Before Investing in Cryptocurrencies, Read These Three Easy Tips To Get Started
1) Diversification is Essential
Hope is not a investment strategy.
Investing all your money in cryptocurrencies in the expectation of early retirement probably means that you’re hoping rather than planning for the outcomes you want.
Why? Because it is easy to see the headlines of bitcoin millionaires and say that you want some of what they have got. Don’t we all?! Putting all your money into one of the digital currencies is madness.
The reality is these people, if they exist were just plain lucky. Luck, like hope is not an investment strategy. Certainly you cannot plan to be lucky although of course, you can hope for it.
Yes cryptocurrencies can form part of your investment strategy but only part. You may also consider stocks, bonds, property and perhaps even gold or silver.
Within each category you might specialize. For example within the stock category you might look at pharmaceutical stocks. Within the bond category you might look at European government bonds and so on.
I should add that I am not an investment advisor, none of this should be taken as professional advice, this is solely for demonstrating how you might allocate your capital.
Cryptocurrencies might also be a category that you decide to allocate some money to. What portion is down to your risk tolerance. Personally, with cryptocurrencies I would view anything above 5% as being risky.
The main idea behind diversification is that where one category might decline for a period, another might perform quite strongly. The portfolio overall is not exposed too greatly to any one category.
Avoid putting all your eggs into one basket
Just one final note on diversification. Investing 100% of your funds in cryptocurrencies but spreading the investments across a variety of cryptocurrencies is not the diversification I am referring to.
Each digital currency is highly correlated to the next. From the research I have done, on a day when the price of bitcoin falls, there is a tendency for the other digital currencies also to fall. They all usually move together. When the public’s sentiment is feeling positive about bitcoin, it affects all the cryptos. When investors are nervous about ether because of some negative news, all the digital currencies are affected.
Of course, you may want to pick 4 cryptocurrencies and allocate your funds in proportion to how bullish your research tells you to be. However, in the context of your overall portfolio, each individual cryptocurrency allocation is only a small piece of your entire investment.
2) Use a Digital Wallet
In a previous article I wrote about Coinbase. Exchanges like Coinbase are a good place to purchase and sell your digital currency however, be careful about holding the currency in your account with them permanently.
There have been many instances where exchanges have been hacked.
I’m not saying that this will happen to Coinbase or one of the other exchanges, however we do know that it does take place.
For example, recently, a Japanese exchange, Coincheck was targeted by hackers. Customers who lost money are now suing the exchange.
What I am saying is that it is better to be cautious than sorry that you were targeted by hackers. A good, well established place to store your digital currency can be found on the Blockchain.info website. However, do your own research before sending them your money.
3) Get to Know Technical Analysis
As a cryptocurrency investor, it is important that you develop an approach which you can repeat over and over. The strategy doesn’t need to be sophisticated, it can actually be quite simple but it needs to be something that you can replicate every day. Technical Analysis (TA) might help you in this respect.
TA uses price charts and analyses historical price trends and patterns to predict future price movements.
Two common patterns are the ‘Flag’ and ‘Pennant’. Either pattern can suggest that a previous move up or down, will continue.
Many traders will focus solely on technical analysis, their strategy relies on them being able to recognise patterns in the chart and of course, these patterns showing up in the first place. I took a similar approach to this when I was day trading futures.
There is a lot more to TA than what I’ve shown written here, but if you would like to learn more about it, try the Smart Bitcoin Buyer Beginner’s Guide to Technical Analysis.Click here to learn more.
Disclosure: I own Bitcoin and Ether.
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