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Five crypto investment horrors and how to avoid them
Investing money can be a scary business. From volatility to fraud, many financial fears can keep even the most experienced crypto investor awake at night. However, there are strategies that can help protect against these investment horrors and ensure your digital asset strategy remains safe and profitable.
These investment horrors are not specific to cryptocurrency investing. Any form of investment carries risk, and therefore investors in both traditional and digital assets must employ certain strategies to protect their portfolios. In this piece, we take a look at five frightening financial situations and how investors can avoid them.
Losing all your money
No doubt the biggest fear for any investor is the potential for losing all of their money. It is never advisable to invest money you cannot afford to lose, but the thought of a 100% fall in one’s savings is still a terrifying one. Luckily, the chances of this happening to someone with a carefully constructed investment strategy are very small.
In order to minimize this risk, a common piece of advice is to diversify one’s portfolio. What does this mean in practice? Diversification is important across asset classes and within the asset class itself.
For example, if an investor chooses to allocate some money to digital assets, it would be wise to invest in several different tokens, protocols and types of digital assets (such as non-fungible tokens, or NFTs) in order to spread the risk. It would also be worth considering investing in other types of assets outside the world of cryptocurrencies, such as traditional equities or bonds.
The idea behind diversification is simple: even if one of these investments were to fall in value by 100%, this would only make up a small portion of an investor’s portfolio. For example, if 30% of a person’s total savings is held in cryptocurrencies, invested across 10 different coins and tokens, and one of these coins loses all of its value, the entire portfolio will only be down 3% as a result. It is certainly much easier to sleep at night knowing the risk of losing all your money is limited to a small proportion of the total investment.
Another common investment horror, especially when it comes to cryptocurrencies, is market volatility. In the digital asset space, volatility can be more pronounced than in traditional markets, with a 20% fall in an asset’s value in one day not uncommon. Seeing one’s assets drop into the red is nerve wracking and can trigger panic selling. Unfortunately, it is in our nature as humans to buy high and sell low, which is precisely the opposite of what a successful investment strategy should look like.
One way to protect a cryptocurrency portfolio, as well as to diversify, is through investing in stablecoins. Stablecoins are cryptocurrencies that are pegged to fiat currencies, such as the US dollar. Examples include USD Coin (USDC) and USD Tether (USDT). In decentralized finance (DeFi), stablecoins can be staked for attractive returns, while their fiat peg ensures that the price of the asset remains stable. At YIELD App, investors can earn an annual percentage yield (APY) of up to 17% on their stablecoin investments.
Another option is to allocate to certain investment funds that offer a passive income on digital assets. This can help mitigate the volatility of the underlying asset during times of economic stress, reducing the negative impact from price fluctuations. An example of this is the YIELD App Bitcoin fund, where investors must lock their BTC away for 90 days in exchange for a 6% - 12% APY. Even if the price of BTC drops during this time, the APY will dampen the impact on the portfolio.
And finally, as your finger is hovering over that sell button, it’s always worth asking yourself: do I need this money right now? If the answer is no, then perhaps it could be worth waiting to sell when the price of the asset increases again. After all, statistically markets tend to correct themselves over longer time periods – this is why investing is a long-term game.
The terror of transaction costs
When investing in digital assets, it can be tempting to trade frequently to seek out the best returns. This is especially common with yield farming – the practice of staking or lending one’s digital assets in return for rewards. These rewards can be lucrative, but it is common for inexperienced yield farmers to lose money on transaction fees, making the whole process inefficient or unprofitable.
Picking investments with a lock-in period, such as the aforementioned YIELD App Bitcoin fund, can help investors avoid the temptation to over-trade. It is also worth remembering that market timing rarely works, so choosing investments wisely and sticking with them for at least one year or longer could be a better strategy.
Instead of frequent trading, a smart way to invest could be using a dollar cost averaging strategy. Dollar cost averaging is the practice of systematically investing equal amounts of money spaced out over equal time periods: for example, once a month or once a week. This can help investors protect their portfolios from volatility and make better gains than if they had invested one lump sum.
Wherever money is involved, there is always the risk of financial fraud. Today, this is particularly prevalent in the world of digital assets. As such, crypto investors must be vigilant at all times to protect themselves and their investments from fraudulent actors.
Crypto fraud can involve a person or persons impersonating an official representative of a company, fake websites, and solicitations that offer lucrative deals to those who transfer their tokens to a specific address. These can often look legitimate, but there are several ways to spot fraudulent activity.
The biggest red lights include someone contacting you out of the blue, offering a reward that seems too good to be true, and asking you to transfer funds or give away personal details. No official financial organization will ever do this. To stay safe online, it is always worth ensuring any communication has come from an official channel by contacting a representative of the company directly, and never send any funds anywhere. If it seems too good to be true – it probably is!
Crypto tax shock
Last but not least, crypto investment gains could quickly turn into a nightmare if a huge tax bill suddenly lands on your desk one day. It’s important to be aware of the tax rules in your jurisdiction to avoid this happening. In many countries, returns from crypto investing are subject to capital gains or income tax, and this could be significant.
It is also worth remembering that digital assets are still a relatively new form of investment, and a proper taxation system for these may not have been developed yet in your country of residence. It is therefore essential to keep an eye on developments to avoid a nasty shock.