One of the most challenging concerns for investors to avoid when it comes to cryptocurrencies is getting caught up in the excitement. Cryptocurrencies have swiftly become a prominent part of many individual and institutional investors' portfolios. On the other hand, analysts have continued to warn investors about the crypto's volatility and uncertainty.

If you're considering buying Bitcoin or any other cryptocurrency, there are a few questions to ask before investing with your money on what could be a fad.

1. Are you able to understand the market?

In conventional markets, a solid rule of thumb is never to buy shares in a firm whose business plan you don't understand when it comes to stock investment. To put it differently, if you don't know how a company is making or controlling its money, don't invest in it.

The same concept applies to cryptocurrency.

While cryptocurrencies have the potential to grow in value, the inverse might also be true. The same can be said for traditional stocks, but stocks have been around for a long time, whereas cryptocurrency is a recent concept with significantly more speculative potential. As a result, before adding anything to your portfolio, be sure you thoroughly understand it.

Once you've decided which cryptocurrencies to invest in, check into how such tokens utilize blockchain technology and whether they offer any unique features that set them apart from the competition. You'll be best prepared to judge whether a possible investment opportunity is worthwhile if you have a deeper understanding of cryptocurrencies and blockchain technology.

2. Is the asset provider legal in your nation?

Bitcoin was created to be a universal, borderless currency that anyone with access to the internet could use. Although it, like other cryptocurrencies, is technically unrestricted by borders, legalities should not be overlooked by investors. What is legal in one place may not be legal in the other, and regulations are constantly changing as authorities, regulatory bodies try to stay updated.

Always check the jurisdiction in the domestic market, and try to remain regional whenever possible. Check out the most recognized digital asset companies and see if they're available in your country. Look for firms that have been around for a while and look into its history of hacks and breaches in the record. Consider how it was dealt with as well. Because the laws of digital assets vary by jurisdiction, it's crucial to do your homework and find out if it's legal in yours.

3. Can you ensure security and avoid counterparty risk?

Since digital currency and assets are stored online, they are subject to hacking. There are, however, ways to keep your investments safe and secure. A risk management strategy should always include counterparty risk.

To begin with, you must only invest in what you are ready to lose. It is not advisable to put all of your money into cryptocurrency—those who put all of their money on an exchange face the danger of losing it all. You could lose everything if the exchange is compromised. Remove them from the exchange with a wallet or a custody service that will protect your funds when you're not actively trading.

Check the corporation's level of security. You must conduct due diligence on the counterparty to ensure that you are investing safely. The issuer of digital assets must have facilities that can secure digital assets. It's pointless to buy Bitcoin from a corporation that is vulnerable to attack.

As the cryptocurrency market becomes more regulated, you must confirm that the provider follows know-your-customer (KYC) and anti-money-laundering (AML) standards. Choosing reliable companies that follow these guidelines will ensure that you are not obtaining digital assets unlawfully from an unauthorized regulation provider. The presence of certain disclosures on a website is required by law.

If a supplier isn't following AML and KYC rules nowadays, they're almost certainly going to be in trouble with regulators. If not tomorrow, then in the next few weeks, your investment could be at risk.

4. How credible are asset managers?

If you decide to hire an asset manager to help you with your investing strategy and asset protection, make sure they're licensed. The majority of jurisdictions enact strict asset management licensing rules. Because digital assets differ from fiat currency, they must comprehend and possess a fundamental understanding of how they work.

Anyone can be an asset manager, so do your work ahead of time to check out their track record and experience with digital asset management. They'll have a portfolio of prior and present clients on hand to keep track of. The importance of due diligence in this situation cannot be stressed enough while investing.

Also, see if they're working with a credible KYC partner. Not all organizations provide trustworthy KYC services. Some organizations sacrifice quality. Covid-19 has made it practically impossible for people to meet face to face, which has traditionally been a requirement for financial service providers to approve applications. Secure identity verification is becoming increasingly important as the world becomes more decentralized and remote.

5. Can you ensure that you're not buying tainted cryptocurrencies?

As more people buy  Bitcoin,  its reputation as a tool for unethical activity has shifted over time. But its application in criminal activities isn't entirely gone. Investors are looking for "clean coins" with no contaminated history. Thus it's critical to locate providers who can deliver on this promise. We now have cutting-edge crypto analytics technologies that can ensure that coins are not linked to unlawful acts.

If financial firms and digital asset providers offer tainted coins with a malicious history, they risk substantial fines. Companies that use compliance controls reduce money laundering and criminal activities on their platforms while also meeting legal standards and minimizing investment risk.

Conclusion

Finally, keep in mind that cryptocurrencies are high-risk investments. Many other investors have put money into the digital token world to watch it disappear. The story has been the opposite as well for investors who turn into billionaires through their cryptocurrency investments. Investing in this area entails taking a chance.

You can increase your chances of success by researching and getting answers to all these questions before investing.

Author

Nischal Shetty

Nischal Shetty is the Founder, CEO of WazirX, India's largest cryptocurrency exchange (recently acquired by Binance). He is a huge blockchain advocate and influencer with over 100,000 followers. He has also been featured in Forbes '30 under 30' list in the past. Nischal has been active in space for a long time with the mission to involve everyone in the blockchain revolution.

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