5 questions to consider before buying crypto in 2023

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Thinking about buying crypto next year? Read this first.


Important points

  • Before you buy cryptocurrency in 2023, make sure you understand the risks.
  • If the cryptocurrency you bought or the platform you used crashes, you could lose all the money you invested.
  • Do your research, create an investment plan, and only invest money you can afford to lose.

Cryptocurrency investments skyrocketed in 2020 and 2021, with many top cryptocurrencies hitting all-time highs. The grandfather of them all, Bitcoin (BTC) surged from around $7,000 in January 2020 to over $68,000 in November 2021. However, 2022 was a different story.

Prices started falling after the Fed implemented economic tightening measures and investors divested from riskier assets. The market then suffered a series of shocks and prices continued to fall after each shock. A notable example was the collapse of the Terra (LUNA) network, which sent ripples through the market for several months.

As we approach a new year, some investors are hoping the worst may be over and wondering if 2023 might be the time to buy crypto. Here are a few questions to ask yourself before you do so.

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1. Do you have an emergency fund?

Whether you’re buying crypto or investing in stocks, make sure you have a fully funded emergency fund before jumping in. Having three to six months of living expenses in a savings account protects you from unexpected crises like job loss or medical problems.

Crypto prices have fallen dramatically in 2022. Many investors are hoping that prices will eventually recover. But if you’re forced to sell an asset when it’s worth 80% less than you paid for it, you can’t benefit from a redemption. Building an emergency fund allows you to tap into your fund instead of selling your investments or taking on debt.

2. Are you in for the long term?

There are no guarantees when it comes to investing, especially when it comes to cryptocurrencies. However, if you invest with a 10- to 20-year time window, you can even anticipate dramatic short-term falls like the ones we’ve seen this year. To do this, you must believe in the long-term potential of blockchain technology and the individual projects you buy.

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Getting started

Investing for the long term means doing a lot of research and identifying the most promising projects. You might decide to stick with Bitcoin and Ethereum (ETH), the two largest cryptos by market cap. As you gain more experience, you can branch out into projects that you think will be useful and have a good chance of performing well for decades to come.

3. Will your cryptocurrency be part of a diversified portfolio?

I’m a big fan of cryptocurrencies and I hope that technology will change the way we use money and manage our identities online. But for now, it’s a risky and relatively unregulated industry that has some major hurdles to overcome. This may not be possible, and if it isn’t, investors could lose everything.

Don’t go all-in on crypto. Many experts recommend that crypto accounts for no more than 5% of your investments, which is a reasonable starting point. That way you can capitalize on when the industry thrives. But at the same time, if things go wrong, it won’t derail your finances.

4. Do you have a plan?

Be honest with yourself about why you are buying crypto and what you want to achieve. Many crypto investors who bought during the crypto frenzy of 2021 did so because they were afraid of missing out or because they wanted short-term gains. Unfortunately, this meant people were buying near the highs without understanding exactly what they were buying.

Your plan should include the amount of money you’re willing to invest, the types of cryptocurrencies you want to buy, and how long you want to hold them. It’s also crucial that you know why you’re investing – what makes you think blockchain technology could be successful? What triggers might lead you to change your hypothesis? This knowledge can help combat both panic selling and panic buying as it gives you a solid basis for making decisions.

5. Do you understand the risks?

Investing in cryptocurrencies is extremely risky. These risks carry the potential for higher returns, but you need to understand what you’re getting into. If you’re someone who loses sleep on a 20% drop in a day, crypto investing may not be for you.

Here are some inconvenient truths about crypto investing:

  • Cryptocurrency prices are extremely volatile. Prices could fall dramatically within a few weeks and may not return to their previous highs.
  • Individual cryptocurrencies could fail. If a crypto you own collapses or turns out to be a scam, you could lose everything.
  • Crypto exchanges and platforms can go down. If the crypto exchange you are using files for bankruptcy, you may not be able to get your money back as there are few consumer protections in place.

There are ways to mitigate the risks, e.g. B. Using a crypto wallet instead of keeping your assets on a crypto exchange. But you must be willing to invest the time to understand how wallets work and learn how to keep your wallets safe, which not every investor wants to do.

Buy crypto in 2023

We don’t know what will happen to cryptocurrency prices in 2023. Increased regulation is on the horizon, which will likely lead to near-term volatility even as it strengthens crypto fundamentals over the longer term. The current crypto winter shows no signs of thawing and prices could remain low for some time.

If you decide to buy, don’t do it hoping to capitalize on a rally similar to 2021’s. Do it because you understand blockchain and what it can do in the future. And even then, follow the golden rule of crypto investing and only invest money you can afford to lose.

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