Digital currencies arrived about a decade ago. Many investors didn’t give digital currencies the chance to survive. Much emphasis is now on cryptocurrencies partly because of the exponential rise of Bitcoin and Ethereum. Many use cases of cryptocurrencies in finance, art, gaming, and the cloud storage industry, leading to regular coverage from media like BBC, CNN, Forbes, and Entrepreneur. Many investors are interested in the opportunities in cryptocurrencies, with institutional investors joining the retail investor’s wagon since 2020. As there are many opportunities, there are challenges too, with many projects failing to meet their hype. In this piece, you’ll learn what it takes to be a successful investor in the highly volatile and evolving crypto market.
Trader or investor dilemma:
Retail investors at large fail to understand the difference between trading and investing, they keep losing money, believing that frequent buying and selling of popular cryptocurrencies is actual investing. It’s important to understand that investing involves buying and holding a set of crypto projects for years based on fundamental analysis and diversification visa-viz trading which involves frequent (daily) buying and selling of a few Cryptos based on short-term trend analysis.
Frequent buying and selling or trading is done by large institutional players with the primary objective of creating liquidity (enable quick buying and selling of assets with negligible price difference) on the exchanges, these institutional players participate with different sets of objectives, resources, and tools. However, most retail investors get carried away by social media frenzy driven market waves and enter the markets with misplaced objectives, inferior resources and outdated tools which in-turn drifts away a retail investor from his core objective of building consistent long-term wealth.
On the other side investing is a buy and hold strategy for the long term, where the intent is to accumulate long-term wealth via analysis of health and fair value of multiple crypto projects and spreading investment risk through diversification. Therefore, understanding the difference between trading and investing will help individual market participants become wiser and avoid losses from the word go.
Emotions decide you win or lose:
Controlling emotions is one of the fundamentals of cryptocurrency investing. There are times that a coin can lose more than 50% of its value within a few months. Cryptocurrency experts often say that investing in cryptocurrencies is not meant for the weak hands because they will likely sell before the market starts moving to favorable positions.
Let's take Bitcoin, as our case study. Bitcoin moved to an all-time high of $20,000 in December 2017. It was a great time when most investors started seeing the benefits of investing in Bitcoin because the price had gone up 20X since the beginning of the year. Most investors started buying at $20,000, but unfortunately, the price started dipping, reaching $3,000. By this time, most investors who had entered at $20,000 sold their coins in panic to the strongest hands in the game at less than their cost price.
The strongest hands were rewarded in the long term because Bitcoin broke many all-time highs until it went past $60,000 in March 2021, three times more than the value of Bitcoin in late 2020. Instead of frequently jumping from one coin to another and becoming frustrated, one should look at the long-term perspective of those coins. Only the most patient investors are often rewarded in the cryptocurrency game.
Heavy reliance on technical analysis:
Though technical analysis may occasionally give some direction for the short term they are hardly accurate and reliable. Technical analysis is as good as judging a book by its cover. No trader has ever made a fortune just by depending on technical analysis, it’s critical to understand the past, present, and future of the crypto projects beyond the price and volume metrics.
Ignoring fundamental analysis:
You must have heard someone who says that cryptocurrency is a scam, it may be because they have invested in some coins which ended up being scams, or owners of the projects have abandoned the project. Many people just invest in “to the moon projects'' without doing proper research. Investors need to focus on white papers, founder credibility, token economics, use cases, listing on top exchanges of projects in focus. A decent amount of data related to fundamental analysis can be found on websites like lunar crush, Into the Block, Messari, Glassnode, etc.
Lack of diversification:
Most cryptocurrency investors blindly follow their unverified influencers while ignoring the real performers buried under the market noise. Investing in a basket of diversified projects after doing fundamental research will enable investors to hedge against losses. You might do all your research, and a project still fails, but when you have invested in other projects, you can hedge against the loss.
Diversify your investments:
Invest in crypto projects from at least 5-7 sectors that you understand well. When you diversify, you don’t need to buy all the coins available in the market. You can buy a set of promising coins, say, 7-15 projects to achieve optimum diversification. Check out KoinBasket to instantly pick diversified crypto portfolios built around themes and ideas that a common investor understands and believes in.
Investing in cryptocurrency is rewarding if investors can be patient with their investments, follow all the fundamental analysis steps and diversify their investment to hedge against losses. You can become a great crypto investor if you avoid the mistakes that most new investors make.