Cryptocurrencies experienced a huge spike in price in 2020. Bitcoin, the first and most popular of the e-currencies, was worth roughly $4,000 in March when the pandemic was first declared. By the end of the year, it was worth more than $30,000! That’s more than 700% of growth, and it paved the way for other cryptos like Ethereum to follow suit as well.

There are various factors involved in Bitcoin’s stellar rise in price. However, the short story is that investors saw value in cryptocurrency in general that they wanted to cash in on. Investing in a small business more or less goes by the same motivations. You see value in your business plan and the role that it plays in your niche market. As a result, you take the risk.

Why Do People Invest in Cryptocurrencies?

Cryptocurrencies attract investors with their potential for both short-term and long-term growth. Long-haul investors park their money in one or more cryptocurrencies and let it grow over many years. These people are willing to forego the short-term rises in prices and prefer instead to bank on steady growth over a longer term.

On the other hand, short-term traders also have the potential of earning big from the fluctuating coin prices. 44% of people who own crypto admitted to investing in the coins to bank on huge increases over a relatively short time. Like foreign exchange traders, these crypto owners actively monitor prices daily, weekly, or monthly.

Are There Any Risks Associated When Investing in Cryptocurrency?

Cryptocurrencies, by nature, have no central authority like a national bank to regulate their trades. Instead, transactions go into a digital ledger called the blockchain. This lack of regulation also means that cryptocurrencies lack the physical backing that guarantees their value, which is the case in fiat currencies.

This nature also leads to the next two risks in cryptocurrency investment: volatility and uncertainty. These two risks became apparent in two cases. First, Bitcoin’s price rose in 2020 after institutional investors changed their stances on cryptocurrency ownership after previously considering these coins as high risk.

Second, Bitcoin became vulnerable to speculative trading due to Elon Musk and his company, Tesla. A series of tweets published by Musk between May and June of 2021 resulted in Bitcoin’s price rising and falling. There was no clear factor for the jumps and drops – investors simply reacted to Musk’s tweets and subsequent transactions involving the cryptocurrency.

There are also security risks associated with cryptocurrency investment. However, platforms are rapidly adapting to these challenges to make cryptocurrency trading secure.

How Can Small Business Owners Mitigate These Risks?

Safe investing is all about maximizing the benefits and minimizing the risks. Cryptocurrency investment can be made safe using time-proven techniques like diversification and hedging, among others.

Lessening your risk means minimizing your exposure. For cryptocurrency, experts suggest allocating a specific percentage of your portfolio for these assets. TradeStation Crypto senior director James Putra suggests investing between 2% and 5% of your holdings towards cryptocurrency.

This move, he explains, is a hedge against volatility. Your portfolio may lose some as a result of drastic price movements like the one that came after Elon Musk’s interventions. However, the loss is not crippling for the exposure is minimal.

Diversification works the same way. In stocks, you invest in a variety of companies and industries to even out the effects of price falls in the future. The same is true for cryptocurrency.

For instance, Ethereum or ETH shows more moderate yet stable growth than Bitcoin. ETH grew 61% in the first half of 2021 while Bitcoin grew only by 31% in the same period. On the other hand, altcoins or alternate coins like Doge and many other new cryptocurrencies are poised for more explosive growth due to speculative trading.

Just like in stocks, spreading your investment to multiple cryptocurrencies will temper the otherwise volatile price movements that these decentralized coins are known for. Drastic rises in price in Bitcoin and the altcoins can be evened out by the more stable Ethereum. Moreover, limiting your exposure to cryptocurrency to at most 5% means you’re not losing as much money when you take into context your total wealth.

Experts believe that revolutionary blockchain technology is here to stay. This means that cryptocurrency will be here for the long-term. Cryptocurrency could potentially become a source of liquidity for your business, a store of value for your personal portfolio, and a hedge against inflation and other economic factors that could hurt your bottom line.

Businesses that can weather trends are the ones that survive, and cryptocurrencies are a trend that is poised to remain for a long time. As an entrepreneur, you must take the time to understand the benefits of digital coins like Ethereum, Bitcoin, Doge, and various others as well as their risks. You must learn to maximize the advantages by diversifying your investments while keeping the risks low by minimizing your exposure.