Since Bitcoin became the first decentralized cryptocurrency in 2009, digital currencies have been discussed a lot in the media. Much of that discussion has been about the volatile nature of their price. The recent burst of industry growth has not gone unnoticed, and many farsighted investors now see Bitcoin and other currencies as excellent opportunities to make big returns. Many investors, however, find that their lack of technical knowledge can inhibit their ride to the top.
This is partly because cryptocurrencies don’t have central banks regulating their value, and partly because the global economy doesn’t yet price its denomination. Much of this cryptocurrency volatility is the result of cyclical ‘subsequent’ consequences flowing on from what happens in the traditional finance sector. The internal causes within the uncharted territory of the network is anyone’s guess (but this article is to help you get an idea).
In the brave new world of cryptocurrency, previous performance is not necessarily indicative of future performance. Because the technology is so new, the performance data that due diligence normally requires does not exist in the same way it does for other markets and company stocks. For now, cryptocurrency markets remain speculative, which means investors must avoid emotional trading decisions, and accept their proclivity for risk. Part one and two of this series of articles looked at how money derives its value, and why some digital currencies become worth more than others. This installment of my investment series will help you improve your odds of investment success in cryptocurrency and its related markets.
Read the full story below.
In case you've missed them, here are parts one and two of this series:
Part One - Op-Ed: The Cryptocurrency Investment Series
Part Two - Op-Ed: How Do Cryptocurrencies Become Valuable?
Part Three - How Do I Choose A Cryptocurrency To Invest In?
The first questions you need to ask yourself are:
- What type of investor are you? And,
- What degree of risk are you prepared to tolerate?
What is your principal motivation for investing?
Are you looking toward cryptocurrency principally as a means to “get lucky” the way many of the early buyers of Bitcoin did, or do you believe that digital currency could one day become a major player for global payments? In the case of the former, digital currency could play a role as part of high-risk component in your investment strategy. The latter involves a much more complex and informed analysis of your investment options - not all of which will be obvious from studying current market movements.
Gut check time.
The cryptocurrency market has been growing quickly, and with the opportunities for big profits comes potential losses that investors need to be prepared to risk or ride out. Only invest what you are prepared to lose. Short-term traders should always be aware of market conditions, regulatory changes, and other news that may affect the value of their position. If you’re looking for short-term gains and this doesn’t sound like you, or if you’re not prepared to lose your investment, then cryptocurrency may not be your best investment vehicle.
General crypto investment guidelines
- Spread your risk exposure.
As the old saying goes, don't put all your eggs in one basket. Only a handful of currencies have maintained a top ten market capitalisation for longer than a year. This doesn’t preclude growth though, as some rivals may have just expanded at a faster pace. Much as in the early home computing market, low barriers to entry have resulted in a lot of competition in the cryptosphere. There is a long way to go before any cryptocurrency is adopted as a mainstream platform, but the closer this comes to reality, the more resources will be required in order for other candidates to catch up. This pivotal time will see many smaller, less well planned projects fall by the wayside.
- Identify trends
In the past some of the main cryptocurrency trends have been: Proof-Of-Stake coins, anonymous coins, coins with user-governance models for upgrade decisions, hybrid-blockchain reward coins, merged-mining, and other highly technical coins that fulfil niche specialisations. Some of these features were initially useful, and some become standard, if unexciting from a consumer perspective. The trick for investing in technology is to identify long-term trends about consumer preferences. It could be that they want gimmicky money (Dogecoin for example), or it could be that they want a cryptocurrency to serve the functions of money better than traditional money types.
- Be prepared to lose
Don’t get emotionally caught up in the ebb-and-flow of your portfolio position if you’re in it for the long haul. That can lead to poor investment decisions.
- Don’t invest money you can’t afford to lose - high risk
Only attribute a set percentage of your portfolio to higher-risk assets, and spread that risk among different currencies to protect yourself against total loss.
- Keep your crypto secure
Find a secure place to store your investment, and don’t keep too large a chunk of your funds in the exchanges. These are frequently targets of malicious hacks.
- Do your homework and keep updated
Know who & what you’re investing in
Who are the project developers and what does their track record look like? Are they reputable, researchable and qualified? Do you trust them? What success do they have in the past with pioneering new technologies? What is the project’s scope? Does it seem realistically achievable for them? How big an impact will come from its success?
Look for Intrinsic value
Is there value ascribed to the currency beyond speculative investment? Is it backed by profits in any way? Are there proprietary systems that work on its blockchain? Is it utilized in some novel way?
Is there the potential that, in the future, governments could disrupt a currency’s competitive advantages through regulation (take for example the focus on ICOs right now in the USA)? Could future regulations and the market environment hamper the currency’s adoption by the mainstream where government-dictated compliance is an issue?
Infrastructure and technology
What technological or strategic difference does each currency offer? Can their competitive advantages be replicated easily by a competitor? Are their key developments open source or copyrighted IP?
How large is the userbase? Is it growing? How loyal do most of their investors appear to be? Does it seem to be a currency built on investor belief (and therefore less volatile), or speculative pumping?
Continue to review your crypto-asset portfolio over time. Are the projects that you’ve invested in still reaching their projected milestones? Are they engaging with their community? Is their behavior consistent with their stated aims? What new information wasn’t available last time you reviewed your position? The list of successful cryptocurrencies that are able to sustain their position will thin dramatically; the last thing you want is to be caught without a seat in a game of musical chairs.