Investing In Cryptocurrencies: A Quick 101
Over the past few years, many people have started investing in cryptocurrencies following the meteoric rise of Bitcoin and Ethereum. As the media catches on the hype, more and more people follow, with billions of dollars of inflows into this new asset class.
Perhaps the most compelling (and also risky) factor associated with investing in cryptocurrencies is their dramatic change in price. This volatility is enticing to traders and investors alike and has created and ruined fortunes. Many people are caught up with comparing different cryptocurrencies and not on building the foundations of smart investing. The truth is that as much as investing is a financial game, it is also one of psychology and thinking.
Keep these thoughts in mind before investing in cryptocurrencies:
Decide if you are an investor or trader?
Investors hold for the long term, traders optimize for short-term profits. An investor with a trader’s mindset or a trader with an investor’s mindset does poorly. For example, John is a big believer in Ethereum. He researches the project and sees the long-term potential of Ethereum. He buys $1000 worth of ETH only for it to drop to $750 the next week. Panicking, John sells all of his ETH. A few months later, ETH would go on to increase in price by two times. John ends up missing out on a lot of profit.
John’s story is a typical story seen over and over again on Reddit, investment forums, and crypto meetups. John bought cryptocurrencies with an investor’s mindset – carefully researching before purchasing – yet sold as a trader. Day to day price fluctuations are common in the space. If your investment horizon is ten years, then why should you be bothered with what’s happening with the price of ETH every twenty-four hours. Even better, stop logging on to check your portfolio every day. It will do nothing except to create more anxiety.
If you want to hold crypto, make sure it is part of a balanced portfolio. Many people have put all their monthly earnings in one single altcoin, hoping for it to “moon” (crypto slang for a stratospheric rise in price). This strategy of keeping all your eggs in one basket is good when the coin is doing well, but the same investors get hammered when there’s a downturn. Don’t commit too much capital at once. It’s been proven that smaller buy orders reduce anxiety and stress.
If you find that one of them has more potential, you can always put more money in later. In fact, there’s a term for this in investing called dollar cost averaging (DCA). The essence of DCA is that instead of taking one big position, it’s wiser to spread it out over time buying little by little to minimize the impact of price fluctuations.
Know when to leave
You will never always win in investing. Not every cryptocurrency you buy will 10x or even be profitable. Before you buy, ask yourself: at what point should you sell? Plan for the worst-case scenario. If you buy ETH, and in a few months ETH drops 50% in value, do you hold or sell? Part of this is knowing your own limits and conducting good research. If you strongly believe in the Ethereum platform, then maybe a 50% drop in value isn’t really a concern. On the other hand, if you’re going to be needing money soon then maybe you should just cut your losses and sell.
Keys to Smart Investing
These three tips build the basis of a mental framework when investing in cryptocurrencies. Each investor will have their own strategy when it comes to investing and it’s up to you to discover your own method. However, the only way to do that is to get your feet wet and start buying and selling crypto. If you’re not comfortable with real money, try using an online market simulator and practice. Over time you’ll have a sense of the markets. The cryptocurrency markets are very new and are quite different from traditional equity markets. Not everyone becomes a world-class money manager overnight and even Warren Buffett had to start small once.