So you’re thinking about investing money in cryptocurrency.
You’ve seen the headlines, your friends’ Facebook posts and celebrities promoting token sales, known as Initial Coin Offerings (ICOs), essentially a crowdfunding alternative (think IPO meets Kickstarter) to traditional venture capital fund raising that rewards early investors.
Media coverage is increasing at a rapid rate and your Uber driver is talking about the next big thing in crypto. All of a sudden everyone wants in.
If Floyd Mayweather Jr. is giving his stamp of approval, surely this is a knockout, right?
Not so fast…
I was at a restaurant in Seattle a few months back, and while eating my sushi, I noticed (by accident, of course) that the girl sitting next to me had a crypto portfolio tracking app open on her phone. This was the first time I had encountered someone like that in the “wild” outside of my group of friends, so naturally I started talking about cryptocurrency.
By the end of the evening, the bartender, who turned out to be a speculative investor himself, had also joined in on the conversation, as we shared trading experiences and lamented not having bought more in the “early” days.
A lot of people are rushing to get in on the lucrative gains, but that’s not necessarily a bad thing as it brings in more money, stability and distribution of assets.
Basically, a lot of people are talking about and investing in things they don’t fully understand (I don’t claim I do either, but I have a decent amount of experience), and this makes sense because Blockchain technology is complex and radically different. A new era of the internet is upon us, but many fundamentals remain the same, and I hope to guide you through some in this article.
It’s easy to be overwhelmed by the sheer volume of information and hype that will pummel you as you enter the dimension of cryptocurrency. The noise is relentless and just like a kid in a candy store who reaches for the first thing, you might be tempted by the first new ICO that is hyped.
In all likelihood, you will also come across people that will “lay it on thick” about how great a certain investment is. It’s almost similar to when a car salesman keeps telling you how great a certain car is, and prattles on about the features. This is known as shilling in the community, and although they may be right about a certain investment, you always want to know what you’re getting yourself into.
I recommend joining one or two community chat groups for companies building technologies that excite you the most, and go from there.
Emotions can run high
With so much money being pumped into cryptocurrencies, it’s natural that there are also many emotions at play.
Fear of missing out (FOMO) when things are going well, contrasted by fear, uncertainty, doubt (FUD) when there is perceived trouble, are just some of the driving factors behind the surges and dips in price and demand.
FOMO is akin to buying something only because everyone else seems to be buying it, and not really doing any logical thinking while FUD is similar to gloom and doom; a contagious negativity that is hard to ignore.
Both are pretty extreme, and as such both should be largely ignored. As with most things, the truth is somewhere in the middle.
So just how do you filter the constant barrage of information and handle the emotional rollercoaster, and what are some sound investing guidelines before taking the plunge?
Here are some things that I wish I had known before I started.
A friend of mine once sent me an article by venture capitalist and blogger, Fred Wilson. It sounded like common sense investing advice, yet I wasn’t doing it. I was caught up in buying large amounts of speculative crypto fueled by a fear of missing out, rather than making deliberate moves.
I had no strategy.
I’m not a millionaire (yet), but if I do get there, it will be thanks to building a position over time.
Investing in crypto might not be a marathon, but it’s also not a sprint. Just like runners try to save some energy to close a gap when they see an opportunity, many of the investors that I talk to ease into buying.
I buy cryptocurrency every week, little by little, usually, but not always, trying to average down my cost. This mitigates some of the risk associated with a very nascent and highly volatile market. It also helps me sleep at night.
The key word is…
By building a position over time, you will also naturally gain more insight into the market: the trends, average daily volumes, updates about your investments, new regulations etc. Keep at it, be patient, and gradually build your crypto portfolio. There will be spikes and dips along the way, but by buying here and there, you take a lot of that out of the equation.
Almost everything that I’ve seen in the market so far has gone through a period of significant correction, allowing investors who gradually buy to drive down their average cost.
I’m not saying that I have all the answers, but I do think this is the correct approach. Being a member of multiple crypto Slack and Discord groups, I frequently see people saying they wish they could enter a position (fancy term for buy) at the current (lower) price, but that they don’t have any funds remaining. Where are their funds? Likely tied up at higher price points when they went “all in”.
If you think you found a good price point to purchase crypto, it’s likely that it won’t seem that way at some point in the future, so don’t go all in. Take what you want to invest, divide it in half or more, and only put that much in.
Rinse and repeat.
One of the biggest mistakes that I made early on was making a single purchase of Ethereum in 2016 and not checking it and slowly increasing my position in the following months as it continued to climb. I then bought FOMO at $350+ (again, large sum), and ended up selling most when the market plummeted during the big selloff in July as my stop limit order triggered.
The point of this story is that I could have, and should have, continued to buy small amounts at regular intervals rather than bulk amounts once or twice, and as I explain below, I also should have taken some profits in between.
Too much excitement combined with a bit of greed and lack of experience is not a good recipe for successful trading. Anyone can get lucky the first time, but it becomes harder to replicate.
This was a painful learning experience for me, but one that taught me to be persistent and patient in my future crypto investments.
Also, don’t be like this guy. After all, you want to be able to sleep at night.
It doesn’t cost any money to transfer funds from your bank account to a reputable cryptocurrency exchange such as Coinbase or Gemini, but not having FIAT (government issued money e.g. USD, EURO) currency ready can be costly.
In May, the price of Ethereum went from $85 to $200 in less than a week. That’s over a 132% gain in a few days.
It takes an average of five days to transfer money from a bank account to a crypto exchange assuming you already went through the sometimes lengthy verification process.
This means that you would have missed out on a great buy opportunity, only to buy at the top once your money arrived, only to see it drop back before correcting.
Not fun at all.
Think of it this way. Professional athletes always stay in top, game ready shape even if they are not part of the starting team, because they never know when their number might be called to play. If they’re not ready, the coach will likely bench them and they will have to wait even longer for their next opportunity.
Similarly, smart investors will keep their accounts funded, because they want to be ready to buy when a good opportunity presents itself.
Another reason to keep some funds ready to go, is because they’re necessary if you want to take advantage of built in trading features. Limit buy (buy only when the price drops to X) and stop limit buy (buy only after the price climbs to X, called the stop, but no higher than limit Y), are only available if you have funds on the exchange.
These features can help you automate trading as they will trigger only when your targets are met, and can also help take the emotion out of trading, something that most experienced investors advise to do.
Remember that unlike traditional trading, cryptocurrencies are a 24/7/365 marketplace. If you’re coming from the traditional investment space, this is radically different.
You can of course use a credit card to buy right away, but with much higher fees and lower limits.
There is also the option to purchase crypto with your bank account that locks in the price, but doesn’t deliver the assets until your money clears. Again this is going to have higher fees than using limit buys and you will not be able to sell or move the assets immediately.
If you’re in the US, I recommend using Coinbase’s trading platform, GDAX which offers many order types for Bitcoin, Ethereum and Litecoin and 0% maker fees (not buying or selling at market rate but placing an order on the books).
GDAX is fully insured and compliant with US regulatory bodies. If you trust these exchanges with your money, this will give you the most flexibility and buying power.
If you live in a climate with multiple seasons, surely you’ve been surprised by an early arrival of winter at some point. You might have had some pre-winter tasks that you weren’t able to complete because you thought you had more time. Instead, you were left with kicking yourself over your procrastination and waiting for the seasons to change.
This analogy rings true in the world of crypto as well.
It’s easy to become entranced by the green candles and big increases in your portfolio’s unrealized gains, but they are just that, unrealized, until you actually take some profit.
Ironically, fake money, as your dad might call Bitcoin and other crypto currencies, is actually your unrealized profit of crypto assets. It’s not there until you take it, and it might not be there tomorrow, or when China wakes up (learn your time zones, btw).
Swings of 20% or more up and down the next day are not uncommon, and there are also relatively long bear markets.
Even if you are a long investor (such as me), and you believe in blockchain technology, it makes sense to recoup some of your invested money in this young and unpredictable market. It can hurt to be “stuck with a bag” of tokens that you have nothing to show for in terms of profit when the market inevitably enters a downtrend, or whales (large investors) decide to take profits themselves.
You don’t want to end up having to wait out a particularly long crypto winter without having sufficient reserves.
You likely already do this with your budgets and financial planning (if you don’t, crypto investments might not be the wisest move). Maybe you force yourself to put away 10% of your paycheck, or you reward yourself by going on vacation when you achieve a financial milestone.
You have targets that you gauge your performance by, and you make decisions based on that information.
The same applies here.
Set some targets at which you can cash out a portion of your investment, ideally to the point when you have your principal investment (money you put in) back.
For example, if you invested $1,000 and that has doubled, it’s not a bad idea to that that initial $1,000 out and only play with the profits. You can also take a portion out. The target numbers are up to you, but you definitely want to have some.
If your money is already tied up in a project that is currently down, selling for a loss is usually not wise. Just like your unrealized profits aren’t “real” until you realize them by cashing out, your unrealized losses are only on paper until you decide to sell It’s a double edge sword.
Early on, I stressed quite a bit about my investments going into the red after a period of prosperity that I didn’t capitalize on. Many are now back in the green, but some are down, and will likely stay there for a while for a myriad of reasons including technical challenges that nobody has encountered of solved before.
Although I don’t advise flipping for a profit only, because I think it undermines blockchain projects overall, a mixed approach of short and long term exit points is recommended, with targets set on each side to protect yourself.
Something that I have done in the past, was set a target to sell a percent of my profitable investments if the price dropped significantly. This allowed me to guarantee a profit and actually happened back in June when the price of Ethereum plummeted by over 60%.
The Wild West
Being an early adopter inherently carries risk, especially with something as disruptive as blockchain technology.
Not every project in the space will be able to sustain its value, and we have yet to see any significant regulations from the SEC and other governing agencies.
Protect your crypto investment like you would anything else that you own.
Cryptocurrencies go through market cycles like any other asset class out there. The main difference is that they are typically shorter than on Wall Street.
A down cycle on Wall Street might be like winter in Winterfell; long and brutal. In crypto, things move a lot faster, so that downturn that you are seeing is more likely to be a King’s Landing winter than anything else; quick to subside.
I see someone post this chart at least once a month when people start to moan and groan, and every time it’s been accurate. If you struggle to deal with the cyclical and turbulent nature of cryptocurrencies, force yourself to take a break from looking at your portfolio. It really helps.
Eventually, you will grow accustomed to these bumps in the road, and ideally, use them to your advantage.
Don’t lose sight of the bigger picture.
There are companies building on the blockchain that will change how we use the internet. From decentralized storage that takes advantage of unused drive space around the world that is highly secure, to world computers able that utilize idle CPU and GPU resources to render images and deliver unprecedented computing power.
I have no doubt that this will be truly disruptive technology.
The big question…when?
As mentioned earlier, these companies are facing complex technical obstacles that nobody has solved before. Progress will be slow, especially with a shortage of blockchain engineers. On top of that there will need to be a cultural shift from centralized and easy to use products such as iCloud, Amazon Web Services and EC2 to decentralized apps (dApps).
This could take years.
That means that the value of their tokens might trade sideways for a long time, or as I have seen with some such as Golem (GNT) and SiaCoin (SC), drop 70-90%.
I still believe in these projects long term, and they’re among my investments, but I don’t worry about their current value. I believe they will be much more valuable in three or five years and I check on them once in awhile.
I don’t stress because my expectations are set.
Around the corner…
Financial technology or Fintech is what I am most excited about in the near-term, and this makes up a solid portion of my portfolio.
There are companies close to delivering products that solve real problems in the financial sector building infrastructure that can be used by banks, large institutions and consumers today.
Think about some incumbent corporations and legacy financial services and standards that we have to deal with:
Just a little room for improvement there, maybe?
Some of my investments in this space include Salt Lending and Metal Pay, two companies with disruptive technologies that seek to challenge the status quo of the loan and payments industries, respectively.
To sum it up, it’s important to understand the landscape of crypto and to ask yourself if whatever you are investing in really makes sense as a token on the blockchain, and if so, what problem is it trying to solve and how soon can it have an impact.
We are still in the early days of cryptocurrency, although some say that we’ve reached an inflection point as the market begins to mature.
Let’s take a look at some numbers:
I think it’s safe to say that an industry that is likely to be the next layer on top of the internet has plenty of room to grow.
Of course, the 1 million Bitcoin question is how much?
In the meantime, sit back, relax (or at least try to) and enjoy the ride. To the moon!
Hopefully you’re now feeling more confident about investing in cryptocurrencies.
Here’s a summary of the points outlined in this article: