There’s been a flurry of interest recently in cryptocurrency investment, a.k.a. “getting into crypto”. If you’re thinking about making the jump, here are some strategies on how to approach it.
Chances are you’ve heard of fortunes being made – and lost – investing in crypto. Many are starting to become interested in investing themselves, but deciding where to start can be daunting. Should you buy Bitcoin? Ethereum? Litecoin? Or will Doge go to the moon?
There are over 1,000 different cryptocurrencies and not a lot of information out there about what makes one better than another. Here, we outline a few different strategies to help you navigate this complicated space.
Why Should I Care? (Reading time: 0:57mins)
There’s a reason for the tremendous hype around cryptocurrencies: they could represent the future of finance in a less centralized world.
As long as you don’t invest more than you can afford to lose, high-growth – and high-risk – investments like cryptocurrency can play an important role within investment portfolios, offering the sort of potential returns that are otherwise hard to find.
Although past performance is no guarantee of future results, a diligent approach to investing here could put you in a position to make substantial gains in the long-term 🔮
There are a few cardinal rules when it comes to investing in crypto:
- Do your own research before investing. Don’t just buy that coin because your friend said it’s definitely going to go up.
- Make security a priority. Make sure you use two-factor authentication such as Google Authenticator (not SMS!) on any exchanges, and potentially even invest in a hardware wallet (you can find out more about those here).
- Only invest what you’re willing to lose. Don’t be that person who mortgages their house to invest in crypto, and never put all your eggs in one basket.
What Can I Do? (Reading time: 4:30mins)
There are three main strategies when it comes to investing in crypto:
The fundamental investor is the most common investment strategy in crypto. This strategy entails buying high-quality projects (like Bitcoin or Ethereum) and holding them long-term. High-quality projects tend to be well known; they’ll have robust developers and a strong user base. The development team’s quality can be assessed by doing some research into their experience and credentials. A coin with a strong user base and development community typically has an ecosystem with new products being built, partnerships and a real, tangible purpose.
An easy way to identify these types of coins is by looking at the top coins on a site like coinmarketcap.com. Albeit an imperfect metric, a higher market cap (i.e. the total market value of the coin) can give you a sense of how confident investors appear to be in the long-term viability of the coin.
Cryptos are very speculative investments and are subsequently very volatile: speculative investments are extremely sensitive to both positive and negative news. By ignoring short-term price fluctuations and focusing on long-term trends, you’ll be able to avoid overtrading, selling too early or incurring unnecessary taxes (which can be a pain to sort out for crypto investments).
Focusing on fundamentals is a tried-and-true strategy when it comes to investing in anything – and it makes particular sense for crypto.
Pro Tip: Given that cryptos are volatile, the market tends to give new investors plenty of opportunities to “buy the dip”.
✅ Who is this good for?
An investor who wants long-term exposure to crypto and an investment strategy that’s straightforward. (Most people)
Another strategy is to research and invest in new “ICOs” (Initial Coin Offerings) or lesser-known existing coins. Many people who feel they missed out on Bitcoin’s meteoric rise are hunting for the “next Bitcoin”. Given that some of these ICOs have delivered huge returns, there’s been a bit of a frenzy at times as investors try to book a seat on the next rocketship.
This strategy involves following websites like icodrops.com or icobench.com in order to stay on top of new projects. For recent ICOs, or already existing cryptos, it’s important to analyze each project’s viability as an investment by asking yourself some basic questions.
These questions will help you better understand whether or not a specific crypto is a good investment, as well as protecting yourself by filtering out potential scams:
- How qualified is the team running this project? Do they have prior experience with blockchain/cryptography and/or relevant experience in the industry the project is looking to disrupt?
- What is the community sentiment? Join the project’s telegram/slack/subreddit via their website and assess how others feel about the project.
- What is the real-world problem that this project is trying to solve – and does it really need its own blockchain or token to do that? Is this a novel idea, or is there stiff competition?
If the project passes these smell tests, then it might be worth putting in a small part of your portfolio that you can afford to risk.
Pro Tip: ICOs that have reasonable hard limits on the funds they’re looking to raise tend to perform better, as there’s more demand than there is supply.
✅ Who is this good for?
Someone looking for high returns by researching new cryptos and trying to pick the winners. This strategy is the most risky, and investors should be prepared to lose their initial investment as ICOs are extremely speculative and unregulated. (Highest risk & medium complexity).
The most complicated and difficult strategy is to day trade cryptos. This involves a significant time and resource commitment, as the crypto markets trade 24/7 (and even on Christmas).
The fact that cryptos tend to be very volatile creates ideal conditions for a trader who wants to take advantage of swings in the market. This involves buying when the market dips and selling when it rises – a.k.a. “swing trading”. Many traders analyze charts by using technical analysis.
Technical analysis can help traders identify patterns and make inferences about what an investment’s price is going to do based on what it’s done in the past. If they can identify a pattern, traders may have a better idea of when to profitably buy and sell. There are plenty of free online resources teaching technical analysis and trading strategies, as well as paid trading groups which offer guidance and lessons for a fee.
Becoming a full-time trader and learning technical analysis is not easy to do – and can often lead to underperforming the market. If done right, however, trading can lead to significant gains.
Pro Tip: The economic cycle in stock markets tends to be about 8 years. In crypto, cycles tend to happen much faster – over the course of months to a year. Assets like Bitcoin or Ethereum, which are more liquid and more established (similar to blue chip stocks), tend to be safer during a downturn, whereas smaller, less-established cryptos (more similar to small cap stocks) tend to outperform in an upmarket: the higher the risk the higher the reward.
✅ Who is this good for?
This strategy is for someone who wants to buy and sell cryptos frequently and be more active in the markets. Someone with experience buying and selling stocks may be more comfortable with trying to actively trade and produce returns better than the market. (Medium risk & most complicated).
If you do decide to take the crypto plunge, the strategies and precautions outlined above are useful starting points. It’s important to make sure you’re adequately equipped both to capitalize on the opportunities and mitigate the risks.
Finally, whether it makes sense for you to invest in crypto or not depends on your personal financial situation and your appetite for risk. As easy as making money in crypto may seem, it is just easy to lose it as well. So don’t quit your day job just yet…