This is a 5-part beginner’s guide to investing in cryptocurrency: part 1 covers crypto fundamentals, part 2 how to buy your first cryptocurrency, part 3 is about buying altcoins, and this part 4 explores investment styles & strategies in crypto.
This post follows my usual disclaimer that none of my content should be used as legal, financial or medical advice. It’s for entertainment purposes only.
I’ve never been so thankful for losing money in my life.
In June 2016, 3.6 million ETH was drained in the now-infamous DAO hack, crashing ether’s price to 50% of its all time high.
Having just bought in during the hack, this was a formative experience for me. This is the fuckin’ wild west, I thought at the time. It inured me to the wild swings of crypto that would inevitably come.
It’s hard not to get emotional when you experience rises and drops of 50% in a day, which is not uncommon in cryptoland. But setting up personal rules and systems ahead of time can help you avoid the type of emotional investing that leads to losses. I’m looking at you FOMO, exuberance and impatience!
The stockmarket is a device for transferring money from the impatient to the patient. – Warren Buffett
Before diving into investing styles (jump link), I want to share my favorite investment philosophies which act as mental guardrails to help you stay objective (and sane) during dramatic market rises & dips.
High level crypto investing advice
Do not invest more than you can afford to lose.
This is now a cliche message for new crypto investors, but it’s important. It’s sad to hear new investors lose their life savings over a bad trade, or overcommit their funds to too-good-to-be-true scams.
If you’re new to crypto, invest a little – not a lot. It might be 1 month’s salary, 1% of your savings, or the maximum amount you’re willing to lose on a bet. Maybe it’s $100 just so you can get an extra $10 from Oz’s Coinbase referral ;)
Choose an amount of money you’d agonize over, and stop below there.
Play on house money.
As much as “hodl” is advocated as a strategy, there’s no shame in taking profits. Let’s say you made $500 on a $500 investment (100% gains!) For psychological peace of mind, some people will take out their original investment and play with their gains “on the house.”
Even if that remaining $500 dips down to half it’s value, you’d be more immune to panic selling.
It’s still early in the crypto game.
Everyone laments not having bought Bitcoin when it was pennies on the dollar, but that’s a fool’s hypothetical. Plenty of opportunities are coming out as the cryptocurrency market matures and finds its footing within the masses. And we’re still a long ways off from mass adoption.
As of February 2018, I still think it’s early. More regulation and infrastructure is on the way, which will bring in more institutional investors ($ from banks and companies). Not to mention the media increasingly treating crypto as another asset class alongside stocks and real estate.
Even if you missed out on BTC/ETH/NEO/INSERT SYMBOL, there will be other investment opportunities inside and outside of crypto.
Crypto investing styles & strategies
What if you don’t want to miss out on cryptocurrency as an asset class, but don’t want to spend a ton of time learning/managing crypto either?
And what if you become a crypto enthusiast who doesn’t mind turning cryptocurrency & blockchain into a full-time hobby?
That’s why I’m going to order the crypto investing styles from lowest to high involvement.
|Low involvement||Medium involvement||High involvement|
|? Trading style||Buy & hold, dollar cost averaging||Limit buys/sells, more consideration of entry & exit points. Some technical analysis||Active technical analysis|
|? Cognitive load||Easiest because most investing decisions are automated.||More effort involved in following crypto trends.||High cognitive load; frequent trading & consumption of crypto media.|
|? Exposure to altcoins||Low exposure, predominantly Bitcoin, Ethereum and whatever is easiest to buy with fiat money.||Increased exposure, e.g. top 20 altcoins on CoinMarketCap.com||High exposure to top 100+ altcoins, participation in initial coin offerings|
The higher the involvement, the more knowledge and cognitive load the investor has to deal with. The lower the involvement, the less hands-on active trading is required.
Low involvement: Buy & Hold
For those who want to get into crypto but not get lost in it, buy and hold is the easiest strategy. Set aside an amount you can afford to lose, buy whatever you’re interested in with fiat (usually Bitcoin or Ether), then forget about it.
Buy and hold also has a tax-benefit. For Americans, long term gains on assets held for 1 year+ are taxed at 20% max, versus short-term gains which are taxed at the ordinary rate (typically higher).
To reduce your risk even more, I recommend Dollar Cost Averaging (DCA). This means spreading your purchases over time, instead of all at once.
Using a $1200 example budget, one way to DCA is to buy in increments of $100 monthly over a 1 year period ($1200/12 = $100).
Imagine the stress of buying a cryptocurrency with your entire $1000 stash, then seeing it dip 50% one week later. DCA softens this scenario by spreading your risk over time; perhaps you buy an asset one month when it’s 30% down, and the next month when it’s 20% up.
Coinbase offers automated buying for a brainless DCA investing style (though it does come with transaction fees):
Low involvement investing pros & cons
- Pros: Least amount of effort involved, “set it and forget it” style = less cognitive load, save on taxes.
- Cons: No exposure to high risk / high reward altcoins (LINK).
Medium involvement: Light Trading, Increased Altcoin Exposure
Getting more involved in crypto typically means buying into more altcoins, e.g. the top 20 altcoins in market cap. This is usually done by opening up accounts on different exchanges, then selling your Bitcoin or Ether for an altcoin.
Just as “blue chip” stocks are considered more stable than their “small cap” counterparts, there are thousands of higher-risk-and-potentially-higher-reward cryptos outside of Bitcoin & Ethereum that you can buy.
Investing in altcoins demands more research; which coins should you pick that are undervalued? Which have legitimate products or solid teams? Sure, one can throw money at any “flavor of the week” altcoin, but it’s not a sustainable strategy as the crypto exuberance inevitably dies off and the wheat is separated from the chaff.
Part 3 of this series is a deep dive on altcoins and the exchanges to buy them.
Other than buy and hold, you can take the extra step of setting up limit buys and sells. This means setting an entry and/or exit price so that you can (ideally) buy low and sell high.
Let’s use an example with the fictional TacoCoin™, which is currently selling for $10 on the market. If the investor has a $100 budget, this is an illustration of a process she might follow:
- Purchase TacoCoin at current market value of $10 for a total of 10 TacoCoins.
- TacoCoin increases by 20% to $12. Investor now has $120 worth.
- Investor sells 10% of holdings (1 TacoCoin) to make a $12 profit (or 12% gain).
If the investor wanted to get more specific with her entry/exit points:
- Set a limit buy at 20% below market value of $8, for a total of 12.5 TacoCoins.
- Sets a limit sell of 2.5 TacoCoins (20% of holdings) @ $11
- Crosses fingers that steps 1 and 2 happen according to plan.
A number of variables are at play in this: the entry point, exit point, re-entry point, how much of your holdings to sell, etc.
This is a guessing game. How would you know how low to set a limit buy? What if Bitcoin never dips down to $4000 again…but what if it does? Conversely, you may feel the FOMO if you set a limit sell too low. (Only in crypto do you see an investor get upset with “only” 200% returns.)
At this point, some investors choose to learn technical analysis (“TA”), the study of market trends & charts to make trading decisions.
TA presents a higher learning curve and investment on the part of the investor. I’m of the philosophy that fundamentals are more important than technical analysis, and that technical analysis drives price when it acts a marketing device:
“Bitcoin just dropped to its lowest 20 day moving average…maybe it’s a good time to buy.”
(I’m also open to being completely wrong about technical analysis, as I’ve met many investors who claim it’s made them money).
Medium involvement investing pros & cons
- Pros: Potential to buy low / sell high, get exposure to more altcoins. Bring in a controlled system to
- Cons: Exposure to riskier altcoins. More upfront effort in setting up limit buys & sells, which may still underperform the buy & hold strategy. Frequent trading = higher taxes.
High involvement: ICOs, High Altcoin Exposure
If you’re very involved in crypto, you probably not only have exposure to the top 200 alt coins…but you’ve probably participated in at least one ICO, an initial coin offering (a la “IPO” in stocks).
ICOs can be complicated to get involved in, are subject to scams & hacks, and often sell out before you even have a chance to buy them.
Getting in on a quality ICO is like buying a raffle ticket. If listed on a popular exchange and performs well, an ICO coin could make an investor dramatic returns.
And lawd, there are a ton of ICOs coming out every week. Much due diligence is required to evaluate all these coin offerings.
Despite the effort, it may be fruitless. I was excited to pre-register for DADI’s crowdsale, logged in at 4AM Los Angeles for the sale event…then never got a chance to buy. My transaction was rejected as the ICO sold out in seconds.
Many investors stay away from ICOs due to their risky nature, and do perfectly fine never participating in one. But for the gamblers, the allure of getting in early on the next crypto that makes 10x, 20x, or even 100x the original investment is too strong.
Those who are even more involved than the aforementioned refer to themselves as crypto enthusiasts or crypto addicts.
They’re at the bleeding edge of crypto – daytrading, playing with questionable pyramid schemes, mining coins, and maybe even working in the blockchain industry.
These enthusiasts are usually experimental, technical types who want to try everything blockchain (the Kool Aid been DRANK!) and spend hours every day in crypto.
If you’re into it, follow your bliss. But for investors who go down this rabbit hole, there is one question to consider: What if I do just as well, or better, with a simple buy & hold strategy?
Monitoring and reacting to crypto prices is mentally taxing, and just like any activity involving money can get elevated akin to a full blown gambling addiction.
High involvement investing pros & cons
- Pros: Spot trends in the market, early adopters to potentially game-changing (and profitable) investments. Fun, for some.
- Cons: Highest risk exposure, prone to immense amount of time/effort/stress involved in dabbling across multiple crypto offerings. Can become a full-blown addiction that still may underperform buy & hold.
My “80/20” advice if you want maximum benefit with minimal effort is to go with the low involvement investing strategy: buy and hold, and automate your buying with dollar-cost-averaging.
For those who want to commit to a medium – high level of involvement, I put together something for you. It’s called Cryptosheet, which is a bigass list of crypto resources, included my personal coin picks and crypto tools that I use: