It’s official; the crypto bear market is in full swing. These moments may be shocking, but to others, it’s just another case of déjà vu. Let’s think back to December 2018 or March 2020 as prime examples.
Although the likes of Bitcoin and Ethereum are nowhere at their lowest during these periods, they’ve certainly lost a decent chunk in value. Understandably, many investors see these scenarios as good investment opportunities.
So, if someone gifted you with $1000, how would you invest in cryptocurrencies? We’ll cover the most straightforward routes to follow, what to study, some alternatives, and mistakes to avoid.
Deciding on the investment approach
$1000, to the average person, is no small amount. Therefore, you should first decide on the right investment approach. One big part of this stage is diversification. While there is nothing wrong with putting your thousand into one cryptocurrency and ‘holding for dear life’ (HODLing), this method has several risks.
The cliche of never putting all your eggs in one basket is true for most investing. The crypto space is highly competitive. Thus, even if you believe strongly in a project, it is not guaranteed to perform exceptionally well.
So, spreading your $1000 around is crucial. Even if one coin is slacking, you have more chances of earning more overall with the other projects.
Market cap diversification
One method is to use the 50-30-20 approach according to different market capitalization categories: large-cap (over $10 billion), mid-cap (between $1 billion and $10 billion), and small-cap (less than $1 billion).
Conservative investors may allocate 50% to the large-cap ranges, projects like Ethereum and Bitcoin. These cryptocurrencies are the most established and are less likely to lose substantial value in the worst-case scenario.
Yet, because they are more expensive, one is unlikely to experience significant growth. 30% of your $1000 can be dedicated to the mid-cap category, where you have many options for promising projects like Solana, XRP, Cardano, and Binance Coin.
These coins can grow at a higher rate over time and are reasonably established. The remaining 20% may be allocated to riskier altcoins in the small-cap range. Alternatively, if your risk appetite is higher, you could dedicate 50% to the mid-cap bracket and the other half to the small-cap bracket.
Regardless, you can decide on the proper percentage allocations based on the previously mentioned categories.
Dollar-cost averaging vs. lump sum investing
Dollar-cost averaging (DCA) is when you buy your chosen coins in periodic purchases. For instance, if you decided to spend $500 buying Bitcoin, you might allocate $100 weekly rather than at once. With DCA, one doesn’t need to wait for the perfect opportunities to ‘buy the dip.’
Furthermore, if the price loses value, you can buy more units of the same coin. So, ultimately, dollar cost averaging is meant to limit volatility risks, particularly during sell-off periods. Conversely, lump sum investing is where you make a one-time purchase of a cryptocurrency.
This approach provides several benefits, such as time-saving and cheaper transaction costs. Therefore, you should research the pros and cons of each method and decide which resonates the most with your goals and experience.
Choosing the exchange
If you choose to hold more than one coin, it’s crucial to select an exchange providing the widest choice of markets like Binance, Gate.io, Huobi, and OKX. This means you can have everything under one roof, saving you time from switching between different platforms and making it simpler to track your portfolio.
Another crucial factor is trading with reasonable trading costs. Some platforms charge higher rates than others. Thus, make sure you’re using an affordable exchange in the quest to ‘stretch’ your $1000.
Other alternative cryptocurrency investments
Thus far, we’ve only referred to investing by purchasing cryptocurrencies directly. Yet, thanks to the versatility of this industry, investors are not limited to this method alone. Here are other alternative avenues to grow your $1000.
Staking may be something to implement in addition to buying a particular coin. So, for instance, you could invest a portion of your $1000 in a proof-of-stake project and use those holdings to participate in their staking program.
This expands your earning potential since you can profit from the natural appreciation of the coin and the interest rewards.
Another option, albeit riskier, is to become a miner. However, we should note that mining hardware will likely cost above $1000 (unless it’s second-hand). Moreover, you should also factor in additional costs such as electricity and maintenance.
Yet, this approach could work for some investors in some circumstances (although it would be harder to diversify).
Trading cryptocurrencies as a derivative through an exchange or broker is technically the cheapest option. Due to margin, you wouldn’t need to commit the entire $1000 into taking positions in the markets. However, trading is the riskiest avenue because leverage can magnify your losses and profits equally.
Although trading isn’t necessarily investing, you can realize substantially higher gains in a shorter period with the right experience and risk management skills.
Some mistakes to avoid when investing in cryptocurrencies
Below are some quick-fire mistakes to avoid in your investing journey.
- Not doing enough research: Research, research, research! You should only invest in projects you believe have the highest potential based on in-depth fundamental analysis.
- Assuming price equals value: Whether a coin costs $0.1, $1, $10, $100, or $1000 doesn’t matter. What’s more important is the market cap, which considers the price and circulating supply.
- Frequent buying and selling: Unless you’re trading, you should buy and hold for the long term (after all, that’s the point of investing) to reduce your overall transaction costs.
- Buying a coin near its all-time high: This is usually due to FOMO (fear of missing out). In your overall analysis, you should pinpoint relatively undervalued projects.
Despite existing for more than a decade, cryptocurrencies are still a relatively new asset class compared to stocks and commodities. This, of course, means one thing: much higher risk.
The entire market is largely unregulated, further adding to the threats of loss in the long term. Thus, as the old saying goes, you shouldn’t invest more than you can realistically afford to lose.
Plus, it becomes a life-and-death situation in this information age to ensure you stay abreast of the latest market developments.