(Disclaimer: Author holds investments in Bitcoin.)
The question that prospective crypto investors rightly ask themselves is how much to invest in the sector.
The burgeoning crypto universe is susceptible to market fluctuations, partly due to its relative infancy. As such, investors should always retain a cautious attitude toward their investments.
With this in mind, it’s important to consider several factors:
Decide which kind of cryptocurrency you’re interested in.
As important as it is to decide how much to invest in cryptocurrency, it is also necessary to be strategic in understanding the fundamentals of a digital asset, as this can play a major role in the level of risk involved.
Fundamental analyses are the best indicators for long-term investors, so you’ll need an understanding of how a coin or Initial Coin Offering (ICO) functions, its history and what it brings to the table before choosing to participate in its development.
It might be best to look at the purpose of the cryptocurrency you’re interested in, how long it has been in the market, its market capitalization and its underlying tech solutions. Cryptocurrencies that solve problems are less likely to fail than those that are essentially ICOs.
Also, the longer a cryptocurrency has been in the market, the more trusted it is.
Decide what type of investment you’re after.
Naturally, you’ll want to create a plan if you want to enter the crypto market. The question is whether your trades will be short-term or medium- to long-term endeavors. This is an important consideration that affects the amount of money you’ll place in your investments. If the plan is to trade regularly, then understanding market trends, the culture driving the markets and the mentality of investors is a step in the right direction.
If you want to go further, then studying up on market indicators, fundamental and technical analyses, incoming market-moving events, general tech news and developer announcements — among other things — is the next step to up your game.
Remember: crypto market statistics matter.
As I mentioned previously, gauging market behavior during different time periods is part of a well-ordered strategy. While this might be confusing to follow up on at times, market dynamics shouldn’t be overlooked — especially if you plan on trading in the short term. To make it simpler, streamline your cryptocurrency choice to the ones you prefer, look up their charts and try to spot trends via market indicators.
Find out whether the digital asset is widely accepted and trustworthy.
As in most markets, trust is crucial for prospective investors. In order for someone to put their money behind a cryptocurrency or ICO project, that person must, through some process of their own, conclude that they trust the idea enough to put their money behind it. In the crypto universe, one could predicate this process on three key factors about new technology billionaire philanthropist and entrepreneur Peter Thiel has discussed: a unique idea (that offers tangible solutions), incremental improvement (which requires a good development team), and the ability to coordinate complex ideas.
In reality, these three points are the best indicators a long-term investor can consider in regard to cryptocurrencies.
In a talk at the Economic Club of New York in March, Thiel analyzed the trustworthiness of cryptocurrencies by drawing parallels between Bitcoin and gold. Both are considered a store of value, are not backed by any government, have unclear inherent values and are immutable in different ways.
Take a look at the major crypto players so far.
In any field, learning from the knowledge of predecessors can never hurt, but it can help. Cryptocurrency is no exception. In fact, this move might be more important due to the market’s volatility, as a small mistake could cost a fortune or your entire holdings.
The most common saying by crypto investors and finance experts is that you should only invest money you are willing to lose. Put into perspective, this translates into a low percentage of your net worth. The question is: Do they really do as they say? Crypto millionaire Erik Finman, for instance, invested $1,000 in cryptocurrency when he was 12 years old. He had very little money, yet he went for a high-risk,-high-reward strategy and earned millions in the process.
At one point, Jeremy Gardener invested most of his stock holdings in crypto investments and has since become a millionaire.
At the end of the day, these individuals took huge leaps by investing in cryptocurrency. Even so, the important thing about their investments is that they were willing to lose the money.
Invest the right amount of money.
The rule of thumb that you should “only invest what you are willing to lose” is nigh on impeccable. Think about it this way: If you woke up one morning with your investment in a shambles, would it make you unable to pay your bills the next month? If so, you’re investing too much. Of course, losing money will always hurt. But if you invest properly, it won’t be a devastating event if the worst comes to pass.
I believe investors should always ensure that they maintain 95% of their investments in a well-diversified portfolio across different asset classes, sectors and geographical regions. This helps position investors to mitigate risks and take advantage of opportunities as they arise.
Personally, I invest around 5% of my portfolio in cryptocurrencies because, like a growing number of investors, I believe that there is no longer doubt that cryptocurrencies in some form are the future of money.