The promising years ahead for cryptocurrencies will likely arouse the appetite for both seasoned and new investors. Consequently, this will benefit the crypto market as a whole due to increased liquidity.
However, crypto investors should master some golden rules before investing in cryptocurrencies. Definitely, with a FOMO feeling that could sway the market as it did in 2017, judgment mistake could once again be many. To avoid making grave mistakes, we have prepared six golden rules of investing in cryptocurrency for you.
Rule 1: Start small, think big
The number one rule in any investor’s book is to reduce risk, and for a newbie, it would mean to learn the market basics before investing even one dollar. The truth is that the crypto market is very volatile: you can easily lose over half of your investment within a single day. Therefore, it is advisable not to give in to the market sentiments and start investing with small amounts and increase your investment as you learn.
You can’t lose more than what you invested; therefore, do not spend what you cannot afford to lose, and it will be all right, even on the worst day.
Rule 2: Always buy the dip, sell high
Well, this sounds a bit weird. Who would not purchase something at a lower/through-away price and sell at an improved price? But then why do 80% of investors end up making losses? The answer to this quiz is found in Dan Ariely’s book “Predictably Irrational.” The author argues that while people think they are making smart and rational decisions, they end up being driven by utter emotions and social customs.
The figure below demonstrates the typical emotions a cryptocurrency investor may experience and how a small decision to ‘buy low and sell high’ becomes challenging with time.
Rule 3: Diversify between trading and investing (holding)
We will not refer to the old school argument about whether trading is profitable than investing. There are professionals in those fields that have made equal amounts of profits by correctly putting into practice the respective strategies.
While trading strives at regular purchasing and selling of assets to realize returns from market price changes, the aim of investing is to accumulate profits over a lengthy period by acquiring and holding assets. It is advisable to diversify your investment portfolio by investing in stable assets such as bitcoin, ether, ripple, litecoin, and trading in lesser-known assets like iota, nem, dash, neo, and others.
Rule 4: Identify pumps and dumps
Since cryptocurrency exchanges remain unregulated in many parts of the world, it is quite easy for the ‘big boys’ to sway the market by rapidly buying out the liquidity. Once other investors enter the market, they sell their investments leading to a sudden drop in price.
Remember, not every sudden increase in price is always a pump and dump case.
Trade history: study the price pattern for the past six months and see if there has been any sudden increase and decrease scenarios.
Small market capitalization: compare the asset market cap with significant assets to confirm whether it would manage to sustain the rise.
Technology updates: check whether there has been any big update released by the team behind the project.
Rule 5: Use automated stop-losses
Once of the helpful tools you can leverage, especially if you lack the discipline to routinely monitor your trades, is a stop-loss. It is basically an order that a trader can place with the exchange to avoid losses- just in case the investment falls below a specific tolerance limit.
For instance, your $2500 investment might drop to $2200, and you might be worried it could fall further. As you wait for things to get better, you can set an automatic order to sell in case it drops to $2000.
Rule 6: Read, read and read
If you are new in the crypto space, it is essential to follow popular channels to get the latest news and trends in the cryptocurrency market. These are some of the well trusted and popular news sources and discussion forums that can offer you adequate knowledge to make informed choices.
Twitter: @Cointelegraph, @niccary, @BitcoinMagazine, @petertoddbtc, @SatoshiLite. Telegram Channels: Whaleclub, coinfarm, indiabits, dashknights, Monero Enthusiasts. Facebook Groups: Cryptocurrency for Beginners, Cryptowarriors, cryptos newsgroup, cryptocurrency club for beginners.
News and Trends: Cointelegraph, coindesk, cryptocoins news, coin marketcap.