Cryptocurrencies are in everybody’s head these days. It’s hype, it’s cool, it’s sexy, but is it really profitable? There is no single day without news about a new token, or a new ICO, or a new cryptocurrency-backed fintech startup, but how many of these are really profitable? It’s all fun and games, but at the end of the day, we all have to put bread on the table.
So, how do we invest in cryptocurrency in a profitable way? What is the best time to enter the market?
Know Your Tools
Before getting to the actual tips, I beg you to stop for a while and get all our tools clear. Every craft has its tools and investing is, at the core, just an another craft, one that can be hugely profitable, if done right. The most basic 3 tools that you can use are:
- Liquid capital
- Asset portfolio
- Information channels
Liquid capital is the total available amount you can invest in a given period of time. I strongly suggest you to create a medium-term pattern, like breaking down the amount of money you have for cryptocurrency for at least 6, 12 or 18 months. Set a monthly maximum and do your best to stick to it. Don’t go over, don’t stay under. Keep it liquid (now you know why it’s called liquid, right?)
Asset portfolio is the collection of cryptocurrency assets where you’re investing in. Although it’s “measured” in money, just like the liquid capital, it’s a very different kind of beast. Assets are by definition not liquid. They all have a maturation period, that you should stick with, as much as possible. In other words, assets are where you “hold”. That money is blocked, it shouldn’t move, unless there really is actually a bankruptcy or its equivalent.
Information sources are your news channels. It includes price feeds, markets, news sites. Especially when it comes to news sites, be very careful who do you believe. Do they have any affiliation? (hint: most of the time, they do). Are they disclosing this affiliation? How biased are they and towards which market actors? As for the price sources, please be sure you use at least 2-3 sources, not only for the validity of information but also for potential arbitrage opportunities.
Now, let’s see how it can be done.
1. Amount of liquid capital (How big my position should be?)
The most important hint about investing is, as dumb as it may seem, the total amount of liquid capital that you have. In an ideal world, you should deduct all your monthly and daily expenses, all your savings and pension schemes, and after that, decide how much of what is remaining is going to go to cryptocurrencies. Investing on a “whim”, or, even worse, investing money that you don’t have (like trading on margin, for instance) is a very risky game. It may go well, and when it goes like this everybody is a happy camper, but when it goes bad, it goes really bad.
So, first, decide beforehand how much are you going to put in this game.
2. Does the token solve a real problem?
The second factor in your decision should be the general usability of the token. Because of the nature of cryptocurrencies, with the software being open source most of the time, there are literally hundreds of copycat tokens (or “colored” coins) with little or no technological improvement compared to the original codebase. So make a lucid assessment, after you discarded all the marketing mumbo-jumbo and see if there is something useful beyond that. Is the coin helping with privacy, like Monero or ZCash? Is the coin helping to build a decentralized storing network, like Filecoin or Storj? (Please be advised these are just examples and by no means, they don’t represent investment suggestions).
3. Maturation time (How long until I exit my position?)
Remember what we talked about assets? Well, all these coins should have a maturation period. Meaning you have a buying period, a holding period and then a selling, or liquidation period. Try to understand in advance when that maturation period is, because you will have all your liquidities blocked until that time comes (or at least you should strive as much as you can towards maintaining that kind of discipline). Most of the coins have information about the total supply, the total generation time, inflation or deflation structure. Based on this, you should be able to at least make an educated guess as to when the demand for specific coins should grow consistently and set your maturation time accordingly.
4. Rumors versus News
All markets are manipulated and cryptocurrencies are probably even more subject to these practices (because they are still unregulated, they are at the very beginning, because, because, because…). At this specific moment, rumors have a tendency to be negative, so they usually drive the price down. When the actual news comes out, it’s most of the time, less worrying, so the price goes back up. This is a little bit counterintuitive to the “traditional” market behavior, where you have to buy the rumor (which announces a potential increase in the value of an asset) and sell the news (which validates the rumor, so more potential buyers will be on the market).
There is a very, very thin line here and you should really make your own due diligence because each market and even each token reacts differently to this rumors-news biome. But whenever that thing happens, it almost always creates a lot of liquidity in the market, hence, this is a good moment to take some profits.
5. Bottoms and Tops
I left this at the end because it’s a bit technical, but it does apply to cryptocurrencies as well. In short, you should buy the bottoms, when the tokens are cheap, and sell the tops, when the price will start its descent. The problem is how to identify a real bottom and a real top. I wish there would have been some foolproof way to do this, but unfortunately, it isn’t. The market will always go where the market wants to go and not in the direction of our projected “top” or “bottom”.
But with enough discipline, patience and market knowledge, you will start at least to “feel” some patterns.
Disclaimer: investing in cryptocurrencies is very risky. The material presented in this article doesn’t contain trading advice and the author can’t be made liable for any investment you do. Please make your due diligence before investing and never invest more than you can afford to lose.