If you want to invest in cryptocurrency, you might be tempted to follow colorful influencers on YouTube, TikTok or Twitter who promise huge overnight profits. Unfortunately, cryptocurrencies and life in general are not that simple. There are no shortcuts to success and there is a real risk of losing your investment. However, you can give yourself a better chance of success and keep your sanity by taking a sensible, realistic and patient approach, which can be summed up in these five tips for investing in cryptocurrencies.
DYOR and don’t invest what you can’t afford to lose
We should start together with two key cryptocurrency investing tips: do your research and don’t invest what you can’t afford to lose. These cannot be underestimated especially as this is being released as the market moves sideways and threatens to turn from bullish to bearish.
If you selectively focus on specific coins and recent price history, you can easily convince yourself that investing in cryptocurrencies is as easy as putting a fish in a barrel. You may also be tempted to take random tips with borrowed money or use other assets as collateral to get in the game in the short term. Don’t do any of these things.
Cryptocurrencies are highly volatile (see our specific advice below) and while some of the established coins have been profitable over the long term, past returns are no guarantee of future success. Many coins that rallied during the 2017 bull market sank without a trace.
Do your research on any cryptocurrency you are considering investing in. If you can’t explain what a project does to a child, then you don’t understand it yourself. A good place to start is by researching fundamental analysis and reading reputable crypto books or listening to podcasts.
Don’t go into debt expecting short-term gains – you’re playing with fire. It only takes one piece of bad news to change sentiment overnight, which can lead to months, if not years, of price declines. This process becomes exaggerated if you invest in less established projects or use more speculative techniques (such as DEFI or leverage).
When the inherent risk is this high, you should only invest money you are willing to lose. This means taking into account the money that is left over after all of your existing and essential financial obligations have been fulfilled, i.e. discretionary income.
You may risk money you can’t afford to lose to FOMO, or feel like you’ve missed the boat; you are not. It’s still very early, and the mainstream interest in cryptocurrencies has just begun. Krypto rewards patience and caution. As a general rule, if doubling your proposed investment gives you nightmares, you’re overinvesting.
Understand the survival bias
It’s easy to think that cryptocurrencies are full of winners and prices will only go higher, especially during a bull market where optimism is high and buyers outnumber sellers. Media of all kinds, social and mainstream, focus on extreme success stories and dupe cryptocurrency investors into believing that anyone can do it.
The reality is that these are the jackpot winners of the cryptocurrency lottery and most cryptocurrency investors are making modest short-term gains during the recovery and significant losses during the recession.
The tendency to pay disproportionate attention to a few extreme successes and exclude everything else is known as survival bias. The best-known example of survival bias is the monkey typewriter thought experiment.
If you put enough monkeys in front of a typewriter (which we could turn into laptops for the 21st century), one of them would end up composing the works of Shakespeare. It’s just about the scale of mathematics.
The same goes for investing in cryptocurrencies. Of the millions of new investors who try different approaches and combine portfolios of thousands of coins added to the market, a small fraction will inevitably produce the investment equivalent of a monkey writing Othello.
That doesn’t mean they have special abilities, the same goes for our author monkey. Ask them to repeat the feat and they will almost certainly fail because it was just a fluke.
Too many new cryptocurrency investors miss out on this dynamic and trust YouTube essays or just random meme coins as inspiration for extreme anomalies.
Crypto is a roller coaster ride. Be ready
Strapping yourself in for a roller coaster ride is mentally preparing you for the extreme ups and downs you know are coming. You will experience extreme highs and low stomach cramps; the main difference is that you don’t know when they will arrive.
If you’re used to earning less than 1% in your bank savings account, it can feel like you’ve hacked the system when your cryptocurrency investment returns double-digit growth within 24 hours.
Volatility is rooted in cryptocurrency investing because the industry is still so immature. Extreme price movements are common and work both ways, in fact it is more violent on the way down hence the phrase “prices go up with the escalator and down with the elevator”. Remember, a 50% increase from €1 takes you to €1.50; A 50% reduction takes you from €1.50 to €0.75.
You experience this over short periods of time and extended market cycles known as Bull and Bear markets. But here are some examples
- In January 2021, the number one coin by market capitalization, Bitcoin, dropped by 10% in two hours
- In March 2020, Bitcoin fell 50% in two days due to the Covid pandemic
- In February 2021, News of Tesla’s Bitcoin Investment Soared 25% in Less Than 24 Hours
- On January 6, 2018, the price of Bitcoin was $14,572; by the end of the year it was down 79%.
- A year later, it’s up 72% after being 200% up in June 2019.
If you are not prepared for this volatility, your likely response is panic buying or selling, which in turn can lead to regrets and a chain reaction of new bad decisions.
Those feelings are intensified if you haven’t followed the first piece of advice on our list — don’t invest in what you can’t afford to lose — but help is at hand with our next cryptocurrency investing wisdom.
Out of sight out of mind
One of the best ways to deal with the inherent volatility of cryptocurrencies and your tendency to make hasty decisions in the face of short-term price swings is to simply avoid the temptation to step into cold storage.
That doesn’t mean that you send it to Antarctica, but that it uses some sort of crypto wallet that is offline by default. The default for Offline is cold; online is hot by default. Cold storage prioritizes safety over convenience, but it also has the added benefit of protecting you from yourself.
The most popular way to encrypt in cold storage is a hardware wallet, a small physical device that gives you complete control over your money. You can keep it in a safe place, out of sight and out of mind. This will help you weather the storms that often hit the cryptocurrency market and allow you to turn a profit when things improve.
While hardware wallets are optimized for security, you are fully responsible for your funds and secure access to your funds, otherwise known as seed. So do a lot of research before going cold storage, including keeping your semen safe, but it could turn out to be the wisest crypto decision you’ll ever make.
Average cost: Slow and steady cryptocurrency investments
All of the cryptocurrency investment advice thus far underscores the fact that cryptocurrencies are volatile and risky, subject to periodic price rises and falls, and established coins like Bitcoin and Ethereum have proven profitable over the long term. Even if you’ve done your research (as advised), deciding the best time to enter the market is still a potential minefield for a new investor.
Everyone wants to buy low and sell high, but unfortunately market movements are inherently unpredictable and in such circumstances the best advice is to take a slow and steady approach, such as dollar cost averaging.
Cost averaging simply divides your investment into equal, recurring amounts to arrive at an average price. This softens volatility and can be especially effective if you hold it during a bear market and the price recovers.
Cost averaging through a bear market lowers the average entry price and allows your stack to grow faster, which is then proportionately more valuable when the market returns to more positive sentiment. Cost averaging is wise, but it doesn’t guarantee you’ll make a profit, the same goes for other tips