5 questions to ask yourself before buying cryptocurrencies in 2023

5 questions to ask yourself before buying cryptocurrencies in 2023 - PayPal Cryptocurrency scaledCryptocurrency investment soared in 2020 and 2021, with many major cryptocurrencies hitting all-time highs. The granddaddy of them all, Bitcoin (BTC), went from around $7.000 in January 2020 to over $68.000 in November 2021. However, 2022 was a different year.

Prices started to fall after the Fed introduced economic tightening measures and investors abandoned riskier assets. The market then went through a series of shocks and prices collapsed further after each one. A notable example was the collapse of the Terra (LUNA) network, which sent a shock wave to the market for several months to come.

As the new year approaches, some investors are hoping the worst is over and wondering if 2023 might be the right time to buy cryptocurrencies. Here are some questions to ask yourself before doing so.

1. Do you have an emergency fund?

Whether you're buying cryptocurrencies or investing in stocks, make sure you have a well-stocked emergency fund before you take the plunge. If you have three to six months of living expenses set aside in a savings account, this will protect you from unexpected crises like job loss or a medical problem.

Cryptocurrency prices have dropped dramatically in 2022. Many investors are hoping that prices will eventually recover. But if you are forced to sell an asset when it is worth 80% less than you paid for it, you will not benefit from any recovery. By building an emergency fund, the idea is that you can draw on the fund rather than resorting to selling investments or borrowing.

2. Are you going to do it long term?

There are no guarantees when it comes to invest, especially with cryptocurrencies. However, if you invest with a time horizon of 10-20 years, you will be able to expect even short-term dramatic declines, such as this year. To do that, you need to believe in the long-term potential of blockchain technology and the individual projects you buy.

Long-term investing means doing a lot of research and identifying the projects that are most likely to succeed. You may decide to stick to Bitcoin and Ethereum (ETH), which are the two largest cryptocurrencies by market capitalization. If, on the other hand, you are more experienced, you could dedicate yourself to projects that you consider useful and with a good chance of obtaining good results in the next decades.

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

I'm a big fan of cryptocurrencies and hope the technology transforms the way we use money and manage our identities online. Right now, though, it's a risky and relatively unregulated industry that faces some major hurdles. It may not be able to do this, and if it doesn't, investors could lose everything.

Don't bet everything on cryptocurrencies. Many experts recommend that cryptocurrencies make up no more than 5% of your investments, which is a reasonable starting point. This way, you will be able to profit if the industry is successful. But at the same time, if things go wrong, your finances won't derail.

4. Do you have a plan?

Be honest with yourself about why you are buying cryptocurrencies and what you hope to achieve. Many cryptocurrency investors who bought during the frenzy of 2021 did so because they were afraid of losing something or because they wanted short-term profits. Unfortunately, this meant that people bought near the highs without fully understanding what they were buying.

Your plan should include how much money you're willing to invest, the types of cryptocurrencies you plan to buy, and how long you plan to hold them. It is also essential to know why you are investing: what makes you believe that blockchain technology can be successful? What are the triggers that could make you change your assumptions? This knowledge can help combat both panic selling and panic buying, as it provides a solid basis for decision making.

5. Do you understand the risks?

Investing in cryptocurrencies is extremely risky. These risks come with the potential for higher returns, but you need to understand what you're getting yourself into. If you are someone who could lose sleep over a 20% drop in one day, investing in cryptocurrencies might not be for you.

Here are some inconvenient truths about investing in cryptocurrencies:

  • Cryptocurrency prices are extremely volatile. Prices can drop dramatically in a matter of weeks and never return to previous levels.
  • Individual cryptocurrencies could fail. If a cryptocurrency you own crashes or turns out to be a scam, you could lose everything.
  • Cryptocurrency exchanges and platforms can fail. If the cryptocurrency exchange you use goes bankrupt, you may not be able to get your money back, as consumer protections are few.

There are ways to mitigate risk, such as using a cryptocurrency wallet instead of leaving your assets on a cryptocurrency exchange. But you have to be willing to take the time to understand how portfolios work and learn how to keep yours safe, which not all investors will want to do.

Buy crypto in 2023

We don't know what will happen to cryptocurrency prices in 2023. More regulation is on the horizon, which will likely cause short-term volatility, even as it strengthens the foundations of cryptocurrencies in the long term. The current cryptocurrency winter shows no signs of thawing and prices may remain low for some time to come.

If you decide to buy, don't do it because you hope to profit from a rally similar to the one we saw in 2021. Do it because you understand blockchain and what it might be capable of in the future. Again, follow the golden rule of investing in cryptocurrencies and only invest money you can afford to lose.