This guide outlines 10 key tips for successful cryptocurrency investing. The crypto space presents unique prospects but also challenges and risks not encountered in traditional markets. Extreme volatility, technical complexity, and regulatory uncertainty can overwhelm new investors. But by following the core principles of strategic asset allocation, secure storage, dollar-cost averaging, and buying fundamentally strong projects, you can carefully include crypto as part of a well-balanced portfolio.

1. Never Invest More Than You Can Afford to Lose

Cryptocurrencies are still relatively new and extremely volatile assets that can gain or lose significant value in a single day. While the long-term trend has been bullish, there is still skepticism and opportunism in these markets.

For that reason, the first principle is only to invest an amount of capital that you are fully prepared to lose should the market take a downturn. At the very least, you should have enough emergency savings before investing funds into crypto. Once you’re ready to invest, you should make crypto no more than 5% of your portfolio. This is enough to gain exposure to potential gains while limiting the impact of losses on the overall portfolio.

2. Use Dollar-Cost Averaging

Use dollar-cost averaging for crypto, which is making small, recurring purchases on a set schedule, such as weekly or monthly. Automate these purchases through an exchange rather than buying manually each time.

Dollar-cost averaging allows you to methodically build a position while avoiding the psychology of trying to perfectly time market tops and bottoms. As a result of the trend of continuous price increases, the value of the assets you buy will rise over time, reducing the impact of volatility. You can also consider occasionally making opportunistic extra purchases when the market dips significantly.

3. Research and Stick to the Fundamentals

Vetting a crypto investment involves different metrics from the stock market. These often include assessing real-world adoption potential, reviewing technical specifications, studying the founders and developers, scanning community engagement, and evaluating competitors.

Favor projects that have been time-tested or that offer unique capabilities not easily copied and have the promise of widespread adoption. Beware of assets tied solely to speculation without any true fundamentals.

Crucial fundamentals to research are the utility of the token, the speed and scalability of transactions, the security of the network, the transparency and experience of the team, and the competitive advantages it has over competing cryptocurrencies.

4. Stick to the Major Crypto Currencies

Large, established crypto assets like Bitcoin and Ethereum enjoy first-mover and adoption benefits, have large market capitalization, and are tied to a series of financial products built on top of them, such as ETFs and derivatives markets. These well-known coins have weathered several significant market cycles and downturns.

While risks remain, bigger cryptocurrencies (by market cap and trading volume) have generally demonstrated their resilience, unlike newer or smaller-cap coins. However, if the chance arises, consider rebalancing periodic profit-taking from major assets into promising newer projects with real-world utility. As with any particular asset or security, avoid heavily overweighting major cryptos relative to your overall investment portfolio size and risk tolerance.

5. Use Safe Storage

Store sizable crypto holdings in a hardware wallet or with a trusted crypto custodian rather than leaving them on an exchange long-term. Leading hardware wallets include Trezor and Ledger, and some software-based wallets like Electrum are considered secure. These provide reinforced security protections like offline storage, encryption, PIN codes, multi-signatures, recovery phrases, and anti-tampering mechanisms.

Keep your recovery phrase somewhere safe, like a locked or bank vault. Do not electronically store your recovery phrase; if you must, encrypt or password-protect it. Be careful when entering sensitive wallet data on devices. Use complex and unique passwords, seed phrases, and secure backups.

6. Employ Objectivity

Stay objective when evaluating crypto investments. Do not fall prey to the fear of missing out, speculative meme coins, or hype cycles. Also, avoid any assets with promises of easy money, guaranteed returns, or anything that sounds too good to be true. Invariably, it is.

Maintain a balanced portfolio across multiple asset classes. Don’t be overexposed to crypto. Vet any crypto-related information for accuracy before acting on it. Understand that crypto investing remains highly speculative, and be ready to cut your losses if investment trends change. Consider consulting fee-based financial advisors for guidance tailored to your financial situation and goals.

7. Take the Time to Understand the Technology

Put aside time to learn about the underlying tech powering different crypto assets. Knowing how blockchain networks, consensus mechanisms (e.g., proof-of-work vs. proof-of-stake), hashing algorithms, and smart contracts work will give you better insight into a project’s prospects.

Learning cryptography basics also helps you better grasp the potential of products like zero-knowledge proofs. Subscribe to legitimate industry publications and blogs independent of the crypto you invest in and stay up-to-date on new technological developments in the space.

8. Pay Attention to Regulations and News

Follow relevant legal cases and regulatory developments, as well as legislative proposals related to crypto, both domestically and abroad. Major regulations can significantly affect prices and adoption. For example, when China banned crypto mining, many miners moved their operations. Stay on top of governance changes enacted by blockchain projects, and the posturing of politicians and their promises. These can substantially alter staking yields, development funding, and other dynamics.

9. Use Crypto Indicators to Inform Decision-Making

While crypto’s volatility makes accurate predictions impossible, tried-and-true technical indicators like moving averages, relative strength, and crossovers can provide valuable signals. Moving average crossovers, for instance, may identify momentum shifts. Crypto-specific indicators like on-chain activity, mempool size, average transaction fees, addresses by time held, and so on are also important.

Assessing indicators can help you better time your entries and exits. Combine technical and blockchain-based analysis for a more complete perspective. Always maintain a long-term outlook rather than reacting to daily price swings.

10. Stay Disciplined

Create a robust, rules-based framework. A systematic approach based on predefined criteria helps prevent costly emotion-driven decision-making. Continually refine your portfolio and strategy based on lessons learned. Remain flexible and open to new information rather than rigidly locking yourself into any one system.

The Bottom Line

Cryptocurrency investing carries substantial risks and should be approached with caution. This market is prone to high volatility, uncertainty, dishonest practices, theft, and more. However, crypto assets also present unique potential for those willing to accept the elevated risks. By only allocating speculative capital you can afford to lose, dollar-cost averaging into positions, focusing on fundamentally strong projects, utilizing cold storage, and employing disciplined portfolio management, you can more safely navigate these choppy waters.

Stay objective, think long-term, and consider crypto’s risks relative to your overall finances. Don’t chase fleeting gains. The crypto market will continue maturing, and adoption is growing steadily. Patience and diligence remain essential virtues in the world of digital assets and decentralized finance.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.