Cryptocurrencies offer investors excellent opportunities but also high risks. Choosing the right investment target requires knowledge of the market, clarification of investment goals and assessment of one's own risk tolerance. As the crypto market grows, it is important to weigh whether you want to invest in the most well-known currencies, such as Bitcoin and Ethereum, or look for returns from projects with a smaller market value. In this text, we go over the key criteria that help make informed investment decisions with cryptocurrencies.
Crypto investing
Cryptocurrencies have conquered the investment world, offering unique opportunities, but at the same time they also challenge traditional investment strategies with their high volatility. Among tens of thousands of cryptocurrencies, choosing the right investment target can seem challenging. Before making an investment decision, it is important to understand what role cryptocurrencies play in your own investment strategy and how much risk you are willing to bear.
Crypto investments offer the opportunity for both quick profits and significant losses, so thorough background research and comparison of different projects are key. By choosing a project that supports your own goals, you can improve your chances of successful investments.
In this text, we go over the key criteria and the most important factors that will help you make considered and justified decisions in your crypto investments. Whether you are interested in long-term investments or short-term trading opportunities, this text will give you the necessary tools to evaluate cryptocurrencies and plan your investments.
1. Determine your investment goals and risk tolerance
Before diving into the world of cryptocurrencies, it is essential to clarify your own investment goals and determine your own risk tolerance. The crypto market is known for its extreme volatility, and the values of cryptocurrencies can fluctuate drastically in a very short time. When planning your investment, it is important to understand why you are interested in cryptocurrencies and how much risk you are willing to take - this will guide you in choosing the right investment strategy.
Short-term vs. long-term investment goals
One important question is whether you are looking for short-term or long-term returns. There are many investors in the cryptocurrency market who seek quick profits by buying rapidly rising currencies and selling them soon at a profit. Cryptocurrencies, whose volatility can be very high, are often preferred for short-term investments.
On the other hand, if you are interested in long-term investments, you may be willing to hold investments for years in the hope that their value will increase steadily. Long-term investing in cryptocurrencies has proven to be one of the most profitable ways to invest in cryptocurrencies. When it comes to long-term investing, you should turn your attention especially to the biggest cryptocurrencies, such as Bitcoin and Ethereum.
Assessment of personal risk tolerance
In the cryptocurrency market, risk tolerance is often put to the test, as fluctuations in currency values can be large and happen quickly. An investor's risk tolerance is individual, and it is influenced by both the financial situation and their own personal characteristics. In general, a higher risk tolerance allows you to invest in smaller and emerging cryptocurrencies, which can bring big returns, but also big losses. Low risk tolerance, on the other hand, may mean that you should consider more stable and well-known cryptocurrencies.
A concrete way to assess risk tolerance is to think about how much you are willing to lose without your financial situation or investment strategy collapsing. This helps determine the size of the investments and the composition of the crypto portfolio in such a way that it remains manageable regardless of changes in the market. If the investor's idea is to invest only with the maximization of quick profits in mind, investing in cryptocurrencies can involve considerable risks. If, on the other hand, the goal is to build a long-term investment portfolio, it is recommended to keep the amounts to be invested such that they do not endanger your financial well-being.
2. Familiarize yourself with interesting cryptocurrencies
Before investing in any cryptocurrency, it is important to understand the background and goals of that cryptocurrency. Knowledge of the currency's technology, purpose of use and innovations gives valuable information about the project's potential and suitability for your own investment goals.
Each cryptocurrency is developed to solve specific problems and fulfill market needs. By looking at the project's original purpose and vision, you can better assess whether it is in line with your own investment goals.
For example:
Bitcoin was created as a store of value and an alternative monetary system that does not depend on central banks or governments. Many investors see Bitcoin as digital gold – a long-term store of value that protects assets from the swings of traditional markets.
Ethereum, on the other hand, is designed as a platform that enables the construction of smart contracts and decentralized applications (DApps). This makes it a flexible platform on which a wide variety of decentralized services and applications can be developed.
By getting to know the purpose of the project, you can assess how well its vision and development plan fit the needs of the market and your own goals. For example, currencies that use the Proof of Stake algorithm or produce innovations for decentralized finance (DeFi) may suit you if you value sustainable development or are interested in innovations in finance.
3. Cryptocurrency market value and liquidity
When evaluating a cryptocurrency, it is important to pay attention to its market value and liquidity, which indicate the currency's financial stability and demand. The market value is calculated by multiplying the number of coins in circulation by their current price, and it gives an indication of the cryptocurrency's position in the market. Cryptocurrencies with a large market cap, such as Bitcoin and Ethereum, tend to be more stable and their value fluctuations are more moderate compared to smaller projects.
Liquidity, on the other hand, describes how easily a cryptocurrency can be bought and sold without its price changing significantly. High liquidity indicates that the currency has a high trading volume and there are many buyers and sellers in the market. This is especially important when you want to quickly get rid of your investment or protect yourself from large price fluctuations.
Currencies with a large market value have higher liquidity, so buying and selling them is easier. However, with smaller and more unknown cryptocurrencies, the lack of liquidity can make trading more challenging, as the number of buyers and sellers may be limited. By analyzing the currency's market value and liquidity, you get an idea of how easily your investment can be converted into money, and how big the risk is in price fluctuations.
4. Special features of the largest cryptocurrencies as an investment
Each cryptocurrency has its own unique characteristics that affect its suitability as an investment. For example, Bitcoin and Ethereum are the largest and most well-known cryptocurrencies on the market, but there are significant differences between them. Bitcoin mainly acts as a store of digital value and is often referred to as digital gold. Its limited supply and wide acceptance make it a stable and attractive long-term investment. Bitcoin is often invested by those who are looking for a stable safe haven in the crypto market and want to protect their investments from the fluctuations of the traditional market.
Ethereum, on the other hand, provides a platform for a wide variety of decentralized applications and smart contracts. This makes it not only a valuable investment but also a very flexible platform for technological innovation. Ethereum is particularly attractive to investors who believe in the wider adoption of decentralized finance (DeFi), applications built on blockchain and smart contracts. In addition, Ethereum's transition to a more energy-efficient Proof of Stake algorithm has reduced its environmental impact and improved sustainability in the long term, which may increase its interest among green investments as well.
While major cryptocurrencies such as Bitcoin and Ethereum have their own strong characteristics, lower market cap cryptocurrencies can also have attractive opportunities to offer. Investing in these so-called "altcoins" can offer remarkably high returns at best, as many of them are just in their early stages and may grow significantly if they develop into popular projects.
In investing, return and risk always go hand in hand. Naturally, cryptos with a lower market value also carry a higher risk, as these projects can suffer from greater price volatility and may have more limited liquidity, which can make them more difficult to sell. Moreover, the development and success of these currencies depends on various factors such as team, technology and community support, which makes the background work of investors even more important. Investing in cryptocurrencies with a low market cap is especially suitable for investors with a higher risk tolerance and an interest in finding early-stage projects that have the potential to develop and grow.
Before investing, it is recommended to thoroughly research the background, technological vision and future plans of each project. A well-diversified portfolio that includes both major and minor cryptocurrencies can also help an investor manage risk.
Summary
Investing in cryptocurrencies offers both great opportunities and significant risks, so it is important to consider your own goals and risk tolerance when choosing investment targets. The stability and recognized status of major cryptocurrencies such as Bitcoin and Ethereum make them attractive long-term investments. Among cryptos with a smaller market value, on the other hand, there may be greater profit opportunities, but also greater risks. Knowing the special features of each currency and analyzing the market helps the investor to make well-considered decisions. A diversified portfolio that combines both major and minor cryptocurrencies can be an effective way to manage risk and take advantage of the opportunities offered by the crypto market.
Mikko Soon
Head of Northcrypto Private
Last updated: 18.11.2024 15:00
