An emerging asset class that has attracted a lot of attention of late, cryptos have detractors and admirers in equal proportions.
While critics point out the extreme volatility associated with them, along with regulatory ambiguity, cybersecurity issues, and their uncertain future, its admirers point out the mind-boggling returns that they have generated over the years.
However, being a new investment class, very little information is available for their fundamental analysis, and hence it’s vital to tread with caution while you are trading with them. So, what are the things that you need to watch out for? Let’s find out.
Avoid Taking Big Bets
Several cryptos have given mouthwatering returns in the past one year. A few thousand rupees invested in them would have grown into lakhs. This high growth may prompt you to take big bets on cryptos and put in a huge amount of money.
However, you must avoid it. As said, cryptos are a highly volatile asset class, and their prices can come down significantly without prior warning.
Recently, Tesla’s U-turn on Bitcoins coupled with the crackdown of Chinese governments on institutions dealing with cryptocurrencies saw the crypto market crashing down, sending investors into a tizzy.
Hence, you must ensure to trade in small amounts losing which will not hamper your goals and affect essential commitments.
Invest Through an Established Platform
This is another essential consideration. In India, the crypto space is not regulated, leading to the mushrooming of many new platforms.
Just like you choose an authentic broker before investing in stocks, it’s vital to choose a trustworthy intermediary so that you are not duped, or your money is not tied up.
Do thorough research about the platform, its working mechanism and read reviews from investors who have used its services. Equally important is to read about the crypto you wish to invest in.
While Bitcoin is the most popular one, there are many other cryptos too in the market such as Dogecoin, Ethereum, Cardano, Ripple, and Litecoin, among others.
Resist the Fear of Missing Out
Just like investing in stocks and other asset classes must be guided by financial goals and risk appetite among others, the same goes for cryptos. If you are just trading in digital currencies because of the fear of missing out (FOMO), there are chances of committing errors and losing a large amount of money.
Ensure that your trading strategy is backed by facts and not speculations. Note that most investors are dependent on information available on social media as there is a lack of information in this area. Betting on such tips is an open invitation to trouble and makes you vulnerable to losses.
Check the Market Capitalisation and Trading Volume
As of January 2021, there are more than 4000 cryptocurrencies in existence. Many of these cryptos have low market capitalisation and trading volumes. It’s in your best interest to avoid currencies that don’t have adequate market cap and have low trading volumes.
While risks exist in all tokens, those with a high market cap and large circulation are less vulnerable to manipulation.
Cryptos with a high market cap and trading volumes are easier to buy and sell than ones that are low on market cap and are traded in small volumes. In other words, liquidity is a concern with the latter.
Track the Global Developments
It’s essential for you to track the developments happening globally in the crypto market. This is because these events can significantly impact prices.
You need to be quick to act only on any major development, and the fact that crypto trading is done 24X7 helps in the process.
In a nutshell, trading in cryptocurrencies calls for caution and knowledge. While the former helps make the right calls, the latter helps in picking the winning bet and acting judiciously during different phases of the investment.
(The author is EV & Head, Edelweiss Personal Wealth Advisory)
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
