The interest in investing in cryptocurrencies has grown significantly over the last couple of months, as blockchain and cryptocurrencies become household terms.
Among my friends I have been one of the first and most active to invest in blockchain projects. It makes me happy that more and more friends gain an interest in the topic as I truly believe in the economic potential that blockchain-based token networks can unlock.
When asked about investing in crypto I tend to give a repeating set of advice that are some of the base principles I try to adhere to when making an investment, so I would like to share it here.
These are the most fundamental truths that I believe apply to investments of any kind, applied to cryptocurrencies.
1. Only invest money you can afford to lose.
Crypto is probably one of the riskiest asset classes out there right now. Extreme volatility, lack of regulation, and an overflow of scams would give your local bank’s financial advisor a heart attack and make him lose his front-pocket pencil holder. So don’t take out a loan to invest in crypto, don’t buy with credit card debt, don’t take our a mortgage, don’t invest your daughter’s college fund, and certainly don’t be that guy. Only invest money you truly have to spare and that would not affect your financial stability if gone.
2. Be mentally prepared to lose 50–60% of your investment in the short term.
Again, volatility is the name of the game. The crypto market has consistenly followed cycles of hyper-growth and extreme corrections. Usually with higher hights and higher lows. Money is made off the people who come in late and sell early. When the market starts correcting it can be quite drastic. Unless you have caught the right moment before the top and switched to fiat you will have to ride it out. Don’t get discouraged, and don’t sell at a loss. The market will turn back around. Be prepared to take the hit as it most certainly will happen. Buy when there’s blood on the streets. Hodl!
3. Never have expectations.
Expectations are when investing becomes gambling. If you invest and expect a 50%, 100%, 10x return, you’re gambling. Having expectations will make you shortsighted and impatient. You will make impulsive ill-informed decisions. You will be checking your balance waiting for it to move to that number you are imagining. Make informed, well-timed decisions and let it sit.
4. Do you research.
Not every coin that is tradeable and not even every major coin has any value beyond the purely speculative one. Don’t just jump on a wave because the coin recently had a good run. A good number of the top 30 altcoins have very little technical differentiation from the ones they have been forked from, and barely haver existing developer support and ecosystem. Research a coin thoroughly before investing in it. What is the purpose of the underlying protocol? What is the differentiator? Who is the team behind the project? What is the opinion within the crypto community about the project? What was the price development in the past and most recently? Before I invested in Ethereum for the first time (and I already was trading crypto for more than a year at that time) I researched and followed the market for 2 months. After a longer period of the price being flat I went in. It started climbing rapidly within 36 hours of me going in and ended up at almost 10x at the peak. Research the fundamentals, looks for releases and announcements, listen to the chatter and pull the trigger when the time is right.
As with all investments, don’t put all your eggs in one basket. Research and invest in a variety of coins. The market is still in it’s infancy, most projects are in a proof of concept phase. The high volatility and speculative markets only add to the uncertainty of the survival of a single project. Always make sure to have some of the more ‘established’ coins in your portfolio. Don’t be fooled though that diversification will hedge you during a downturn. The currencies showed to have a very strong correlation in price development in the past. Occasionally some have break-out periods of extreme growth or decline in value, but in general the charts follow similar patterns. Diversification only decreases your risk of complete elimination in the event that a coin collapses.
6. Be in it for the long term
There’s a lot of speculation in the crypto market. Fortunes have and will be made, the tales of which propagate and invite new participants to try their luck. A large portion of that money will be speculative. It has lead and will lead to ever highter waves of hype, followed by brutal corrections and eventually a crash. All that is natural and healthy. It creates awareness and lays the infrastructure for the next generation of the internet. This infrastructure will be build with the money of the weak hands that get shaken out in bear markets. The ones that were in it for a quick buck and not the underlying technology. The dot-com bubble took out a lot of speculators and a large number of over-hyped, over valued companies went bust. But the ones who survived went on to become some of the largest technology behemoths of today. If you would have had any stake in Amazon during that time and would have managed to hold on to it when and after the bubble burst, it would have made you a staggering return at today’s valuation. The same will happen with the current generation of companies that issue crypto tokens. So be in it because you believe in the technology, not because you want to make a quick buck. More long-term money creates a solid base, which creates a less volatile market.
Be smart, don’t rush it. Don’t worry, the market will still be there tomorrow.
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