Things to look for before investing in crypto assets
Before investing your money into exciting new cryptocurrency projects, there are some important steps you should take to minimize your risk, avoid scams, and reduce the possibility of making common mistakes that newcomers often make.
Although it’s impossible to guarantee that every investment will be a lucrative one, it’s easier to avoid losses if you carry out some simple due diligence processes. In this AAG Academy guide, we’ll take a look at some of the most important things you should do before putting your money into a new cryptocurrency project for the first time.
Cryptocurrencies have been around for a while now, so most people already know that they are a form of digital currency. But before you actually start acquiring coins and tokens of your own, it’s a good idea to bolster your understanding of how cryptocurrencies work, what you can do with them, how you can buy and sell them, and what kind of risks are involved.
It can be a complicated industry, but you don’t need to know absolutely everything if all you want to do is trade and invest. We recommend starting with the basics. AAG Academy offers a wide range of guides on cryptocurrency coins and tokens, blockchains and the underlying technologies, swapping and exchanges, cryptocurrency wallets, and lots more — and every guide is aimed at newcomers, so they’re written in a way that’s easy to understand.
Here are ten guides that are a great place to start. They’ll teach you the basics of cryptocurrency and NFTs, everything you need to know about cryptocurrency wallets, the differences between various exchange types, and more:
This tip might sound a little obvious, but believe it or not, it’s all too common for people to invest in new cryptocurrency projects they know nothing about — usually because someone else told them to. You cannot be confident in your investments without carrying out your own research, and investing in projects at random is a surefire way to lose your hard-earned cash.
Hundreds of new cryptocurrency projects are launched every day, and the sad truth is that only a small percentage of those end up sticking around and becoming a success. To minimize the risk of losing your money, then, look into projects that interest you before you commit to investing in them. Here are some things you should look out for:
Look into the project’s creators (you can usually find this information on the project’s website) to find out who you’re trusting with your cash. If you cannot find this information because team members have chosen not to disclose their identities, that’s a huge red flag — and usually a sign of a project that should be avoided.
You should also check the project has been audited independently, which is when a third-party carries out rigorous checks to ensure that the project is set up to operate as promised, and that there is nothing nefarious going on under the surface.
Every cryptocurrency project has a mission. This could be to launch a new product, to help people in need, to provide a service, or a range of different goals. Find out more about that mission and how the project intends to accomplish it, and only invest if you are confident that the project can fulfill its promises.
Price history and trading volume
You can usually find the price history of a cryptocurrency project by simply Googling its name, and just like those listed above, this is a hugely important thing to look into before investing. A rising or steady price over a prolonged period can be a sign of a healthy cryptocurrency project, while significant drops in price can be a sign that the project is dying.
Price history can also help you determine the right time to invest in a project. If the price just hit an all-time high, it may not be the best time to buy tokens, since they’re going to cost you more. Many investors will wait for a “dip” in value before putting in their cash in the hope that the price will rise again and they’ll see a return on their investment.
While you’re checking a token’s price, also be sure to take a look at its trading volume. This tells you how many tokens have been bought and sold over the last 24 hours, and it’s a good indicator of how healthy a project is. A high trading volume suggests a project is popular and that it will be easy for you to trade its token. A low trading volume suggests the opposite.
Popularity doesn’t necessarily mean much, particularly when it comes to new cryptocurrency projects, but if it’s difficult to find other people talking about a particular cryptocurrency project, it may be an indication that the project is struggling to take off. Check the official social media channels for the projects you’re interested in to see how many people are following or interacting with them — and what they have to say about the project.
It’s important to bear in mind that you should not be too influenced by what people are saying about a cryptocurrency project online because everyone has their own agenda. However, overwhelmingly negative comments can be a sign that something isn’t right and that it may be a project that should be avoided. Projects with healthy followings and a relatively positive community are typically a safer investment choice.
In addition to seeing what others are saying about a particular project, it’s also a good idea to find out what cryptocurrency websites are writing about it. Again, overwhelming negative news is not a good sign.
If you’ve followed all of the steps above and you’re still interested in a certain project, it’s time to find out what exchange its tokens are listed on. Certain tokens are only available from certain exchanges, so you’ll need to ensure you have access to that exchange and the right kind (centralized or decentralized) of cryptocurrency wallet.
Manage your risk in crypto
As we mentioned earlier in this guide, it’s impossible to ensure that every investment you make will be a lucrative one. If you spend enough time trading cryptocurrencies, you’re bound to lose money at some point because cryptocurrencies are volatile by nature. However, you can have some control over what you lose by correctly managing your risk.
Here’s how you can do that.
Do not invest more than you’re willing to lose
This is by far the most important tip you should take into account. Before you invest in anything, you must consider how much you’re willing to lose. Ask yourself how much of an impact it will have on you if this particular investment doesn’t work out and you lose your money. If you cannot afford to lose it — which is always possible — you should not be investing it. Even the biggest cryptocurrencies can suffer big decreases in value.
Time your moves
In addition to not investing more than you can afford to lose, it’s important to time your moves properly when investing. Ultimately, no one knows when a cryptocurrency will rise or fall in value, but we can make educated guesses based on the information that’s available. We already mentioned that buying into a project at a new all-time high may not be a good idea.
Selling at an all-time low can be just as risky. Many investors will panic when the value of a cryptocurrency falls for no apparent reason, and they will quickly sell their assets, sometimes at a loss, in an effort to recoup as much as they can. But, if you’re patient, you may find that healthy projects will eventually rise in value again, and your assets will be worth more.
Do not buy or sell impulsively. Consider other factors — like what’s going on with the project itself and why the value of its token may have fluctuated — before making a move.
Don’t give into FUD or FOMO
We have dedicated AAG Academy guides on FUD (fear, uncertainty, and doubt) and FOMO (fear of missing out) that can help you learn more about these acronyms, but in a nutshell, they are the terms that are often used to convey how investors feel about a certain project, and you should try your best to ignore them.
Not giving into FUD and FOMO goes hand in hand with the tip above about timing your moves, and everything else we’ve mentioned regarding carrying out your own research. Don’t sell an asset just because some people are spreading FUD about a particular project, and don’t buy an asset based on FOMO alone.
Build a crypto investment strategy
Building an investment strategy means setting goals and objectives before you start investing, and it’s usually best to do this after carrying out your research. Once you’ve found a project you might want to put money into, think about how long you want to hold onto that investment, how much you might like to make from it, and how much you’re willing to lose.
This can help you determine when to make certain moves. Some investors recommend that you should take your gains often, which means selling your tokens at a profit once they reach a certain price, then repeating the same steps in an effort to make small but notable gains each time. Others recommend holding onto your assets for as long as you possibly can in the hope that, over a prolonged period of time, they are worth significantly more than you originally paid for them. Only you can decide what’s best for you.
It’s also important to think about your investment portfolio as a whole. It’s rarely a good idea to put all of your spare cash into a single project — you’ll end up losing it all if the project fails. To minimize your risk, you should diversify your portfolio by spreading your spare cash over a number of projects that you believe in.
Watch out for crypto scammers
The number of scams and attacks within the cryptocurrency industry continues to rise every day, so it’s critical that every investor is aware of the dangers and takes proper precautions to avoid them. We have a dedicated guide on “rug pulls” and how to avoid them, but that’s just one of many types of scam that you should be aware of.
It’s also important to look out for fake cryptocurrency websites and decentralized apps (DApps) that are designed to steal your assets, and bad actors who use other phishing methods to try to gain access to your cryptocurrency wallet. Never link your wallet to a service you don’t trust, and never give your wallet’s seed phrase or login details to anyone.
Once you’ve chosen a cryptocurrency to invest in, you’ll need to work out where you can buy that particular crypto from. This will help you establish how to invest in it.
If the crypto is available from a centralized exchange, you’ll first need to sign up for an account, which will come with a wallet, and then you’ll be able to buy the token using a debit card in supported markets. If the token is only available from a decentralized exchange, you will need to set up a decentralized wallet first. You will also need to acquire another cryptocurrency of some kind, such as Ethereum, that can be “swapped” for the token you want. You can then use a platform like Uniswap, SushiSwap, or PancakeSwap.
That all depends on what your personal goals are when it comes to investing. No one else can tell you or help you decide what cryptocurrencies to invest in without an understanding of what you want out of your investments.
Ensure you carry out your own due diligence research on the projects that seem appealing to you. Try to find out about the team behind the project, and whether the project has been independently audited. If a project’s creators are anonymous, or it has no independent audit that can be seen online, then it is likely a scam.
The AAG Academy is a great place to find out everything you need to know about cryptocurrencies, NFTs, and more. We have in-depth guides on everything from cryptocurrency tokens to blockchains and exchanges, and everything in between. What’s more, they’re all aimed at newcomers, so they’re easy to read and understand.
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About the author
Senior content writer
Senior copywriter for AAG Marketing team with the focus of educating our community on all things web3, blockchain and Metaverse.
This article is intended to provide generalized information designed to educate a broad segment of the public; it does not give personalized investment, legal, or other business and professional advice. Before taking any action, you should always consult with your own financial, legal, tax, investment, or other professional for advice on matters that affect you and/or your business.