90% will still be safe because they’re held elsewhere or held under different conditions (for example, hardware wallets).
Investing in companies with crypto holdings
A company with a large amount of holdings in crypto is a good investment.
You can also invest in companies that have made an announcement that they will be investing in cryptocurrencies or have already done so.
To find out if your favorite company has any investment in cryptocurrencies, you can do it by searching their name on Google and looking for news articles about them making such investments.
Stay informed about crypto news and trends.
Staying informed about the latest crypto news is an essential part of successful investing. As you can imagine, there’s a lot going on in this space and it’s important for you to know what’s happening so that you can make the best decisions for your investments.
Investing through index funds
Index funds are a great way to minimize the risks of investing in crypto. They’re also a passive investment method, meaning you don’t have to do much work!
- Index funds are low cost and easy to manage: The fees associated with an index fund are typically lower than those associated with actively managed mutual funds because they don’t require any active trading or research on behalf of its managers.
- They’re easy for beginners: Since there aren’t many options available (yet), investing in cryptocurrency through an ETF allows beginners like me who don’t know much about technical analysis or market timing but still want exposure into this exciting space without having too much risk.
Copy-trading
Copy-trading is a popular way to invest in crypto. It’s an easy way to get started with investing without doing any research yourself, but it isn’t without risks.
Copy-trading can be done through websites like KuCoin, BitCanuck or eToro, which allow you to copy the trades of successful traders who have been verified by the company as being trustworthy and profitable. But if you’re looking for an easy way into the market without having to do all of your own research first, then this might be your best bet!
Investing in crypto platforms
Investing in crypto platforms can be risky, but there are ways to mitigate the risks. Some of the most popular crypto platforms include KuCoin, Coinbase and Gemini. These exchanges support both fiat currency and other assets like bitcoin or ether. If you’re interested in just getting started with crypto investing, these are good places to start because they have relatively low fees and are easy to use.
You can also look into investing directly through companies that specialize in blockchain technology; many of them have their own cryptocurrencies which you can buy directly from them if you choose not to use exchanges such as KuCoin, Coinbase or Gemini.
Hedging
One way to reduce your risk is by hedging. Hedging is an investment strategy that aims to protect you from losses due to price fluctuations, or changes in value of an asset. The most common form of hedging is using a futures contract, where you lock in a price for a commodity or asset in the future and trade it today at its current market value (or vice versa).
Extensive Research
When you’re ready to invest in crypto, it’s important to do as much research as possible about the coins (or tokens) you’re thinking of buying. You’ll want to look at the company or business model behind the coin and determine how feasible it is.
You can also look up the coin’s history on various websites for more information on its founding and development. The more research you do, the better your chances are of avoiding scams and making a smart investment.
Keep evaluating the market
As with any investment, it’s important to keep your eye on the market. If you see an opportunity for profit, that may be a good time to invest. But if there are signs of a downturn or other problems in the crypto industry, it might not be wise to jump into the fray right away.
When you decide to invest in cryptocurrency like Bitcoin and trading pairs including BTC/USDT, there are many risks that you should be aware of. These risks can be minimized depending on your investment strategy. When it comes to bitcoin cloud mining, one of the biggest risks is not getting paid for shares that you’ve mined. If this happens and a company doesn’t pay out its users, then it’s best to avoid any company like that.
Check if you have enough money
Before investing, it’s important to know how much money you can afford to lose. This is especially true if you’re new to investing and don’t want to risk losing more than a few dollars.
To calculate how much money should be invested in cryptocurrencies, take into account:
- Your current financial situation (your income and debt level)
- How long do you plan on holding onto this investment? If it is short-term (less than 6 months), then it might be okay to invest more than half of your portfolio or even all of it into crypto assets.
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US Financial Watchdogs Highlight Risks of Investing in Cryptocurrencies
Global financial authorities have taken the recent cryptocurrency developments as a crucial moment to revisit crypto regulations and issue warnings on digital assets’ related risks, including liquidity crunch and extremely high volatility to banking organizations. The collapse of Terra Luna UST and FTX, which combined involved over $100 billion, are the key events used to issue crypto warnings.
A recent report by JPMorgan indicated that more crypto regulations are upcoming, particularly focused on the staking and stablecoins industry. As a result, crypto staking giant Lido Finance recently stated the SEC’s crackdown on staking programs could eventually lock out U.S digital asset investors.
According to a statement issued by the Executive Board of the International Monetary Fund (IMF) on Thursday, digital assets should not be granted official currency or legal tender status in order to safeguard monetary sovereignty and stability. The IMF recognized that the cryptocurrency market has immense potential to disrupt global monetary stability.
Additionally, the IMF addressed questions raised by member countries on the benefits and risks of crypto assets and how to structure appropriate policy responses. Notably, the IMF operationalizes the principles outlined in the Bali Fintech Agenda (IMF and World Bank 2018) and includes macro-financial considerations such as implications for monetary and fiscal policies.
“Efforts to put in place effective policies for crypto assets have become a key policy priority for authorities, amid the failure of various exchanges and other actors within the crypto ecosystem, as well as the collapse of certain crypto assets. Doing nothing is untenable as crypto assets may continue to evolve despite the current downturn,” the IMF noted.
Notably, a joint statement from the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) cautioned banking organizations to approach the crypto market with much discretion.
US Fed Issues Warning to Banks on Crypto Liquidity Risks
Cryptocurrency regulatory scrutiny from United States financial authorities has increased recently, fueled by the Terra Luna UST and FTX collapse last year. With the motive of widening the use of the United States dollar as the global reserve currency, the respective agencies have widened the regulatory net to stablecoins and the crypto-staking sector.
This is evident by the fact that Binance-backed BUSD has already been hit by the regulatory wave and will no longer be minted. Additionally, the Kraken cryptocurrency exchange has had to cease offering its crypto staking program after the SEC deemed it unregistered security.
Coinbase Global Inc CEO Brian Armstrong has condemned the U.S. agencies’ crypto crackdown noting that the industry will shift overseas, where regulations are much friendlier.
Fed Warns Banks on Crypto Liquidity Crisis
According to a joint statement from the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), the banking organizations in the United States should be aware of risks associated with cryptocurrency including liquidity crunch.
“This statement highlights key liquidity risks associated with crypto-assets and crypto- asset sector participants that banking organizations should be aware of.3 In particular, certain sources of funding from crypto-asset-related entities may pose heightened liquidity risks to banking organizations due to the unpredictability of the scale and timing of deposit inflows and outflows,” the agencies noted.
The banks are expected to conduct due diligence before indulging in crypto-related business to avoid cases related to liquidity issues in the future. The agencies advised the banks to take note of the stability and demand of stablecoins, which require redemption solidity.
Bitcoin Whales Drive Altcoin Market FOMO, Santiment Warns Of Macroeconomic Risks
The crypto market has seen its highest gains in the past week since the start of the 2022 bear market, led by Bitcoin’s price reaching above $21,000.
However, on-chain analytics firm Santiment has observed that traders are behaving as if the market has reached its peak. Furthermore, Santiment has noted that Bitcoin’s profit transaction ratio is currently at its highest level since February 2021, suggesting that a potential reversal may lead to a general correction in the crypto market in the coming weeks.
It has been reported that the influx of Bitcoin whales – 416 more BTC addresses holding between 100 to 1,000 BTC in the past eight weeks alone – has given the altcoin market the confidence to experience FOMO.
Santiment also warns that the crypto market is not immune to the macroeconomic factors that affect global economies. Additionally, the future of crypto’s mainstream adoption is dependent on worldwide regulations. In its mid-month crypto report, Santiment highlighted the changes in social volume over the past thirty days.
According to the report, Ethereum recorded a spike of over 50%, while Bitcoin posted a decline of 4.92%. In the stablecoin market, Tether (USDT) and USDC posted a decline in the social volume of approximately 26% and 40% respectively.
The next move in the crypto market is practically impossible to guess but historical data suggests that the industry is in the early stages of multi-week consolidation. Notably, the total crypto market capitalization is about $1.03 trillion today with approximately $122 million liquidated in the past 24 hours.
How does Crypto Lending Work? Benefits and Risks
Cryptocurrency lending has grown in popularity over the past few years. More and more people are hearing about this exciting new type of investing, and more projects are popping up to help improve their experience. As per the latest trends, this space is expected to rise even further with more and more people coming forward with their lending capabilities. Many people find it hard to understand how crypto lending works and what they can do with this advanced technology. This guide will outline how cryptocurrency lending works, the benefits and risks involved with it, and the kind of project you should be looking at before putting money into one.
What is crypto lending?
Crypto lending is a new type of financing that allows you to earn interest based on the value of your crypto assets. Private lenders take custody of your assets and use them as collateral for loans. They then return at least some portion of your investment every day until the loan is repaid. Crypto lending is a simple concept that enables you to borrow cryptocurrency with a payment plan. You are basically lending your crypto to a lender and getting it back after a set period of time.
There are two reasons this type of loan can be advantageous: It allows borrowers to make use of their digital assets elsewhere, like trading or buying more altcoins – without having to sell their own crypto. Secondly, the interest rate is lower than regular loans which means there are no hidden fees associated with this type of financial product. Learn how crypto lending works with this step-by-step guide to crypto lending in easy-to-understand terms.
Types of cryptocurrency
A cryptocurrency is a digital or virtual currency that is protected by cryptography, making counterfeiting or double-spending practically impossible. Many cryptocurrencies are decentralised networks built on blockchain technology, which is a distributed ledger enforced by a network of computers. Using this technology, participants can confirm transactions without needing a central clearing authority. Potential applications include fund transfers, voting, settling trades, and others.
There are thousands of different cryptocurrencies in circulation and the figure keeps increasing. Part of the reason why is because of the way cryptocurrencies can be created. The source code of one can be used to build another. Cryptocurrencies are often not issued by any central body and making them potentially immune to government interference or manipulation. Below are the main types of cryptocurrency.
Bitcoin
Bitcoin is considered the first cryptocurrency created which is designed to act as money and a form of payment outside the control of any one person, group, or entity, thus removing the need for third-party involvement in financial transactions. Bitcoins are rewarded to blockchain miners for their work done to verify transactions and can be purchased on several exchanges.
Bitcoin has become the most well-known cryptocurrency in the world, and its popularity has inspired the development of other cryptocurrencies. Competitors attempt to replace it as a payment system or used it as a utility in other blockchains and emerging financial technologies.
Tether
Tether is a cryptocurrency stablecoin pegged to the US dollar and backed “100% by Tether’s reserves. It’s owned by iFinex, which is a company from Hongkong that owns the crypto exchange BitFinex. Currently, it’s the third-largest cryptocurrency after Bitcoin and Ethereum, and the largest stablecoin with a market capitalisation of almost $83 billion.
Ethereum
Ethereum is a technology for building apps and organisations, holding assets, transacting, and communicating without being controlled by a central authority. You won’t need to hand over all your personal details to use Ethereum. You’ll be able to control your data and what is being shared. Ethereum also has its own cryptocurrency, Ether, which is used to pay for certain activities on the Ethereum network.
Just like Bitcoin, Ethereum lets you use digital money without payment. But Ethereum is programmable, which means that you can also build and deploy decentralised applications on its network. It’s more like a marketplace of financial services, games, social networks, and other apps that respect your privacy.
Terra
Terra is the blockchain technology that houses the LUNA coin and associated stablecoins like TerraUSD. The LUNA coin is used as a protocol token to reduce the volatility of the stablecoins on the Terra blockchain.
The aim of Terra was to create stablecoins to combine the decentralized freedom of cryptocurrencies with the stability of fiat money. However, due to the faults in Terra’s ecosystem, LUNA saw a massive crash in its price.
XRP
XRP is the native cryptocurrency of XRP Ledger, which is an open-source, public blockchain designed to facilitate faster and cheaper payments. If a person uses XRP as a bridging currency, it’s possible to settle cross-border transactions in less than five seconds on the open-source XRP Ledger blockchain at a fraction of the cost of the more traditional methods.
XRP Ledger is a permissionless network of peer-to-peer servers that powers XRP operations. It intends to act as a bridge between hard-to-match currencies. So if there are no market markers on the network willing to trade shekels for shillings, one can sell the shekels for XRP and then use XRP to buy shillings.
How does crypto lending work?
Crypto lending lets users borrow and lend cryptocurrencies with interest. Borrowers can instantly get a loan and start investing just by providing some collateral. When the collateral falls below a certain value, they will need to top it up to the required level to avoid liquidation. When the loaned amount plus a fee is returned, the capital is unlocked. They can also get collateral-free loans known as flash loans, which must be paid back within the same transaction. If the borrower cannot do this, the lending transaction is reversed before it has the chance to be finalised. Crypto loans make borrowing and lending simple, and the process is completely automated by smart contracts.
Benefits of cryptocurrency loans
- Capital is easily available. Anyone who can offer collateral or refund the cash in a flash loan or quick cash loan is eligible for a crypto loan. This makes them easier to get than a regular financial institution loan, and they won’t look at your credit score.
- Loans are managed using smart contracts. A smart contract automates the whole loan and borrowing process, making it more efficient and scalable.
- It is simple to get passive money with minimal effort. Borrowers may store their cryptocurrency in a vault and start earning without having to handle the loan themselves.
Risks of crypto lending
- Depending on your collateral, you have a high danger of liquidation. Even with heavily collateralised loans such as car loans, crypto values might decrease unexpectedly, resulting in liquidation.
- Smart contracts are vulnerable to cyber-attacks. Badly constructed code and back-door vulnerabilities might lead to the loss of your loaned amount or collateral.
- Borrowing and lending might put your wealth in danger. While diversifying your portfolio is a smart idea, doing so via crypto-backed loans introduces additional risks.
Things to consider
You’ll have the highest chance of success with a crypto loan if you choose a reputable crypto lending platform and reliable assets as collateral. But, before you lend or borrow, keep the following points in mind:
- Understand the dangers of transferring custody of your crypto holdings. Once the funds leave your wallet, you must rely on someone else (or a smart contract) to handle them. Projects can be the subject of hackers and fraud, and your funds may not be instantly available for withdrawal in such situations.
- Before lending your cryptocurrency, consider the market circumstances. Your coins may remain frozen for an extended length of time, making it unable to respond to crypto market downturns. Lending or borrowing with a new platform can be dangerous as well, and you may be better off waiting until it gains more trust.
- Read the loan terms and conditions carefully. There is a variety of choices for where to obtain loans like secured loans. You should seek lower interest rates as well as more advantageous terms and circumstances.
Conclusion
Cryptocurrency may be a good investment if you’re ready to recognise that it’s a high-risk bet that might pay off – but also that there’s a big possibility you’ll lose it all. Cryptocurrency prices have been decreasing in 2022 as a result of a global crypto price meltdown. Before you purchase and sell digital currency, understand the risks so you can decide whether it is a smart investment for you and your personal finances. It is critical to proceed with caution when investing in bitcoin or other cryptocurrencies.
Author’s Bio:
Marjorie Hajim
Marjorie Hajim is the SEO Manager for Friendly Finance. Friendly Finance is a leading loan matching service in Australia specialising in consumer finance. She loves growing businesses with a focus on their online presence and is passionate about organic growth and all things digital.
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