Updated: Jul 16, 2019
Let me paint you a scenario: You have just gotten paid, something you have longed for the last couple of days as you have seen some of your favourite cryptos rising in price. You buy and, seemingly, the moment your order goes through... Boom! The price crashes into oblivion.
Maybe I was a bit overdramatic, but you get the point. This is common for a lot of people in this space. But how do you avoid this?
Well, I placed some common pitfalls in this scenario to start you off with some easy tips:
1. "Be fearful when others are greedy, and greedy when others are fearful" - Warren Buffett.
You have probably heard this before. Don't invest because you see prices going up, and similarly don't sell because prices are going down! Often times, buying in the red and selling in the green is the smartest choice. Research and perform your due diligence to determine a fair price for what you are buying, buy when it is under that price point and sell when it is at or above that price point.
2. Never have "favourites". This is a big problem in the crypto space. If you have favourites you are investing based on emotions. If you want to be a successful investor you must be emotionless towards assets, you buy the ones which are furthest below your price point and sell those which are furthest above.
3. Don't find patterns where there are none. Think logically. Why would the asset you are investing in decrease in value as soon as you buy? It would not. Humans are built to find patterns everywhere, and that's what we do. However, acting on these patterns often gives horrible results. Learn how your brain works and control it. If you control your brain you can start controlling what happens around you, including your investments.
I must admit that, although I describe the three above points as simple, they are not. But, they can certainly be achieved by anyone. First of all, determining a fair price for an asset can be hard, and it is almost impossible when it comes to most cryptos. The reason being that, with many cryptos, there is no true underlying tangible value. With bitcoin, monero and other cryptocurrencies for example, it's value solely rests on how many will use it as payment, which is very hard to estimate.
Furthermore, the cryptomarket is one of the newest asset markets on the planet. When studying what investments strategies work with cryptos we can only go as far back as 2009. That's 10 years, compared to the stock markets 100s of years and commodities 1000s of years.
Simply put, it is very difficult to determine fair price in cryptos because of the lack of information, which is why you see such quick and big changes in the price of many cryptos. This market is more unpredictable and thus offers higher risk. But, as they say; with high risk, comes the possibility of high rewards. You just need to know how to make the right investments.
First of all you need to realise that not all of your investments will be winners, that's impossible to expect. What if the CEO/Lead Developer gets hit by a car and dies? What if the office building collapses? There are things that are out of your control. This problem can however easily be solved by a simple trick: Diversification.
By diversifying your portfolio it does not matter if some of your investments turn out to be losers, you just have to rely on averages. As long as your average investment decision is good, and the average good is greater than the average bad, you will make a profit. Diversification is the basis of a good portfolio as it removes the risk of mistakes, which everyone makes. It changes what is needed of you from always making good decisions to just having to make good decisions on average. Diversification is also one of the only proven ways of increasing expected returns while also decreasing risk. This was shown by Harry Markowitz who earned the nobel prize for the discovery. I ahve also written an more in depth article on diversification here: thedecrypter.com
So, by diversifying your portfolio, both between different cryptos but also between different assets such as stocks, cash, commodities, real estate, loans etc., you already have a proven edge on the market, with higher returns and lower risk. Also, you can now rely on your average decisions instead of your single decisions. But how do you get your average decision regarding crypto investments to be as good as possible? It is here where the valuing of cryptos comes in. Let me teach you how we do it with three simple steps, the triple D's.
When it comes to finding potential crypto investments to research further we see forums as a good start. Look through different sources (Youtube, Reddit and The Decrypter of course) for what is mentioned there, do some basic research on those cryptos that you find interesting and try to find competitors trying to solve the same problem. This will give you a wide variety of interesting cryptos solving different problems. Choose many different niches and industries and many different cryptos within each niche or industry.
Another interesting way of finding potential investments amongst all cryptos is by going to coinmarketcap, looking at all cryptos there (not just the standard top 100) and sorting by biggest 24h price change (both loss and gain), and simply looking for cryptos with interesting names or logos. This might sound a bit trivial and maybe even stupid, and honestly, most times you will end up with shitcoins this way. But this is a very good way of finding coins that are under the radar, and those few good coins you do find, can often be potential multibaggers.
2. Due diligence:
Now you have many different cryptos that you have done some minor initial research on and you find interesting, now comes the time to do the real research. Check each crypto thoroughly for the following things:
Webpage: If you cannot make a good webpage you surely cannot make a good crypto, so look at a cryptos web page and ask: Is it professional? Does it have a nice design? Also look for the most important points about the crypto, which is often presented on the webpage.
Whitepaper: Details, details, details... Always read the whitepaper. This alone will put you leagues ahead of most crypto investors. Look for how the organisation/crypto is run, is it a company, a one-man operation, a open source project, a charity, community etc.? What is the problem which will be solved by this crypto and how are they solving it. Also, never forget to look for what purpose the crypto serves in their system; why do they need a token/coin to accomplish what they want to accomplish? If this is not clear, it does not matter how good the project sounds because you are not investing in the project, you are simply buying a crypto. Thus, if the crypto is just a means for the organisation to fund their project and does not have any use, the crypto does not have any value and will be a bad investment.
Roadmap: The roadmap shows you what will be achieved in the future. Just the simple fact that there is a roadmap shows that they plan ahead. Look for if they have achieved their previous goals and if it looks like they are setting goals with the expectation to work hard on the project or if they plan to take 1 year just to start a twitter account. But, most importantly look for their long-term vision.
Team: It is the team behind the crypto that will develop and market the crypto. Ideally you want each member to be experienced and experts at what they do but also for each member to have a diverse skill set.
Google: Even if everything above seems good, remember that that is exactly what they want you to believe. The above sources are all biased as they are written by a group of people that want you to buy their crypto. That is why you must always google to check if the team really are who they say they are, if the code has any security issues and so on. Look for what other people say, but know that there are many paid shills.
Now you have sorted out the bad ones and have a diversified bunch of cryptos. So, the final steps before you press the buy button, ask yourself the following questions:
Does this crypto provide any value to me?
Would you use this crypto, or are you buying just because you think that someone else will buy it at a higher price?
Only buy if you plan to hold because of passive income (like staking or profit-sharing), or if its a crypto that you actually want to use.
Would I consider the current price as fair for the value I am getting?
Maybe you want to "use" a gold-crusted chocolate dessert from a three-starred michelin restaurant, but that does not mean that you should buy it. You must evaluate if the price is right. Ponder what value you are getting out of the crypto and try to put it in dollar terms, and compare it to the price it currently trades at. This is quite easy for cryptos providing passive income, for example, if your yearly return will be above 5% just from staking or profit sharing it would seem to be quite a good price.
If you buy a crypto that provides value to you at the price you buy it at you have a fail-proof investment. If it provides value to you at the current price it will probably provide value to others at the current price, meaning that others will buy which will make the price increase. And even if it turns out that no one buys it, at least you got value out of it.
There is a complication to this, though. Maybe the project dies or turns out to be a scam and the value you thought you would get out of the crypto never becomes reality. This can however, mostly, be avoided with proper due-diligence and the potential damage can be greatly reduced with a diversified portfolio.
So, to summarise. Be logical and emotionless when it comes to investing. Do not buy because of the latest price movements, invest on fundamentals! Diversify your portfolio, the more you have, the better, as long as you can keep up with your investments. And follow the triple D's!
I can not guarantee great returns but i can guarantee that, if you follow these tips, you will have higher chances of long-term financial gains, get more value out of your crypto-investments and you will lessen financial risk and sleep better at night.
In future posts we will tell you more about the cryptos we found and invested in using this method. Subscribe to our newsletter to be the first to know!
/Alex - The Decrypter.
Note: Invest at your own risk and always make sure to research your investments thoroughly.