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Written By Johan .
Investing in cryptocurrencies has its own rules. Not knowing or following these rules can lead to big losses. It’s the same way humans created laws to dictate the rules of participating in society. Sure you might get away with some stuff by not following the law/rules, but eventually the law usually catches up to you.
Then there are sports. Every sport comes with its own set of rules. Not following the rules doesn’t necessarily mean jail time, but they can get you benched or eliminated from practicing it.
The same principle applies to investing in cryptocurrencies. There are rules. You don’t have to follow them, but the consequence of not following them is losing a lot of money. We can’t stress this enough. You will lose a lot if you don’t know what you’re doing.
That’s just the game.
Learn the rules or be prepared for a wild ride that will chew you up, spit you out, step on you, pick you up, and throws you in the garbage.
This space is filled with people who regret their decisions. So in this post we want to give you a list of things we learned over the years. Hopefully it will help you navigate this space better than most. Trust me, if investing was easy every investor would be a millionaire.
The reality is that it is hard. So preparation is key. Time to get you prepared for investing in cryptocurrencies.
1. Understanding the Volatility of Cryptocurrencies
1.1 Cryptocurrencies: A World of High Volatility
Before we start I just want to warn you that we will be using terms that are difficult if you’re new in the world of crypto. Unfortunately, that’s also part of the game. You have to learn the words being used in this space so you know what people are talking about.
However, we’ll try to simplify it as much as possible. So if you see a word you don’t understand, chances are that it will be explained shorty after.
Cryptocurrencies often change in price very quickly. Which we call volatile in the world of investing. This is because there aren't as many people buying and selling them compared to regular money markets. If you’ve been in the space for a while it’s not strange to see prices go up and down with plus or minus 50% in a day.
The liquidity refers to how easily a cryptocurrency can be bought or sold without affecting its price.
In the crypto market, if many people are buying and selling, transactions are quick and easy. If this is the case we would call it highly liquid.
Low liquidity, on the other hand, means fewer buyers and sellers, so trading can result in larger price swings.
Market capitalization, or market cap, is the total value of a cryptocurrency. You find it by multiplying the price of one coin by how many coins there are. So, if each coin is worth $5 and there are 1 million coins, the market cap is $5 million. Get it? Got it? Good! Let’s continue.
The way cryptocurrency prices go up and down a lot is not just because of what people think about the market. It's a basic part of how the crypto market works. Investors should know that this market is still new, and prices can change a lot even with small amounts of money moving in and out.
1.2 Understanding Volatility through Price Movements
In the crypto market, you can clearly see volatility when prices move up and down a lot.
Consider two scenarios: a cryptocurrency increasing in value from 1 to 2 dollars, and another jumping from 100 to 200 dollars.
Both scenarios represent a 100% increase, yet the capital required to drive such changes is vastly different.
In the first case, raising a cryptocurrency's price from 1 dollar to 2 dollars is a 100% increase, just like going from 100 to 200 dollars.
But, the key difference is that it takes a lot more money to make a 100% increase from 100 to 200 dollars than from 1 to 2 dollars.
This shows how the same percentage increase can mean different things in terms of the money needed.
Cryptocurrencies with a smaller total value can have their prices change a lot, even with small investments. This is different from traditional markets, like real estate or stocks, where you need a lot more money to make a big impact on prices.
1.3 Low Liquidity Amplifies Price Movements
Another aspect contributing to this volatility is liquidity. Cryptocurrencies, especially the new or not-so-famous ones, usually are not as easy to buy and sell as traditional things like stocks.
We already touched on this in the beginning of the article so we won’t go over it again.
1.4 Volatility as a Double-Edged Sword
For people who invest, the big changes in price can be both a chance to make money and a risk of losing money.
It's like understanding how a car works to drive it better. Understanding why prices go up and down, such as how many people are buying and selling and the overall worth of the currency, can help you make smarter decisions in crypto markets.
If you made it this far, you’re already becoming a better investor! Keep going.
Now, let's talk about two main ways to invest in crypto: looking at its fundamental value and studying its price patterns.
2. The Dual Nature of Crypto Investing: Fundamentals and Technicals
2.1 Beyond Basics: Mastering Both Fundamental and Technical Analysis
To invest well in cryptocurrencies, you need to understand two things: understanding both fundamental and technical aspects.
On the internet you’ll find a lot of articles about Fundamental versus Technical Analysis. That’s confusing because they are not in a competition against each other. The more nuanced take is Fundamental Analysis and Technical Analysis.
When you invest based on fundamentals, you look at what the cryptocurrency is about, who is behind it, and how much it could grow.
On the other hand, technical investing focuses on reading charts, recognizing patterns, and understanding market trends regardless of the asset's fundamentals. It's crucial to blend these approaches for a well-rounded investment strategy.
As a long term fundamental investor it took me way too long to realize the importance of technical analysis. If I could go back in time I would definitely invest more time into learning technical analysis first. As much as I didn’t believe it at first, I am now a firm believer in recognizing paterns in the chart.
Let's look at how understanding the perceived value and watching its price trends can help you invest better.
2.2 The Interplay of Fundamental and Technical Analysis
In cryptocurrency investing, it's really important to know both the basic of both fundamental and technical analysis. This is for several reasons:
Comprehensive Market Understanding: Fundamental analysis means checking the real worth of a cryptocurrency. It looks at the technology behind it, what it's used for, how skilled its creators are, and how much it might grow.
This helps investors see if a cryptocurrency will do well over time and how much it could increase in value. On the other side, technical analysis watches how prices move, the patterns they make, and how much is being bought and sold to guess where prices will go.
Using both ways, investors get a full picture of the market, which helps them make smarter choices.
Balancing Long-Term Vision with Short-Term Opportunities: Fundamental analysis is important for planning to invest for a long time. It helps you figure out which cryptocurrencies might grow steadily.
On the other hand, technical analysis is really useful for dealing with quick and long-term changes in the market. It lets investors take advantage of changes in prices. By being good at both, investors can mix their long-term plans with chances to make money in the short term.
Risk Mitigation: Cryptocurrency markets are often hard to predict. Using both fundamental and technical analysis in your investment plan can lower risks.
Fundamental analysis helps you avoid investing in cryptocurrencies that are just popular for a short time but don't have real value. Technical analysis, on the other hand, can tell you the best times to start or stop investing to prevent big losses when the market goes down or changes.
Adaptability in a Dynamic Market: The cryptocurrency market changes fast. Projects that used to be popular can become outdated quickly, and new technologies can change everything suddenly.
Using both fundamental and technical analysis helps investors adjust their plans to these changes. Fundamental analysis is good for spotting new technologies that could be successful. Technical analysis helps in figuring out how the market feels about these changes and when to invest based on that.
3. Learning from the Pros: The Path to Mastery
3.1 Finding a Mentor: Patience and Persistence
To get really good at investing in cryptocurrencies, it's like learning a sport. You need to learn from people who have been doing it for a long time. This is true for virtually anything you want to excel in.
Find people better than you so you can grow to and passed their level.
However, identifying a genuine expert is a skill in itself. It requires patience and a foundational understanding of what expertise in this field entails.
Before seeking a mentor, invest time in self-education to build a base of knowledge. This groundwork enables you to discern true expertise from mere claims of proficiency. So what are the skills you need to identify a genuine expert?
Know the Basics: You should understand cryptocurrency well to identify an expert. This part is tricky because you need an expert to understand it well. That’s why it’s important to learn the basics from many different sources so you can find a common truth.
Critical Analysis of Track Record: Look at what they've done in the past. Have they been successful in cryptocurrency projects? Do they make good predictions? It's important to tell if they're really skilled or just lucky sometimes.
Ability to Separate Facts from Opinions: A real expert uses data and clear analysis, not just opinions. They should explain their reasoning well and be open to different ideas.
Assessing Communication and Teaching Skills: They should be able to make complex ideas easy to understand and help you learn.
A Good Understanding of the Market: True experts know a lot about different parts of the crypto market, stay current with trends, understand how big events affect crypto, and know about new rules.
There’s 2 different types of experts I would place in this category. One type of expert is somebody that knows a lot about a little part of the entire crypto market. For example, somebody that knows a lot about DeFi or Real World Assets (RWA).
And another type of expert is somebody that knows enough about a lot of parts of the crypto market. They are amazing at spotting future trends and narratives.
Evaluating Their Network and Reputation: See what others say about them. Are they respected and recommended by others you yourself respect?
Realistic Approach and Risk Awareness: They should be honest about the risks and potential in crypto. They won't promise sure wins and will stress the importance of managing risks.
This approach helps ensure that individuals seeking mentorship can find advisors who not only have the necessary knowledge and experience but also the ability to impart wisdom effectively and realistically.
Now, let's talk about why it's important to think carefully and look at different opinions in crypto investing.
4. Healthy Skepticism: Diverse Perspectives in Crypto Investing
4.1 Embracing Diverse Opinions and Maintaining Skepticism
In crypto investing, it's important to question things and not believe everything you hear. This means not taking information at face value and being cautious about where and whom you get your information from.
You’ll hear many blockchain guru’s claiming to know exactly what’s going to happen. Unfortunately, most are just plain wrong, and some are the biggest scam artist in the space.
It's good to listen to many different opinions, not just the ones you already agree with. Hearing different views helps you get a clearer picture of the entire space, notice if you're being biased, and make better choices.
As you keep looking at different opinions and see how their predictions and ideas work out, you'll learn which sources you can trust more than others. This way, you don't just avoid false information, but you also get a better understanding of the tricky crypto market, which helps you make smarter investment decisions.
5. Back to the basics
Let’s jump back a little bit.Before you start investing in cryptocurrencies, you should understand the basic ideas behind them. This includes knowing:
how blockchain and DAG (Directed Acyclic Graph) technology works
the different types of cryptocurrencies and what they aim to solve
the difference between Layer 0, Layer 1 and Layer 2 blockchains
what a dApp (decentralized application) is, and many more things
the current limitations of blockchain technology
We already took a deep dive into Constellation network and explained how they’re solving these limitations. Be sure to check out that article if you want to be ahead of the curve.
Also, get to know the different kinds of cryptocurrencies like Bitcoin, Ethereum, and others, and learn what makes each one special and how they are used. Learn about cryptocurrency wallets, how to keep your digital money safe, and how to buy, sell, and trade cryptocurrencies.
Knowing these basic things gives you a good start for making smart choices when investing in the fast-changing and sometimes complicated world of cryptocurrencies.
One of these basics is trying to understand the blockchain trilemma and quinlemma.
6. Better safe than sorry, better secure than worry
As with any new industry there are a lot of scammers here. You should be very mindful of this reality especially since there is no way to get your money back once it leaves your wallet.
It's very important to keep your cryptocurrency investments safe because they are digital and often anonymous. It’s almost impossible to get your tokens back once you lose them.
Here are some best practices:
Use Strong and Unique Passwords: Always use complex, unique passwords for your cryptocurrency wallets and exchange accounts.
Enable Two-Factor Authentication (2FA): This adds an extra layer of security beyond just a password.
Use a Hardware Wallet: These physical devices store your cryptocurrency offline, making them less vulnerable to online hacking.
Keep Software Updated: Regularly update your wallet software and any related apps to ensure you have the latest security enhancements.
Beware of Phishing Scams: Be cautious about unsolicited emails or messages that ask for your credentials or private keys. Also make sure not to connect your wallet to every website. Some of them will drain your entire wallet.
Never Share Your Private Keys: Your private keys are the most critical piece of security - never share them with anyone. Your private keys are usually the 12 or 24 words you get when you create a new wallet. Guard those word, in that order, with your life.
Use Reputable Exchanges and Wallets: Stick to well-known, reputable cryptocurrency exchanges and wallet providers. We’ll probably make a post in the future with exchanges, DEXs and wallets we trust.
Regular (check your) Backups: Regularly backup your wallet, preferably in multiple secure locations.
Stay Informed: Keep up-to-date with the latest security threats in the cryptocurrency space. Besides security threats there is also the possibility of some of your coins switching networks. Switching too late can also lead in loss of cryptocurrencies.
Diversify Your Holdings: Don’t put all your investments in one wallet or on one exchange, as this can be a single point of failure.
Time to talk about how different countries have different rules for cryptocurrencies and why it's important to know them.
7. Understanding regulatory landscapes in crypto investing
Each country has different rules for cryptocurrencies, and these rules can change often. Countries like Japan, Singapore, Switzerland, and Estonia have clear rules that support using digital currencies safely and legally. But some countries have strict rules or even ban them because they're worried about financial risks and illegal activities.
If you're investing in cryptocurrencies, it's really important to know the rules in your country and in any other country where you plan to invest.
Since these rules can change quickly and affect the crypto market a lot, it's important to stay updated with the latest information.
8. Control your emotions
It's key to keep calm and not let your feelings take over when investing in cryptocurrencies, because their prices can change a lot. When prices drop quickly, you might feel scared and want to sell quickly, even if you lose money.
On the other hand, if prices go up fast, you might get too excited and confident, and miss signs that prices might drop soon.
Keeping your emotions in check helps you make wise, careful decisions instead of just quickly reacting to changes in prices. It's important to stick to your investment plan and not make decisions because you're scared or too eager. Also, remember that it's normal for the crypto market to have good and bad times.
Here are some books we recommend to learn more about your own emotions:
"Thinking, Fast and Slow" by Daniel Kahneman: This book delves into the dual systems of thought that drive our choices, including financial decisions, and how to manage these systems to make better decisions.
"Mastering the Market Cycle: Getting the Odds on Your Side" by Howard Marks: Offers insights into market cycles and the psychological aspects of investing.
"Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich" by Jason Zweig: This book looks at neuroeconomics and how our brains are wired when it comes to money and investing.
"Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude" by Mark Douglas: Focuses specifically on trading psychology and how to overcome emotional hurdles in investing.
9. If you want to go fast go alone…
But if you want to go far, go together. This is a famous African proverb about the importance of community. Sometimes it's okay to be on your own, but you can't do everything by yourself.
In the world of cryptocurrency, being in a community is like having travel companions on a journey. These groups offer lots of shared knowledge, tips, and updates about market trends, new tech, and rules changes.
Talking with other investors and people who love crypto lets you share and learn new ideas, strategies, and experiences. This is really helpful for both beginners and experienced investors.
Also, a good network can support you when the market is down, help you find good investment chances, and keep you safe from false information and scams. Being part of a community helps you understand the market better and make smarter investment choices.
Finding a good community is like finding a mentor. It's about connecting with people who can guide and help you.
10. Risk it for the biscuit
But don't risk everything. It's really important to be careful with your money when investing in cryptocurrencies because their prices can go up and down a lot. Only invest money you can afford to lose, and don't put all your money into cryptocurrencies.
Having a mix of different kinds of investments, like different cryptocurrencies, stocks, or bonds, can help lower your risk.
Also, having clear goals and limits, like setting a point where you'll sell to avoid big losses, is important. Keeping up with market trends and knowing what affects cryptocurrency prices is also key to managing your risk well.
High rewards might be tempting, but they also come with big risks. Handling these risks is important for a good investment plan.
People often ask how much they should invest in crypto. The best amount depends on your own situation, like your financial goals, how much risk you can handle, and your overall money situation.
A common tip from financial experts is to only put a small part of your investments in high-risk things like cryptocurrencies, maybe about 5% to 10%. This is for people who are interested in crypto but also want to keep their investments varied and balanced.
It's important to remember that this is a general guideline and not a one-size-fits-all answer; always consider your personal financial situation and risk tolerance before deciding on your investment strategy.
The general rule is invest what you can afford to lose. To that I would like to add: invest in what you know the best. Dropping money into real estate is just as dangerous if you don’t know what you’re doing.
Talking to a good financial advisor can help you get advice that fits your own needs and goals.
11. The end….for now
The last thing I want to make clear in this post is something a lot of people investing in cryptocurrency unfortunately never figure out. It’s easy to fall victim to this especially when a coin has made you a decent amount of money. But the number one rule to really win in this game is:
DON'T FALL IN LOVE WITH YOUR BAGS, BECAUSE THEY CERTAINLY DO NOT LOVE YOU BACK.
Get your money and use it to make more money. Then use that money to do good in your community.
There’s probably way more lessons we are forgetting and we might make a part 2 in the future. However, this list should give you a solid foundation before you decide to throw money in this space. Good luck on your journey!
investingblockchain guru
Johan .
