7 Tips for Safely Investing in Cryptocurrency

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In recent years, cryptocurrency’s popularity as an investment vehicle has skyrocketed. There’s a lot of appeal in its potential to generate profits, and that’s enticed plenty of investors to start adding Ethereum and other coins to digital wallets in the hope they’ll soon see big payouts. But another element of cryptocurrency’s appeal — the fact that trading is accessible because it takes place online — is also one that creates a new layer of risk. The world of cryptocurrency is largely unregulated at this stage of the game, and this, coupled with the ever-present need for online security when it comes to protecting your personal information, means it’s vital to safeguard yourself when you begin investing in crypto.

Cryptocurrency trading can be lucrative and, with a bit of luck, can help you see significant financial benefits even as a beginner. But when you’re first starting out, it’s essential to familiarize yourself with the logistics of currency exchanges and pay particular attention to securing your personal details, even after you’ve learned the ropes with your chosen cryptocurrency. Get started by familiarizing yourself with — and practicing — these key tips to help you safely invest in cryptocurrencies.

1. Research Exchanges Beforehand

Cryptocurrency exchanges, also called digital currency exchanges, are online platforms where you can trade cryptocurrencies for government-issued fiat currencies or other types of cryptocurrency. It’s like a currency exchange at the airport — but everything is online. As crypto trading has grown more and more popular, the number of exchanges to choose from has also increased; by some estimates, there are more than 500 to choose from.

There are two types of crypto exchanges — centralized and decentralized. Centralized exchanges are popular with traders who prefer a more secure way of managing crypto transactions. They act as a third-party between the person buying the cryptocurrency and the person selling it. Decentralized cryptocurrency exchanges (known as DEX) focus on peer-to-peer transactions without the involvement of a third party.

Before you opt for a particular exchange, research several to determine what users do and don’t like about them. If you find that one exchange seems to deal with security compromises more frequently, you’ll know it’s likely not the best option for you.

2. Diversify Your Cryptocurrency Investments

Like stocks and other more volatile investments whose values can fluctuate greatly from day to day, there’s no foolproof investment strategy for cryptocurrency that’ll guarantee you’ll see a high rate of return on your investment. All trades have the potential to bring in profits or result in substantial losses based on a variety of factors.

That’s why, similarly to investing in stocks, it’s a wise idea to diversify your portfolio by investing in different cryptocurrencies. You don’t want to risk putting all of your crypto eggs in one basket — one coin — just in case its value tanks overnight. When you have multiple currencies in your portfolio, the others can absorb some of the risk when one doesn’t perform well. And, you won’t have lost all the money you invested.

One effective approach involves choosing a high-demand cryptocurrency, such as Bitcoin or Ethereum, while also investing in emerging cryptocurrencies known as altcoins.

3. Get Ready for Upswings and Downturns

It’s easy to imagine linear growth in the value of the cryptocurrency you invest in, but things likely won’t be this nice and neat. That’s where part of crypto’s riskiness lies — due to market fluctuations, cryptocurrencies can experience upswings and downturns in value that may have consequences for your portfolio. In addition to understanding that they’ll happen and you need to anticipate them, it’s also important to be prepared with a strategy you can deploy when these fluctuations occur.

Because the crypto world is so new, there’s a lot of speculation involved. If you have a low tolerance for risk, whether that’s from a personal standpoint or a purely financial one, this type of investment might not be what you’re looking for.

4. Take a Hybrid Approach to Wallets

As a cryptocurrency trader, you need a wallet where you’ll store tokens and records of your cryptocurrency transactions. Similarly to exchanges, a variety of different wallets are available and have unique security features to safeguard the digital data they store. The upside to this is that you can access them when needed as long as you have an internet connection. The downside is that some of them are vulnerable to hacking and may require you to store paper copies of private keys — if these get into the wrong hands, you could end up losing your investment.

One of the better types of wallets you can can use is the hybrid wallet. Their details are stored on your personal electronic device and a third-party server, which means it’s easier not to lose records of your data.

5. Start Out With Smaller Amounts

Although we’ve made a few comparisons between the two, it’s important to remember that investing in cryptocurrency is different from investing in the stock market. While stock traders often invest larger amounts of money, many crypto experts advise sticking to the 5% rule. This means that only 5% of your overall financial portfolio should include riskier assets like crypto investments.

And it’s wise to start out even slower than that. If you’ve yet to invest any money into crypto, you might want to keep your initial investment to around 2% of your portfolio until you’re more familiar with this type of trading. This is because of cryptocurrency’s shorter track record and higher volatility.

6. Protect Yourself Against Phishing and Scams 

A cryptocurrency offer can sometimes seem too good to be true. If that happens, it probably is. If you want to be a successful trader, you shouldn’t rush to buy cryptocurrency based on the generous offers you come across. Instead, consider looking at other options first.

If you ever receive an unsolicited email that advertises a cryptocurrency deal, it’s most likely a scam. You should also pay attention to imposter websites. Clicking on a personal message or a public social media post can lead you to a website that looks very similar to an authentic trading platform. However, fake cryptocurrency websites often lack important encryption that keeps traders safe. The imposter website likely won’t have “https” in its URL or the lock icon near the URL bar. You may also notice that the website has incorrect spellings. If you don’t pay close attention, you may easily think the website is legitimate. 

7. Never Share Your Secret Key

When you get a bitcoin wallet, you may get a private key that should only remain accessible to you. Some private keys can have 64 characters, depending on the cryptocurrency. This is to make it difficult for hackers to access your wallet.

Sharing your private key with anyone else puts your investments at risk, especially if you transmit the information digitally over an unsecured Wi-Fi network. A hacker can access your wallet and move your cryptocurrency to a different wallet, and it may be impossible to get your money back because of the anonymity involved in crypto trading. Keep a copy of your key in a secure location, such as a safe, and don’t let just anyone have access to it.