Cryptocurrency is the new age investment opportunity that has taken the financial world by storm. It generated massive returns over the past years, outperforming all other investment instruments. As it is the highest-performing investment instrument, it is highly volatile. Hence, investors must be cautious before investing in these digital currencies. In this article, we will explore the safe and recommended amount to invest in cryptocurrency.
Understanding Your Risk Tolerance
Understanding your risk-taking ability it the first step to do before Understanding the recommended amount to be invested in cryptocurrencies. Cryptocurrency investment is highly volatile and riskier than other Investments. It goes through rapid ups and downs over a small period, for instance, Bitcoin’s price surged from around $10,000 in mid-2020 to over $60,000 in early 2021, only to drop to around $30,000 later that year. Here are some steps to consider
- Evaluate Your Income and Expenses: The first thing you have to do as a crypto investor is to evaluate your income and expenses so that you can identify how much surplus amount you have to invest in various asset classes.
- Emergency fund: Creating an emergency fund is way more important than investment. This is the fund that will help you in a financial crisis. Ideally, the emergency fund should be your total 6-month expenses; it could be more than 1 year of expenses. If you have an emergency fund, then you are not going to break your investments in difficult times.
- Debt management: Managing and understanding your debts is the best practice before considering any major investment. If you have any major debts and you are paying high interest on them, consider clearing that debt before making any further investments.
- Retirement savings: An intelligent investor always does the retirement planning well in advance. If you don’t want to work so long and want to take early retirement, then you have to do good retirement planning vis-à-vis your investment.
- Diversification: Diversification is the blood that helps your investment cycle run; in other words, there is a popular saying referring to diversification in investment: “Never keep all your eggs in one bucket.” If any problems happen to that asset class, you may lose all your money. Hence, you have to diversify your portfolio as per your risk appetite.
Recommended investment amount in cryptocurrency.
There is no one-size-fits-all answer to how much you should invest in cryptocurrency. However, financial experts often suggest the following guidelines to start investing in cryptocurrency:
1. A small percentage of investment
Investments give better returns when they’re properly diversified. Decide the percentage of investment you want to spare for cryptocurrency. As it is the most volatile instrument to invest in, you should invest a small part in cryptocurrency. Ideally, if you are a beginner, then you can consider 5 to 7 percent of your investments in cryptocurrencies.
2. Gradual investment
With time, after gaining expertise and understanding of the cryptocurrency market, you can slowly increase your stake in cryptocurrency. However, you have always maintained a fine balance between all your investments in such a way that it should not burden you in case of underperformance or less-than-expected returns in any of the entities.
3. Initial investment
Your initial investment has to be the bare minimum; that is only the amount you can spare if losses occur. This will help you to understand the cryptocurrency market. The best way to approach the cryptocurrency market is to make gradual and informed investments.
Research and Education
Investing in cryptocurrency requires a solid understanding of the market and the technology behind it. Here are some steps to enhance your knowledge
1. Market study
The cryptocurrency market is evolving and under continuous volatility. To be successful in cryptocurrency investment, you have to constantly track the market and take preparatory measures to avoid any financial losses due to market crashes or any other reasons. Market study and understanding the latest developments will help you to make informed decisions and to stay ahead in the race.
3. Security measures
Ensuring top-notch security is paramount for investors. The evolving market may encounter cyber attacks, and you may lose an unprecedented amount. After investing a considerable amount, you can keep your digital coin in a crypto wallet, which is the most secure and best way to store cryptocurrency.
4. Understanding the legality of cryptocurrency
As an investor you should aware about the legal state of the digital currency in that country where you investing. In India the Indian government has implemented a 30% tax on income from the cryptocurrencies.
Emotional Discipline
Investing in cryptocurrency can be emotionally challenging due to the market’s volatility. Maintaining emotional discipline is crucial for long-term success:
1. Avoid FOMO
It has been observed various times people get affected by FOMO, which is fear of missing out due to a lack of emotional discipline. It is very important to stay disciplined and maintain a good investment attitude in cryptocurrency.
2. Stay calm during volatility
As the cryptocurrency market is evolving, it’s going through various ups and downs, so as an investor, you should not lose your cool with high volatility in the market. The best way to approach the market during volatility is to understand the market, do your research, take expert advice, and plan your future executions accordingly.
3. Realistic expectations
Cryptocurrency investment is not a magic stick or any superpower that will multiply your investment manifold. It is a technology-driven financial market that operates on market fundamentals. As an investor, you have to understand the technology and how the crypto market is functioning and avoid any unrealistic expectations.
Conclusion
As we understood from the above discussion, cryptocurrency investment requires a systematic approach, and there is no specific recommendation on how much you should invest in cryptocurrency. Investors are always required to take expert advice and make informed decisions before investing in cryptocurrency.