The meteoric rise of Bitcoin and cryptocurrencies has created hundreds of Bitcoin millionaires who adopted the currency early and saw their investment skyrocketed in value. Witnessing the unbelievable profit of cryptocurrencies, many investors are eager to try their luck. While cryptocurrencies can be good investments, they are highly volatile and unique. Successfully investing in cryptocurrencies requires specific knowledge and a deep understanding of the market.
In this article, we will go over the important topics you must understand to become a successful crypto investor.
The benefit of investing in cryptocurrencies
Savvy investors know why they invest before taking out their wallets. Investing is not gambling. Before putting your hard-earned money into Bitcoins, you should first understand the goal of your investment and how it can benefit you and your portfolio.
While cryptocurrencies are risky investments, they provide several added benefits to your investment portfolio.
Portfolio diversification
You might have heard of the saying “don’t put all your eggs in one basket”. In investing, it means to spread out your investments and don’t concentrate on one stock or bond. This is the idea behind diversification. By holding investments that tend to move in different directions, investors can diversify their portfolios and reduce their risks.
For example, when investment A suffers a loss, investment B might have a gain and neutralize the loss. The different reactions from investment A and investment B help reduce the risk of your portfolio. On the contrary, if all your investments move in the same direction, a downturn can lead to huge losses and even a wipeout. Diversified portfolios have lower overall risks and provide more stable returns.
Cryptocurrencies can add diversification to your investment portfolio, because they have low correlations with traditional investments like stocks and bonds. When other investments decrease in value, Bitcoin is more likely to rise in value and helps curb your losses. Consequently, adding Bitcoins in investment portfolios can increase diversification and reduce overall risks.
Future-proofing you and your portfolio
Although cryptocurrencies are still in their early stages, it is not hard to see their potentials to disrupt almost every industry in our economy. Investing in cryptocurrencies and becoming an early adopter has the effect of future-proofing your portfolio.
Having a stake in cryptocurrencies can also help you stay updated on new technological developments. Blockchain and cryptos could change our world just like the internet did. You don’t want to be left behind. When you hold some cryptocurrency investment, you would be more motivated to learn about cryptocurrencies and the latest developments.
Do not speculate
Cryptocurrencies have investment value but they should not be used for speculation.
Cryptocurrencies are risky investments. The risk is often overlooked because of their high returns. Since 2017 Bitcoin value has skyrocketed 10 times despite the huge selloff in 2018. In a low yield market, the rich return from cryptocurrencies can be extremely enticing. Some speculators even poured their life savings into Bitcoins. However, the fast profit from cryptocurrencies can disappear just as quickly. Blindly investing in cryptocurrencies is no less dangerous than putting your life savings in a casino bet.
Investing should be a rational and calculated decision not a gamble. With knowledge and discipline, you can find the right crypto investment and make it work for you.
Picking the winner
As an investor, you must understand the cryptocurrency you invest in and how it distinguishes itself from other cryptocurrencies. Most importantly, investors should consider the prospect and potentials of each cryptocurrency they hold. For example, if you believe in the potentials of blockchain applications, you should focus your research on cryptocurrencies that support these applications (Ethereum for example).
There are currently over 2,000 cryptocurrencies with various functions. Not all cryptos are built to be used as digital money. In fact, many of them are not meant to become money at all. Largely, cryptocurrencies can be classified into three main groups based on their functions.
Digital currency
Many cryptos are designed to serve as digital cash. Bitcoin, the most well-known cryptocurrency, falls into this category. Their function is to facilitate transactions from buying a cup of coffee to paying for services online.
Payment rail
Payment rails are crypto systems that allow users to send money to other people in the network. While it could take days for you to transfer money to someone in a different country, crypto payment rails can often do it in a few minutes with lower costs.
Instead of being used as cash for everyday purchases, these cryptocurrencies serve as an intermediary between different currencies. For example, when a user wants to send yen to a friend but only has Turkish lira. The payment rail will first convert the lira into its own cryptocurrency and then convert it to yen, completing the transfer. XRP is an example of such payment rail currency.
Blockchain applications
Some cryptocurrencies support the development of blockchain applications. These currencies are not meant to be used in your everyday purchases. Instead, they are used to pay for computational resources and running blockchain applications on a platform. Ether and EOS are the most well-known examples of such cryptocurrencies.
Top ten cryptos by market cap
While there are countless cryptocurrencies in the market, the top ten cryptocurrencies are a good place to start your research. Cryptocurrencies with larger market capitalizations tend to be more established.
| Ranking | Crypto | Marketcap $ | Price $ | Category |
|---|---|---|---|---|
| 1 | Bitcoin | 130,837,760,402 | 7,229 | Digital Currency |
| 2 | Ethereum | 15,826,412,928 | 145 | Blockchain Applications |
| 3 | XRP | 9,571,063,485 | 0.22 | Payment Rail |
| 4 | Tether | 4,120,921,346 | 1 | Stablecoin |
| 5 | Bitcoin Cash | 3,762,172,867 | 207 | Digital Currency |
| 6 | Litecoin | 2,805,345,275 | 44 | Digital Currency |
| 7 | EOS | 2,456,423,311 | 3 | Blockchain Applications |
| 8 | Binance Coin | 2,293,178,736 | 15 | Digital Currency |
| 9 | Bitcoin SV | 1,678,853,217 | 93 | Digital Currency |
| 10 | Tezos | 1,112,642,516 | 2 | Digital Currency |
(Source: CoinMarketCap December, 2019)
Understanding cryptocurrency Investing
Smart investors use two types of analyses to help them make sound investment decisions: fundamental analysis and technical analysis.
Fundamental analysis focuses on a company’s or an investment’s intrinsic value by looking at its cash flow or the company’s financial performance. For example, equity investors will read a company’s financial statements to help them forecast the company’s future performance and determine the “intrinsic” value of its stocks.
On the other hand, technical analysis focuses on statistical trends of trading activities such as price movements and transaction volumes. Technical analysts carefully examine the price chart of a security to determine the potential price target and other useful investment benchmarks.
For cryptocurrency trading, most investors use technical analysis because fundamental analysis does not apply to these investments. Unlike stocks and bonds, Bitcoin has little intrinsic value and there is no financial statement or performance data for investors to analyze. Investing in cryptocurrency relies heavily on technical analysis.
To help you dissect the crypto market, here are so useful technical analysis concepts that can help you make better and more profitable decisions.
Moving averages
The historical performance of an investment can help investors determine its trend. An upward trend could indicate a buying opportunity while a downward trend should alert investors to potential losses. One of the tools to determine the trend is the moving averages. A moving average shows the average trading price of a security for a specific period.
For example, the 50-day moving average is the average price of a security for the past 50 days. It is called a moving average because each day the moving average changes as the old data is dropped and the new one added. Moving average is very useful in helping investors see the price trend beyond daily noises.
A rising moving average shows that the cryptocurrency has an upward trend. Conversely, a declining moving average shows that the security is in a downward trend. Investors can even use moving averages to determine the support or resistance level of an investment.
Resistance and support
Resistance and support are important technical trading concepts that market commentators often talk about. These two levels are essentially barriers or bounds for a security’s price. Resistance is the upward “limit” for the price and the support is the lower “limit”. When the price rises, the upward momentum tends to diminish when it reaches the resistance level. When the price drops, the decline will also slow down when it nears the support level.
Traders and investors use these two levels to help they predict future price range and decide when to invest or sell. While these two levels can be useful in making trade decisions, it’s important to know that these two levels are not fixed and often change after major price movements.
Know the risks
The high reward of investing in cryptocurrencies comes with high risks. The prices of cryptocurrencies are extremely volatile and unpredictable. For example, after reaching nearly $20,000 in 2017, Bitcoin price dropped to $3,500 near the end of 2018. Any investors interested in putting their money into cryptocurrencies must understand the risks they are taking before investing.
Cryptocurrency volatility
In the investment universe, stocks were previously considered some of the riskiest investments. Yet, compared to Bitcoins, stocks can even seem mellow.
We calculated the daily price change for Bitcoin and the S&P 500 index from January 2014 to September 2019. While the highest daily rise in value is 5% for S&P, it is 25% for Bitcoins. Additionally, the largest daily drop for Bitcoin is 21% while it is only 4% for the S&P.
| Max | Min | Average | Median | |
| S&P | 4.96% | -4.10% | 0.04% | 0.05% |
| Bitcoin | 25.19% | -21.63% | 0.20% | 0.18% |
The histogram chart below further shows the high volatility of Bitcoin investment. Bitcoin has a much wider range of daily fluctuations than the S&P. Additionally, based on the frequency, it is more likely for Bitcoin to experience large price movements than the S&P.
Compared to equities, Bitcoins are much more volatile. A 21% daily price drop can significantly reduce your return and even damage your savings. Panic selling can lead to unnecessary losses and a lot of headaches.
Is cryptocurrency investing suitable to you?
Smart investors also know their own risk appetites. Some people are highly risk-averse. They lose sleep when their investment is not performing well. They get overwhelmed and sell their investments out of panic. Cryptocurrency investment is not a good option for these investors. In general, cryptocurrencies are only suitable for investors with high risk-tolerance.
Storing your crypto investment
Unlike traditional investments, cryptocurrency ownership doesn’t have to be recorded or managed by a central authority. Your investment is stored in a wallet that contains information that will allow you to use the money. There are two types of wallets you can use, each with its own merits.
Hot wallet
Hot wallet storage is connected to the internet. Most online cryptocurrency exchanges are considered hot wallets. Internet connectivity makes transactions easier. You can log in quickly and manage your investments online. At the same time, if your account and password are hacked, you will lose your investment. Additionally, hot wallet storage typically requires registration and ID verification that reduce user privacy.
Cold wallet
In contrast, cold wallet storage does not connect to the internet. Instead, your public and private keys are kept on a USB drive or even a piece of paper. These wallets are more secure because no one can access this information remotely. However, cold wallets are cumbersome to use for regular transactions. Just imagine typing the following private key every time you sell your crypto investment.
E9873D79C6D87DC0FB6A5778633389F4453213303DA61F20BD67FC233AA33262
Cold wallets are more private than hot wallets because the information is not managed by an exchange. However, if you lose the USB drive or hardware wallet, your investment is also lost forever.
Conclusion
Investing in cryptocurrency can be a great way to future-proof and diversify your portfolio. With large returns, come bigger risks. It is important to approach crypto investments with caution. The more you can learn about a cryptocurrency’s function, trading pattern, and risks, the more likely you will benefit from the digital gold-rush!
