Cryptocurrencies have managed to take the financial world by a storm and continue to be the topic of discussion among the top investors and market analysts today. Sometimes these markets behave so erratically that they have to be halted. As the market for these notoriously volatile cryptocurrencies continues to grow, you may not want to simply stand by and watch. Let us help you with a framework to build an ideal portfolio.
But before we begin we’ll just call out our top tip to building your portfolio: diversify. Some do prefer to go all in. However knowing how volatile the crypto market is, when building your portfolio we recommend that you diversify your holdings across various cryptocurrencies to minimise your risk.
What to Look for in a Crypto Before Investing
Investing in cryptocurrencies is a lot like investing in commodities and thus, the general rule of diversification applies here as well. Unlike commodities though the crypto market is extremely volatile. It’s common to see volatility in the range of 100s of percent up or down!
The higher the market share, the greater is the dominance of the cryptocurrency in the market. It automatically translates into more transactions and greater trust. For example, the last 3M trend chart indicates the top 3 contenders as Bitcoin (33.88% market share), Ripple (15.64%) and Ethereum (13.02%).
If you’re buying a 10 cent coin in the hope that in 1 week it will hit $10 then really think about this one! If that coin is already a top 10, that means it would have to out beat coins such as Bitcoin, Ethereum, Litecoin, Ripple, etc. to even come close to $10. So be pragmatic and set realistic expectations. Only because a coin cost a few cents, it could mean that’s all that it will stay at- a few cents.
Before you invest in a cryptocurrency it is important to evaluate its usefulness and whether it will be as relevant in the market in the years to come. If you cannot use it for something, then it would have very low or no perceived value. For example, Ethereum finds its use in the development of Decentralized Applications (DApps) on top of its blockchain.
Listings on Exchanges
If secure online platforms like Coinbase, Bittrex, or Kraken plan to list a coin which is still in its ICO (Initial Coin Offering) phase, then it is definitely a positive indicator and you could invest in such cryptocurrencies.
Do your homework and invest a reasonable amount of time in reading the white paper of any cryptocurrency project you wish to be a part of. Also look at the composition of the team and their level of expertise, the marketing stance and strategy, positive mentions in crypto-media outlets like CryptoCoinsNews.com, Altcoin Reviews, etc. Above all, social media has a massive impact on the value of a currency- it drives the news by word of mouth. Think about this one as it can really show you which coins are popular by opinion.
When it comes to trading, you’d think that the technology matters. Unfortunately it doesn’t as much as the above points. But, and it is a big but. Investing in solid technology increases your chances of success over the long term- especially if you decide to hold the coin for the long term. After all, long term success is not just about the above points raised, it’s about the problems that the tech is going to solve.
Who’s who behind the curtain can certainly help. Markets react greater when big names promote a coin. It also helps to know who’s behind the tech- especially when it comes to ICOs.
Okay, so we weren’t even going to mention this but, surf the social forums and you will find that people play silly when it comes to buying crypto. Hype and FOMO leads people to do weird and wonderful things. So, our tip here is, buy low. Sounds simple right? Not when the whole world around you is hyping up the coin and telling you it’s going to be the next biggest thing. There’s a name for this, it’s called shilling.
Risks Associated with Investing in Crypto
Let’s look at some of the risks investors need to be wary of before investing in crypto:
The rapid price swings of cryptocurrencies make them highly volatile and risky. Bitcoins grew from 10 cents to $7,000 and fell down by 80% five separate times. This just goes on to show that any cryptocurrency can even fall to zero.
Frauds and Shady Exchanges
With so many new releases of altcoins or ICOs every week, the chances of cryptocurrency scams, spoofing, and phishing are on the rise. Not to forget, disasters like Mt. Gox where the entire exchange got wiped off. There are not many trustworthy exchanges for cryptocurrencies.
Cryptocurrencies are not regulated by the governments or banks, unlike the other forms of investments. If an investor gets ripped off in a bitcoin transaction, there is no grievance redressal entity he/she can go to.
On 24th December 2013, RBI issued a press release cautioning the users against the risks of virtual currencies. On 1st February 2017, it further stated that it had not issued licenses to companies for trading in any virtual currencies. Chinese and Swiss financial watchdogs have shut down many exchanges and coins in an effort to lower investor risks.
Pumps and Dumps
Through this scam, a group of investors promote a stock they hold (pump) and sell it once its price has risen (dump). The original fake demand leads to an actual demand of the stock. Many beginners get trapped in this illegal activity.
It can be hard to distinguish between scammy coins and those that are legit. But beware of these, as they will drain your wallet faster than you can even say scam. Here are our top 5 tips to avoid investing in scammy coins.
Want to be a part of the cryptocurrency frenzy? Play cautiously.