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Who is this article for?
We wrote this article for the person who is interested in dipping his or her toe into the cryptocurrency water but wants to ensure that his or her whole leg is not consumed by a pool of sharks! And we say that because the crypto market is full of sharks, hence why we believe this article is going to be valuable for the novice investor. So how do we ensure our toe is safe?
Cryptocurrency market in its infancy
As an ex stockbroker I know plenty of ways to obtain independent research on what stocks to buy, hold or sell. Research is written by highly experienced and qualified analysts employed by investment banks and brokerages, and is available online and in various investment publications.
But the same resources are not available to the cryptocurrency market participant. It is pretty obvious to understand why. The market is relatively new. Bitcoin (BTC) was only invented in 2008. Rival cryptocurrencies such as Litecoin began to emerge in 2011. Ether, the second-largest coin by market cap, wasn’t launched until 2015.
The launch of the Ethereum platform (of which ether is the native currency) was the start of the real action. The market really is still in its infancy. But the crypto market is unlike any other. It moves at lightning speed. It has been described as the wild west of investing. We will go a stage further and describe it as the wild wild west of investing! There are now over 6,000 cryptocurrencies trading in the wild wild west. The question is how do you go about picking one?
How do I invest in the cryptocurrency market?
I really don’t like this next phrase but I am afraid it applies to the above question, ‘It all depends…’
It all depends on what your risk tolerance is. Are you in the business of speculation? I.e. to make a quick buck and then move onto the next opportunity or, are you in the business of investing? I.e. you are a long term believer in cryptocurrency and want to hold one or more coins because you believe they will increase in value in the long term (called a Hodler in the crypto world).
Let’s deal with the latter investor first — the long term investor.
Here the situation is much more straightforward as regards selecting coin/s which offer the best value with less risk.
Let’s examine the words ‘less risk’ next.
Risk and cryptocurrencies
They say that cryptocurrencies are not correlated with the stock market and therefore this is a great reason for investing when we are facing volatility or a bear market. However, that hasn’t proven the case recently. They also say it won’t last, but don’t believe it! If you are investing to diversify your portfolio and reduce risk — think again.
What are the risks of investing in cryptocurrencies? Let’s use BTC as the example here as this is by far the biggest coin by market cap and as a result less risky than the other ‘altcoins’, assuming you are looking for a medium to low-risk investment (although you could never describe BTC as low risk).
- Price volatility — obvious right? BTC is far more volatile than any of the S&P constituents. However some limited research has concluded that if you use ‘risk adjusted returns’ then BTC is a superior investment than both gold and the S&P 500 (in one piece of research BTC scored 1.97, gold 1.06 and the S&P 500, 0.25). The fact is do you really want to experience this level of volatility? Can you sleep at night when your investments are up and down like the mood swings of a demented girlfriend (or boyfriend)? If the answer is no then cryptocurrency is not for you!
This is a measurement to allow you to compare investments which have different risks and returns. It allows you to adjust the risk, return and volatility on each investment and compare it with other investments to establish which offers the superior investment opportunity.
2. Choosing the right place to buy your coins — Select one of the regulated exchanges — not one with no domicile and was only set up last week.
3. Storing your coin — Most people store their coins with the exchange they buy through. It is nice and simple. However it does open themselves up to the risk of these exchanges being hacked. And despite what they tell you — the majority of exchanges have been hacked at one time or another. So on that basis you should pick an exchange that has insurance and is regulated. A big hack could lead to the closure of an exchange. The other solution is you store you newly acquired coins yourself. But before you rush into this, take some time to consider your options. Will you store your coins on a USB? And if so where will you hide it, together with the piece of paper with your password, so you won’t accidentally throw it away? Estimates are that 20% of BTC are lost forever because people lose stuff! This is a serious and often overlooked consideration.
‘Cryptocurrencies that you purchase on Robinhood Crypto are stored in a mix of cold (offline) storage and hot (online) storage. The majority of your coins are held in cold storage…
We also carry crime insurance that protects a portion of the assets held across our storage systems against losses from theft…’
If you are a long term investor we would suggest this isn’t the best way to purchase your crypto but it is a hassle free way. Unfortunately hassle free can lead to problems later….
Let us dig a little deeper into what affects the price volatility of cryptocurrency investments. Reasons could include:
- Government regulation or intervention
- Economic factors, both global and domestic
- Software bug/s
- Team ran off with the money — turned out it was a Ponzi scheme
- Competition
- Poor execution of the idea
- Slow or no adoption
Adopting a risk averse investment strategy
Taking into account the above risk factors the best strategy, if you are looking to minimize your risk exposure to the cryptocurrency market, is to invest in one or both of two coins, BTC and ETH.
The majority of the value in the market are in these two coins — representing 71% of the total value in the entire cryptocurrency market. 59% in BTC and 12% in Ether. The total market cap of all listed coins stands at $361bn and the top 5 represents 80% of this. The top 10, 86%. The so-called blue chip coins are in the top five. Although there are two we would dismiss from the investment equation, subject to your own research of course, XRP and Tether. These both have their issues, as an investor with a long term investment goal, steer clear from anything with issues. Some ‘experts’ believe you should invest at least 50% of the funds you have allocated to your cryptocurrency investments into BTC and the remainder should be spread between two or three other top ten coins.
This takes us back to the research resources available…
There is an abundance of independent and non independent information available on the top ten coins. There is one big caveat however before we can move on.
Unlike the highly regulated stock market there is a huge amount of ramping going on in the crypto market. You will see articles expounding the virtues of BTC and how it is expected to reach $100,000, We have even seen predictions of over $1m. But if you are not blinded by such exuberance you will also see through the mist and notice the bears in action, predicting a major correction to BTC, some even saying it is worthless. By reading a mixture of views you should be able to form your own opinion. But form your own opinion you must, there are too many vested interests to be guided by a biased post or ‘expert’.
Where do you find information on the top ten coins?
There are no independent brokerages providing unbiased research. Not yet anyway. This could all change tomorrow. However the message is in order to invest in the crypto market you have to get your hands dirty. You have to do your own leg work, that means your own research. That is the only way I am afraid. If leg work is not your thing then this market probably isn’t for you.
But let’s assume for now, you don’t mind going that extra mile to identify a ‘solid’ investment opportunity. There are a few useful resources which we have outlined below which will help you achieve that goal:
Social media platforms — a very valuable source of information. Twitter and Reddit are the main ones, there is another called Discord. Remember though these generally contain biased views from people with a vested interest. But you can get a feel for what is going on and there are some well respected people worth following. Again remember they also have their own vested interests too, so use them only to get a feel for the market rather than invest in their recommendations.
Crypto Rating Council (CRC) — There is a useful resource available called CRC. This is a great way to start your research on any coin. Their real purpose is to provide an opinion on whether certain coins represent a security or not. In order to do this, they rate them. BTC for instance is rated a 1, as in it is not considered a security, whilst XRP scores a 4, as in it is likely to be classified as a security.
See scoring below:
There are currently only 28 ratings published. That is a help for sure. You don’t want to be investing/speculating in anything that is rated above a 2. But these ratings still don’t tell you much about the projects/coins prospects and whether the coin represents a good buying opportunity or are a raging sell.
The reason why we didn’t include XRP as a blue chip coin is that the CRC rates it as a 4, which means it could be a security. By buying this coin you run the risk that at some point the coin could become worthless overnight.
Research websites — There are a few subscription websites that charge you a monthly fee for research on BTC and a few altcoins as well as general crypto market news. I would avoid these. You can gather the same information from a few of the other resources which I will provide you below.
Cryptocurrency news sites — There are a few worth subscribing too which send daily free newsletters, including:
Binance One of the leading cryptocurrency exchanges, provides a research resource on its website which covers a large number of projects including a deep dive. It however provides research on its own coin, BNB, and other vested interests, which kind of breaks all the rules of credibility right there. But it is a good place to look for general market analysis and background information on the majority of coins which you will have an interest in. This isn’t a recommendation to use Binance as your exchange of choice by the way. You will have to do your own research in this regard, suffice to say there are pros and cons.
Coin Market Cap — Another invaluable source for information is www.coinmarketcap.com. This provides the market price for most cryptocurrencies including information on volume and a summary on the project. The rule of thumb is, if the coin you are researching is not on this list DO NOT invest. That policy would have avoided taking losses in a few of the big cryptocurrency frauds such as OneCoin.
Medium — This is another great resource for information on the crypto market. There is a subscription to pay to access the plethora of articles but it is a small investment if you are serious about this market. www.medium.com.
A few others…
Check out Blockdata.tech although a subscription site it provides some valuable information on over 800 coins. Also, sign up to cryptoresearch.report for general information on the crypto market. In addition, have a look at CoinCodeCap for the development activity of the coin.
Finally, a valuable tool is the Crypto Fear & Greed Index — alternative.me. Basically the higher the greed factor the riskier the market.
The above should provide you with ample information to make that informed investment decision.
Purchasing outside the wild wild west…
There are other alternatives to purchasing/owning BTC or ETH directly. Grayscale is a fund you will probably have come across. They offer investors a chance to invest in both their BTC and ETH trusts. We don’t advise you buy shares in these trusts through the market as they are priced at a premium to the underlying coin, but this changes (the average premium is 39% on the BTC trust, and is now around 22%). Currently there is no regulated ETF (Exchange Traded Funds), however there are plenty of ETNs (Exchange Traded Notes). ETNs are not obligated to buy the underlying asset so you are running a risk buying these. There have been a few frauds in this area.
Now let’s look at something more risky…
High risk opportunities
How do we find the genuine buying opportunities — the gems, the diamonds in the rough?
This is where the big money is and it is also where you will lose your investment — 100 percent of it. But the dilemma is you have over 6,000 coins to choose from.
The problem is the research is scarce. You can find basic information on coins outside the top ten but the depth of information is substantially less. Your main source of information will be the projects website and their white paper (most projects produce a white paper that outlines their business plan. Take a look at the BTC white paper if you haven’t already).
So how do we identify this potential money-spinning cryptocurrency? Perhaps you read about an interesting sounding project in one of your newsletters or a few Tweets. Maybe you were inspired by your own thinking about what areas will benefit the most from the introduction of blockchain and then you conducted your own research and found a few interesting coins operating in that space. However you unearthed the investment doesn’t matter, what matters is whether it passes the rigorous checklist we have provided you below:
- Is the coin listed on www.coinmarketcap.com — if yes, check out the price, volume and basic information, then proceed to step 2. If not, look for another opportunity.
- Check out the projects/coins white paper. You should find that on the project’s website.
- The white paper is an important document, here are a few key areas to consider:
- Typos are a no go. If someone has produced a document littered with typos and grammatical errors then that is a very bad sign for the future.
- Is a firm of lawyers advising the company launching the coin? Check them out, are they reputable?
- Who are the advisors? Are they reputable? Feel free to call them up.
- Check out the team, Google their profiles and their LinkedIn profiles. Do they stack up? Have they had experience in this field? Have they run successful tech businesses before?
- Has the project received venture capital from respected VCs?
- Are they on schedule with their launch of their product/coin? If the product has missed crucial launch dates, this is a major warning sign.
- How many coins have the management awarded themselves? Too generous — avoid.
4. Check for online comments — essential!
5. Check to see if the CRC has rated the coin. If they haven’t, check online for general comments. If in doubt steer clear.
6. Check out the coin on deadcoins.com. This has a list of scam coins, dormant coins and other coins to avoid.
Below are some additional resources to help you reveal that potential hidden gem.
Coin List
www.coinlist.co is a valuable resource to check out forthcoming and current coin offerings. Called ICOs or IEOs. It is a valuable guide to the new issues and information on each of the projects including the projects white paper.
An ICO is an initial coin offering, similar to an IPO, this is an issue of new coins. These were all the rage a few years ago, but have died a death for three reasons, one, the market crashed, two, most of them were frauds and three, many of them were classed as securities. But there are a few still emerging that may offer buying opportunities for investors. But you must follow the checklist above to ensure that these are not scams or have no hope of ever achieving their objectives.
The hot area right now — DeFi
www.defipulse.com has a list of all the tokens in decentralized finance. This is the hottest area in cryptocurrency right now. Many participants are speculating on what are called governance tokens which relate to many of the DeFi apps. Before speculating in these tokens however take a read of our follow up article.
Short for decentralized finance, the most popular area of DeFi right now is the lending/borrowing platforms, where people deposit or lend cryptocurrency in exchange for a payment of interest. The capital is protected through a smart contract (i.e. a legal contract which releases your capital if certain conditions have been met, with no human interference). There are millions pouring into this area of DeFi right now both from VCs and private investors. Our next article will explore this exciting fast moving area in more detail. This field of DeFi is set to revolutionize the crypto market, and not just for the well informed!
What is your risk tolerance — and how much should you invest?
Finally, let’s review the area all financial advisors should ask you about before they start pitching you their latest investment strategy, but always manage to skim over the subject.
Do you have a high, medium, or low tolerance for risk? The answer to that will determine whether you should even be investing in the wild wild west.
According to Benjamin Graham (the author of The Intelligent Investor and a one time mentor to Warren Buffett) only a tiny proportion of investors can be classified as having a high tolerance to risk.
You fit into this category if you pass all these tests:
- Have set aside cash to support your family for at least one year.
- Will be investing steadily for at least twenty years to come.
- Survived the last bear market.
- Did not sell stocks during that bear market.
- Bought more stocks during that bear market.
- Anyone who panicked in the last bear market is going to panic in the next one.
There are other factors to take into account, including your age, the younger you are the more risk you can afford to take on. Your tax position. A pensioner for example is a low-income earner in need of income but needs a loss like a hole in the head. And your portfolio size. The overriding factor in any investment decision is your risk tolerance.
Let’s assume you can afford to take a punt in the cryptocurrency market based on the above criteria, how much do you invest?
There are a few rules with any non mainstream investment (ETFs and Index tracker funds are mainstream).
- Don’t ever touch your pension pot — many have and lived to regret it.
- Don’t remortgage the house! Sounds madness, but people do it.
- Only use money that you can afford to lose.
Taking the last point in my 3 point list — how much should you invest?
You should only invest a maximum of 5 percent of your portfolio outside your pension and main residence. And out of that 5 percent this should in turn be spread amongst other investment classes — at least 10.
This is the safest way to invest to safeguard your pension and your home. If you are a 23 years old high achiever with money to burn, by all means speculate, but the same rules apply. There are many many stories of people losing their shirts when speculating in high risk investments, from CFDs to cryptocurrency, from growth stocks to the latest overseas property hotspot! Caution is the way to go.
Takeaway
What can we take away from this gem of an article?
- Decide whether you are a long term investor or looking to make a quick killing.
- Whatever your strategy you must perform your own research bearing in mind the many inherent biases in the marketplace.
- Choose a regulated exchange and preferably store your own coins.
- Work out your storage strategy if you decide to hold your own coins.
- What is your risk tolerance? Never invest more than a proportion of 5 percent of your portfolio into a high-risk asset class of which this clearly is.
Financial advice
This article does not constitute financial advice in any way. This article should be treated as supplementary information to add to your existing knowledge base.
Next article
DeFi — The hottest area of cryptocurrency explained.
For news and alerts follow us on Twitter @fraudstamp
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