Investing in cryptocurrency is a hot topic these days. Are you excited by the opportunities the blockchain technology presents? So you should be!
You’ve been introduced to a major technological innovation with the potential for massive global disruption. You have your exchange accounts set up, dug into wallets and security, and read up on the different blockchain applications and their cryptocurrencies. It’s time to start investing!
In this article, you will find the basis for the strategy you’ll need to develop. After all, you’re investing your hard-earned money. An effective and well-thought-through strategy for managing this is vital. We’ll look at each of these in more detail:
- Doing your research
- Investing in multiple rounds, and don’t start with day trading
- Understanding investment psychology
- Buying in low and taking profits
- No regrets
1. Do Your Research
For starters, I can’t stress enough how essential thorough research is in this industry. Due to a lack of regulations, there are a lot of pump-and-dumps happening. Numerous cryptocurrencies on the market won’t stand the test of time. On top of that, there are quite a few cryptocurrencies created with the sole purpose of making the owners a lot of easy money, after which the project is abandoned.
On Invest in Blockchain, our aim is to provide information about legitimate cryptocurrency projects and companies. Always do your own additional research and don’t stop doing research after you’ve invested. You want to stay on top of news related to that project.
Additionally, put in the work of assessing the purpose of a cryptocurrency and its underlying blockchain technology. Does it solve a real-life problem? Is there a potentially large target group? Who are the competitors and what is their approach?
The internet will provide you with all the news, facts, data, and updates needed to make informed decisions when investing. You just need to know where to look. The official website of a cryptocurrency and its underlying blockchain technology is always a good start, but for obvious reasons quite biased. Social media gives everyone a voice and fills the gaps; however, read comments and updates from a multitude of sources to come as close to the real situation as possible. A lot of posts on social media will lead you to informational websites about blockchain and cryptocurrencies. It’s therefore important to assess credibility.
2. Invest During Multiple Rounds, Don’t Start with Day Trading
When you’re ready to start investing in cryptocurrencies, this is crucial. Never put all of your investment capital in a single project or in a single segment of the blockchain industry. Spread your eggs and your baskets. No matter how much potential a cryptocurrency seems to have, there will always be competitors that employ different, and perhaps more effective, strategies. These competitors might not even be around yet. Just think of Google and Yahoo.
It’s considered a Best Practice not to invest all of your blockchain investment capital at once. A responsible approach is to invest about 15 to 20% of your total planned investment and average in. No matter how much potential the market has in the long run, it is still very volatile and highly sensitive to news and updates, both fake and real. You don’t want to go through the stress of investing your entire crypto budget at once, just to see it drop 25% 3 days later because some banker doesn’t like Bitcoin. Moreover, doing your investments in cycles makes you more aware of the general trends and price variables and you grant yourself more time to study the industry in depth.
If you’re not an expert financial analyst, don’t do day trading. Day trading means you’ll have to outsmart big institutional investors with years of experience for relatively minor gains. 90% of people attempting this make a loss. Additionally, data shows that over the last year, most long-term holders have made a significantly higher return on their investments than day traders. You’re entering a highly unpredictable market but, importantly, an expanding market in its infancy. In the long run, the market is quite forgiving. Even though the value of your investments might have dropped in the short-term, it will most likely go back to, and beyond, the value you bought them for – if they’re sustainable projects.
Of course, there is no guarantee that the market will remain this forgiving, but it has been over the last year. When you worry about the dropping price of some of your investments, research why it is happening. If nothing came to light that threatens the existence of a cryptocurrency, it’s usually a lack of investor interest and you’ll just have to wait. Holding on to your coins in those red days has been dubbed HODLing by the crypto community, and is based on the communal long-term vision about the future value of their blockchain investments.
3. Hype, FOMO, and FUD: Understand Investment Psychology
Be greedy when others are fearful, and fearful when others are greedy. Buy low, sell high. These are these basic rules for investing. And yet it’s so hard to act accordingly because you basically do the opposite of what your emotions will tell you to do. Hype, FOMO (Fear Of Missing Out), and FUD (Fear, Uncertainty, Doubt) are 3 commonly used phrases in the crypto space, referring to general psychological mistakes investors make. This causes people to do the opposite of they should do to make a profit, with most still end up buying high and selling low.
When a particular group or, in the case of cryptocurrency, a community of people, drives up the price by creating perceived value, this is hype. This is what makes many rookie investors sit up and take note, as story after story hits the press about overnight fortunes made.
Compelled by these motivations, investors then buy high because they are susceptible to FOMO, the fear of missing out. This happens when the price of a cryptocurrency that they already had their sights set on suddenly soars. They impulsively buy in because they’re afraid they will never be able to buy the coin cheap again. They get caught in the hype, which is created by everyone who gained from the rising value, and only read positive news about the cryptocurrency. At some point, the hype is over, big traders cash out, and the price drops.
FUD, which means fear, uncertainty and doubt, are constantly spread through multiple media outlets – it’s the nature of the media. Those same people who fell for FOMO will sell because they start doubting why they bought it in the first place. This then snowballs down, as people who bought high will panic and sell. The ripple effect is that more and more investors then see a loss, and do the same. The price will drop to a point where the demand is based on HODLers and long-term investors, make a quick bounce up, before gradually continuing to climb upwards. This process is valid for both individual cryptocurrencies, as well for the market as a whole.
It’s very important to realize that no cryptocurrency will always go up. There will always be pullbacks. Just take a look at the graph of any cryptocurrency and you’ll see this straight away. You might have to buy in with a minor premium on the price, but you’ll miss the drop that happens after a peak. Never buy at an all-time high.
4. Buy In Low and Take Profits
Accumulating when the price dips is a solid strategy for buying low. This tactic goes well with the strategy of investing in multiple rounds, as you can analyse the market for a longer period of time and start seeing patterns. Once you’ve established that the coin isn’t prone to an existential threat, a wise strategy is to accumulate during a decline. Don’t start buying as soon as the price goes down. Wait until the value has dropped significantly, and start buying in at the lows. Don’t invest all your targeted budget at once, but start buying small portions of the budget of that investment round. If there’s a clear bottom forming and the price seems to stabilize after a sharp drop, you can start buying larger amounts.
If you do want to take profits every now and then, you incorporate a similar tactic into your strategy but in the opposite direction. When prices are surging, start taking profits by selling portions of your holdings in that cryptocurrency. Create a strategy for these situations too, for example, when a price doubles, you sell 35% or, for a more conservative approach, every time a price goes up 20% you sell 10%. Additionally, decide whether you want to realize your profits in Bitcoin or in regular currency. Bitcoin has been far more stable than most other cryptocurrencies but is still very volatile relative to the Dollar and the Euro.
If you’re a long-term investor, don’t worry too much about short-term volatilities and cycles of the market. Timing the market is extremely difficult. You wouldn’t be the first one who observes the historic peaks and bottoms and convinces themselves predicting those is a piece of cake. You’ll risk it for the biscuit, and probably end up making a loss. Work in portions, thus accumulate at the lows and partly sell on the way up. If you believe in the future potential of a cryptocurrency, you may want to set aside a small portion to hold, even at historic peaks.
5. No Regrets, No Rookie Mistakes
On a final note, aim to never regret a choice you’ve made. If you do, this is caused by two reasons:
- it’s in hindsight and your regret is nonsensical because you just can’t predict the future; or
- you didn’t do your research properly before acting and you realize this.
FOMO tends to cause most of one’s investment regret, as it leads to ignoring valuable information by creating a sense of urgency. Other causes for skipping research are “the golden tip” by some guy from the internet or the mainstream media highlighting an investment opportunity and historic performance, which is in no way an indicator of future performance.
The Keys to Success in Investing in Cryptocurrency
All in all, start with doing more research than you think is necessary, then create a sound strategy and stick to it. Don’t invest your whole stake at once, average in, understand and learn how to rationalise your emotions and, of course, enjoy the crypto rollercoaster. Good luck!