We asked Paul Veradittakit of Pantera Capital, the leading institutional investment firm that focuses on blockchain and cryptocurrencies, about the three most important questions to ask yourself when investing in cryptocurrency.
Here are his answers.
1) Know your risk appetite
As with any investment, investors need to consider their ability to shoulder losses. Just how much can you stand to lose in the event that things go south? To this end, Paul advises people to ask themselves:
“What’s your risk appetite? This is a new space and there are a lot of unknowns.”
We often hear about the risk inherent in cryptocurrency. When investing in any particular coin or project, it’s important to keep in mind your appetite for risk.
How much are you willing to risk? While many cryptocurrencies and related projects have what’s referred to as “asymmetric upside” (meaning the potential rewards outweigh the potential risks), that doesn’t mean you’re guaranteed to win (ever).
There have been too many failed blockchain projects to count. That’s why being diversified counts.
2) How diversified do you want to be?
The second question investors should be asking is how exactly they want to invest.
Diversification is often best accomplished via an investment vehicle like an exchange-traded fund (ETF) rather than buying a coin on an exchange or through an ICO.
“Do you want to invest in companies or projects directly, or do you want to buy into a vehicle like a fund or an index?”
This is a point many people might never stop to consider. Simply exchanging fiat for a coin on an exchange is not the only way to invest in cryptocurrency, although it might be the most common.
This also plays into the third question.
3) Are you investing in things you’re passionate about?
This one is simple. Yet most investors might never consider it.
“It really helps to understand what you’re investing into…if you’re not willing to do the research, you should invest in an index or a fund or something that is diversified.”
Legendary investor Warren Buffet is well-known for his famous quotation saying that he only invests in businesses that he understands.
Why would investing in cryptocurrency be any different?