Responsible Investing

Responsible and Safe Investing

Investing always carries a risk of financial loss. Some types of investments are safer than others, but no investment is 100% safe. However, there are precautions that you can take to mitigate risk. 

This page will cover what you should be aware of before making investment decisions, things to watch out for, and helpful resources for investing responsibly.

What should be considered before investing?

Whenever money is involved, you should never dive straight into a decision. Here are some important things to think about before making an investment.

1. Budgeting

Crypto is a highly volatile market. It’s possible that any investment you make could suddenly crash in value, which is why it is important never to invest more than you can afford to lose. Make sure you leave yourself more than enough money to live comfortably when deciding how much to invest, and don’t exceed your investment budget without making a thorough reassessment.

If you want to be able to ride out bear markets and wait for a good time to sell, you may need to hold onto your investments for years. Bear this in mind, and don’t invest any money that you might need to spend in the coming years. 

It’s wise not to invest your entire budget in one go as better opportunities may arise in the future. It’s also a good idea to take strategy into account when budgeting. If, for example, you intend to invest every time the price dips, consider what the maximum number of investments you might make is so that you can size each investment accordingly.

2. Research

Thorough research is a crucial prerequisite for any decision where money is involved. You should consider what gives an asset fundamental value before investing in it. This could include the utility and benefits of the token, what influences its supply and demand, the strength of the team behind the project, whether it attracted well-known investors, the importance and profitability of the sector it is in, and whether it has any competition.

You’ll be able to find a lot of this information on the project website or whitepaper. You can also find information about a range of cryptocurrencies on our coin pages or data sites such as CoinMarketCap, as well as project reports like those on Binance Research.

It’s also a good idea to spend some time familiarising yourself with more general crypto concepts so you have a better understanding of how different cryptocurrencies work and how this might affect their value. These topics could include blockchain, transaction speed, scalability, consensus mechanisms like Proof of Work and Proof of Stake, network fees, smart contract functionality, Web 3.0, and DeFi.

You can find good explanations of many of these topics on sites such as Investopedia and in the educational sections of platforms like Coinbase.

As well as crypto and the technology behind it, it is useful to research the platforms and apps you’ll be using to buy, store, and trade your crypto. There’s nothing worse than making a well-researched investment and then losing your tokens because you kept them on an unreliable platform or transferred them to the wrong address.

Make sure only to buy crypto on reputable and secure platforms, store it somewhere safe, and take extra care when transferring it between wallets. You can use our reviews to aid your research into exchanges, brokers and wallets.

3. Time

Before you get started on your investment journey, consider how much of a time commitment it will be. Set aside enough time to conduct the thorough research detailed above before you start investing. Some platforms, like eToro, offer a virtual trading account, so you may want to spend some time practising before you risk any of your own money.

Before committing to a particular investment plan or strategy, you should think about what actions it involves and how much spare time you have. For example, active day trading strategies could require a significant time commitment as you will need to regularly monitor the market and conduct technical analysis. If you don’t have a lot of free time, you may prefer to select a less active investment strategy, like buy and hold.

4. Expectations

Although you may find some sensationalised stories in the press about crypto turning people into millionaires overnight, you should not think of investing as a get-rich-quick scheme. It’s important to manage your expectations and remember that it can sometimes take years for a major price surge to occur, while some assets might never surge at all.

Before you put any money into crypto, it’s wise to formulate an investment plan and an exit strategy. Think about what your goals are for investing, how you will react if the market moves against you, how you will capitalise on your investments if you achieve your goals, and be realistic about how long this might take.

What to be careful of?

Even once you’ve given careful consideration to the factors above, you still can’t afford to be complacent. The crypto sector and its technology are rapidly evolving, and regulators are still catching up, meaning there are plenty of risks to getting involved. Below are some of the common pitfalls to avoid.

1. Rapid fluctuations or changes in the market

The first thing anyone should know about the crypto market before making an investment is that it is highly volatile, far more so than traditional financial markets. Price swings can be significant and frequent. Any investment you make could quickly be worth a lot more or a lot less in a matter of days, hours, or even minutes.

These dramatic price changes can lead to high emotions like hype and FOMO (fear of missing out) among crypto traders and investors. You shouldn’t let these things cloud your judgment. Just because a coin is making astronomical gains and being hyped on social media, it doesn’t mean you should buy it without doing due diligence.

The price histories of cryptocurrencies show they can rise significantly during a bull market, but after the peak, the crash can be just as dramatic. News, economic changes, and social media can also lead to substantial price changes. You should be fully aware of this before deciding whether and how to invest.

This is why investment plans and exit strategies can be crucial. No one can predict the future, making it practically impossible to buy at the lowest price and sell at the peak. However, if you decide on a profit margin you are happy with in advance, then when you sell at this price, you can be satisfied that you achieved your investment goal. There’ll be no need to improvise, and you shouldn’t feel FOMO if the price continues to rise.

2. Putting all your eggs in one basket

The key to a strong investment portfolio is diversification. If you put all your money in one place, you risk losing it all if it turns out to be a bad investment. While cryptocurrencies can provide higher returns than traditional financial assets, they also carry a higher risk. For this reason, experienced investors may only allocate a small portion of their portfolio to crypto, keeping most of it in safer assets.

When it comes to your crypto allocation, you can diversify further. However promising a particular token or project looks, there is always a risk it could fail. This is why you might want to invest in a variety of cryptocurrencies.

You don’t want to find yourself at a loss just because one particular industry does badly. To avoid this, you could invest in a variety of sectors within the crypto space, such as smart contract platforms, payments, DeFi, CeFi, Web 3.0, gaming, and oracles.

It’s also important to think about where you want to store your crypto. If you keep it all in cold storage like a hardware wallet, it ought to be secure, as long as you keep your seed phrase safe and don’t fall victim to a scam. If you would prefer to keep it somewhere it is more accessible and/or earns you interest or staking rewards, it could be prudent to use more than one platform or app for this, just in case one of them gets hacked or declares bankruptcy.

3. Scammers

As with any new and lucrative industry, there are some people who may try to take advantage of others for financial gain. Always stay vigilant and never part with your money or crypto if you have any doubts as there are a few common crypto scams out there.

Be wary of any investment you see promoted on social media, even if it is endorsed by a celebrity. Some well-known people have been paid to endorse unsound investments, while others have had their social media accounts hacked by criminals attempting to defraud their followers.

Also, be wary of new projects promoting ICOs. Check that there is actually a reliable project behind the ICO, and that it is not simply a scam to lure investors.

Be careful about which websites and apps you use for crypto activities. Check that it is a reliable website offering a real service. Scammers may set up fake versions of real websites that look just like the real thing, so be careful when accessing a website through a link. Also, make sure that emails you receive from your platform are from the official email address, as you may receive phishing emails that appear to be from your platform.

Pump-and-dump schemes can be found in many types of investing, but are particularly prevalent in crypto. This is why it is important not to get drawn in by hype—the people hyping a particular coin may just be trying to draw in investors to raise its price before they dump their coins and crash the price.

Ponzi schemes are another thing to watch out for. Don’t send your money to an investment programme unless you fully understand the risks and have done enough research to make sure that it is legitimate. If a scheme sounds too good to be true, it probably is.

4. Unregulated exchanges or brokers

Unregulated platforms are less reliable than regulated ones. There are no guarantees as to their quality—they may have poor security or engage in unethical practices such as frontrunning. They could even cease operations without warning, leaving users unable to retrieve their assets, as has happened with a number of platforms, such as Mt. Gox and QuadrigaCX.

We recommend only using regulated platforms as they are held to a higher standard. Regulatory authorities have rules that platforms must comply with to receive licences, and these rules are designed to protect users.

5. ICOs

Initial coin offerings (ICOs) are when new crypto ventures raise funds by selling their tokens to investors. Being an early investor in a crypto project can be an attractive opportunity and sometimes profitable, but you should be aware of the risks involved.

ICOs are generally unregulated, so projects that conduct them may be poorly managed, lack resources, or even be fraudulent. You should do extensive research on the fundamental value of a project before deciding whether to participate in its ICO. Even if a project does have strong fundamentals, there is no guarantee that its coin will ever be worth more than its ICO price, so never invest more than you can afford to lose.

6. Private keys

A private key is a string of characters that functions like a password, enabling you to access and manage your crypto. If you use a web or exchange wallet, you probably won’t be able to access your private keys as your platform looks after them on your behalf. Hardware wallets are the most secure form of storage as they store your private keys offline where they can’t be hacked.

While you can share your public key to receive transactions, you should never share your private key with anyone. If you are asked for your private key online or by email, it will be a scam. Store your private key somewhere safe where it will not be stolen. You should also keep your seed phrase safe if you are given one, as this is how you can recover access to your wallet if you lose it.

Payment testing

If you ever need to transfer a significant amount of money or assets, you can test out the process first with a smaller amount. When you open an account on a new platform, it is a good idea to start by making the minimum deposit. Once the money has reached your account and you are sure that everything is in order, you can deposit the rest of your funds.

This is also a wise thing to do when transferring crypto on the blockchain. Some people find this a complicated process, and if you send coins to the wrong address or use the wrong network, your coins could be lost forever. 

Investing with assets you don’t have

As we have discussed, investing in crypto always carries risk, and you should never invest money you can’t afford to lose. Therefore, if you use a loan or credit card to fund a crypto purchase you can’t afford, you could end up in debt.

Leverage enables you to increase your trading position by borrowing funds. This can increase your potential profits, but it is high risk as it can also increase your losses. You shouldn’t engage in margin trading unless you have the necessary skills and knowledge and fully understand the risks.

Shorting is another type of trading that involves borrowing assets. You sell the assets you borrow with the aim of buying them back at a lower price and keeping the difference as profit. However, you will have to return the borrowed assets whatever happens, so if the price increases, you will make a loss—and potential losses are unlimited.

You should take full advantage of any risk management tools your platform offers, such as negative balance protection, stop losses, and take profits.

Mental effects of investing

As well as affecting your finances, trading and investing could also impact your mental health. The risk of losing money may cause some people stress, and the financial impact when you do lose money can be even more stressful. This is a good reason never to invest more than you can afford to lose. When you create your budget, make sure the amount of capital you decide to risk isn’t enough to cause stress.

Some may find the frequent price surges and crashes of crypto to be an emotional rollercoaster. Constantly checking the markets to keep up with price changes could lead to anxiety. If you want to avoid this, you could select a strategy that doesn’t require constant monitoring, like buy and hold.

As we have already established, trading and investing can be quite time-consuming, which could leave you with less time for other things and potentially harm your relationships. It is important to strike the right balance for you that leaves you with enough time to do the things you find enjoyable and relaxing. If you find your crypto activities are getting in the way of other aspects of your life, you might want to use a different strategy that requires less time.

Self-care and maintaining good mental health are important. If you ever feel you are struggling, don’t hesitate to talk to someone and ask for advice or support.

Additional resources and help

If you want any further information or advice, you may find the following resources useful.