3 secrets that every investor needs to know before investing in cryptocurrencies

Cryptocurrencies are causing seismic shifts in the financial landscape. They have the potential to disrupt traditional financial systems at various levels, from personal finance to entire economies.

However, investing in cryptocurrencies requires a different approach than investing in traditional stocks. It involves navigating a landscape that blends aspects of stocks with cutting-edge technology.

To build a successful portfolio and take advantage of the unique opportunities offered by cryptocurrencies, I have discovered three key strategies that have proven invaluable over time.

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1. The best time to buy is when things look bleakest

It’s easy to see investing in the depths crypto winters would have produced the highest returns. For example, if you had invested when Bitcoin was at $16,000, you would have generous gains of over 300% today. However, making the decision to invest when sentiment is bearish and the outlook appears bleak requires considerable conviction and goes against human nature.

Ironically, during these periods of pessimism, when the market is dominated by fear, the greatest opportunities often arise. However, taking advantage of these opportunities requires a willingness to swim against the current.

Understanding the influence of a herd mentality on market sentiment and recognizing your own personal behavioral biases can give you the confidence to navigate challenging times in the world of cryptocurrencies. While Warren Buffet’s stance on cryptocurrencies may be lukewarm at best, his advice still applies: “Be fearful when others are greedy, and greedy when others are fearful.” By sticking to this, investors can position themselves capture those monumental gains which have become synonymous with cryptocurrency.

2. Less is almost always more

It’s not glamorous but it’s the hard truth, and I wish I’d heard it earlier in my cryptocurrency investing journey: Bitcoin (CRYPTO: BTC) should make up the majority of your cryptocurrency portfolio. Don’t get me wrong: the hope of getting into the “next Bitcoin” soon is tempting. However, this advice often falls on deaf ears, but most cryptocurrencies will likely fail to outperform Bitcoin in the long run.

Crypto analyst Benjamin Cowen showcased this phenomenon in a recent post on X. As you can see, the number of cryptocurrencies that outperformed Bitcoin in 2023 was small. While this was only measured in the last year, rest assured that if the analysis were to broaden further, there would be even fewer cryptocurrencies that could claim to outperform Bitcoin.

The story continues

The reasons for Bitcoin’s dominance in the market will probably be a topic for another day, due to the different reasons. However, for today’s discussion, the main point to keep in mind is that while other cryptocurrencies with seemingly endless upside potential are tempting, the risk often does not outweigh the reward.

While it seems like all cryptocurrencies go up, especially in bull markets, the reality is that most fade to the point of being worthless in the long run.

It is up to each investor to determine how many cryptocurrencies they want in their portfolio. But it’s worth knowing that you might spread yourself too thin.

When you spread your money across dozens of cryptocurrencies, you expose your portfolio to significant risk. While altcoins play a role and are the source where these monumental gains usually come from, they should not make up the majority of your portfolio. Leave it to Bitcoin. Your future self will thank you.

3. Knowledge is power

This might be the most difficult. While stock investors benefit from myriad data and insights into a company’s finances at their fingertips, cryptocurrencies operate in a murkier realm. This means you need to do your research. You need to learn some fundamentals, such as tokenomics, consensus mechanisms, network functionality, and more, to measure a cryptocurrency’s potential.

Each of these characteristics coincides with each other and forms the basis of the long-term potential of a cryptocurrency. Understanding how these factors interact with each other will give you an edge in choosing cryptocurrencies wisely. The reality is that most cryptocurrencies lose value over time.

But more importantly, doing this research can give you the tools to navigate market fluctuations with confidence. When prices collapse and another bear market sets in, you will be able to trade with the bigger picture in mind and take advantage of opportunities where a cryptocurrency’s fundamentals have greater potential than the current market price.

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RJ Fulton has positions in Bitcoin. The Motley Fool has positions and recommends Bitcoin. The Motley Fool has a disclosure policy.

3 secrets that every investor needs to know before investing in cryptocurrencies was originally published by The Motley Fool

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