5 Rock-Solid Principles for Investing in Cryptocurrency
Posted On July 10, 2023
The best way to profit from investing in cryptocurrency is to be long-biased. For instance, if you bought bitcoin worth $5 eight years ago, your investment would have turned into millions by the end of 2017. As long as you have a good entry, you can just hold your cryptocurrency and watch your wealth grow.
Here are five rock-solid principles that can guide you to success in cryptocurrency:
Take profits to get back your principal
The first rule of investing in cryptocurrency is to sell back some portion of your investment whenever in profit. Your goal should be to take profits along the way until you have fully recovered your initial capital. Depending on the price action of the coin, this could take a couple of minutes or even months. Once you have recovered your capital, you can let your investment play out for the long term.
Risk is part and parcel of any investment and if you are investing in cryptocurrency, you should appreciate that cryptocurrency is still in its early development stages, at least when compared to fiat. This is one reason why the prices are very volatile. The last thing you want to do is chase the prices of your preferred cryptocurrency. The smart thing to do is to predetermine your entry price and stick to it no matter what happens. You can always adjust the price targets with time as long as it is not based on FOMO.
Value proposition is what makes a coin worth holding. Investing in a coin whose price is purely based on speculation and faith is a sure way of burning your account. Do not invest in cryptocurrencies that have nothing to offer apart from the fact that they are digital currencies. Rather look for currencies that support some service which keeps attracting fiat into their ecosystem. For instance, Bitcoin is more of a remittance system and a store of value. Ethereuem, on the other hand, is the first Crypto that was designed to implement smart contracts. This explains why Bitcoin and Ethereum are the de-facto cryptos for long-biased investors.
Most beginners get inspired by hearing how bitcoin investors turned a small investment into millions and they hop aboard looking to also make a fortune. They then end up putting all their eggs into the bitcoin basket. But a smarter approach would be to diversify your portfolio. The importance of diversification is that a price reduction in one coin could just correspond to a price increase in another. Alternatively, one crypto might increase by 10% while another simultaneously increases by 50%. Research some good altcoins and invest in them too.
Always expect volatility when investing in cryptocurrency. Most investors don’t know how to deal with volatility and this is what makes them lose money. Warren Buffet advises cryptocurrency investors use the buy and hold strategy. Most people lose money because of the short-term bets so when they see the prices dropping below what they expected to get in a day, they end up selling at a loss. Later on, they look at the prices bounce back and regret their hasty decision to sell.
A passive investment strategy will eventually pay off. Not only does it attract fewer fees as opposed to actively trading, but it also gives the investor peace of mind. Since you are in for the long-term, you are less affected by the daily price action which is pretty volatile. Just look at the price charts of the major cryptocurrencies and you will notice ho long-term traders seldom make loses.