Author: Jelle Huisman
Cryptocurrencies are more popular than ever before. Owning cryptocurrencies is starting to become normal. At the time of writing this article, the price of Bitcoin is $58,600. The price of many other cryptocurrencies has also risen sharply in the past six months. At this moment, we are in a so-called bull market. A bull market is a market in which prices are rising and it is expected that prices will continue to rise.
When prices rise, there are more buyers than sellers in the market. This also means that more and more people are investing in cryptocurrencies. Everyone is looking for the next “Bitcoin”. At the moment, there are literally thousands of crypto projects active. But which crypto project is the best one to invest in? And which cryptocurrency is the most undervalued? How long do you hold a particular cryptocurrency?
To get an answer to the above questions, you will have to do some research. Below are 5 important tips that can help you improve your investment results.
Do your own research
When selecting interesting investments, you should always do your own research. Make sure you make informed decisions based on independent information. This is easier said than done. Especially in the crypto market, many mistakes are made.
Much of the information you find, especially on the internet, is of low quality. Think for example of videos on TikTok, Twitter and YouTube, or information on forums like Reddit and Medium. Yet it is precisely these sources where you can find valuable information. So it is wise to adopt a positive critical attitude.
Many crypto projects, especially the smaller ones, are hyped through social media channels. The people who promote these projects only do so in the hope that the price will rise quickly. This is also called shilling.
When researching relatively small crypto projects, you need to do more research than when researching large crypto projects. By large crypto projects, I mean projects that have a market capitalization of more than $1 billion. However, it is not true that large projects are always better or more interesting than small projects.
How to avoid scams or bad projects
Unfortunately, not all crypto projects are of the same quality and there are even coins that are designed to cheat people out of money, so-called scam coins. Now that the popularity of cryptocurrencies is on the rise again, we also see many scam-coins in the market.
Just like when evaluating other investments, you should also use common sense when choosing crypto projects. If something sounds too good to be true, it often is. It can be quite difficult to recognize bad crypto projects or scam coins. The online presentation of these projects is often very professional and the story behind the creation of the crypto project often sounds very attractive. Fortunately, there are ways to judge this objectively.
First of all, look at the team behind the crypto project. Is the founder of the project or the developer of the cryptocurrency easily recognizable? Then examine what kind of people these are and what they have done in the past. Have they made their mark in the crypto market in the past or are they fast entrepreneurs who focus on crypto because they think they can make quick money with it. Research where the focus of the project lies. Does the team working on the crypto project focus on the development of their blockchain, or is the focus mainly on pumping up the value of the cryptocurrency concerned.
Next, look at the so-called market cap of the cryptocurrency. The market cap consists of the value of the total number of outstanding coins. The market cap is calculated by multiplying the number of outstanding coins by the current value of one coin. There are now many crypto projects with a market cap of more than 1 billion US dollars. If the market cap of a project is very small, let’s say less than 10 million dollars, you will first have to do extra research on the project. When did the project start and what is the reason for the low market cap?
I use the website coinmarketcap.com a lot. On this website you can find a lot of information about active crypto projects. You can also quickly find the market cap of a project on this website.
On Coinmarketcap you can also see which crypto exchanges offer the cryptocurrency in question. If a cryptocurrency is only offered on one or a few very small exchanges, be wary. Of course, it may be the case that good crypto projects will move on to larger exchanges over time. In any case, make sure you use a reliable, preferably one of the larger, crypto exchanges.
Also try to make an estimate of the developments within the crypto project you are researching. Are goals being met regularly and is there a clear “roadmap”? Does the crypto-project have a strong distinguishing user-case and is there actually a coin or token needed for the project to succeed?
Make as much use of independent sources as possible. In practice, this is easier said than done, as it can be difficult to judge how independent the information is that you come across, especially on the Internet.
Ensure optimal security
As you may know, there are different ways to store your cryptocurrencies. You normally keep your crypto’s in a so-called wallet. For example, you can store your cryptocurrencies in an online wallet at your crypto exchange, but you can also choose to store your crypto currencies in an external wallet or a so-called hardware wallet.
Each method has advantages and disadvantages. When you store your crypto’s in an online wallet at your crypto exchange, you can access them directly and you can act quickly if necessary. The disadvantage is that crypto exchanges are not 100 percent safe. In the past, many crypto exchanges, including the larger ones, have been hacked, causing millions in damage. So think carefully about this.
A hardware wallet is a device where your private keys are stored. In this way you save your private keys offline. Without the private keys it is not possible to move the cryptocurrencies stored in a blockchain.
Make sure you use good passwords, which you keep in a safe place. The same goes for the so-called recovery phrases, which you need to restore a wallet (if necessary). Never share your passwords with another person and always make use of the possibilities to extra secure your account or wallet, for example by means of 2-factor authentication.
Avoid emotional investing
Crypto markets are constantly changing and can be very volatile. This volatility can cause stress, making you unable to act rationally. As a result, many investors buy when prices are high and sell when prices are low. So the behaviour you exhibit as an investor determines whether you make or lose money investing. Many novice crypto investors panic when prices fall sharply and quickly sell their cryptos as a reaction to this. However, smart crypto investors use these moments to buy cryptos at lower prices. This is also known as “buying the dip”.
When investing in cryptocurrencies, you have to deal with different emotions. Think for example about impatience, greed, overconfidence and FOMO. In this article you can read more about the role of psychology in trading.
Fortunately there are a number of ways to prevent emotional trading. One common way is the so called Dollar Cost Averaging.
What is Dollar Cost Averaging?
Dollar Cost Averaging is a strategy where you invest equal amounts of money in a particular market or crypto, at predetermined intervals. In a down market, you buy more crypto’s for the same amount of money. In an up market you buy less crypto’s for the same money, but you have the advantage that you have previously bought crypto’s at lower prices that also generate returns. It is important that you do not deviate from the chosen strategy, so that on average you realise the best purchase prices.
A second way to avoid emotional trading is to apply sufficient diversification in your portfolio. Sufficient diversification ensures that you do not start trading emotionally in volatile times. In the crypto market, you can look at a distribution between large-caps and small-caps, and of course at the purpose for which a cryptocurrency was put on the market. For example, there are crypto projects that focus on smart contracts, DeFi (decentralised finance), NFTs (Non Fungible Tokens), Gaming, Supply Chain Management and many more.
Have an exit strategy
Most crypto investors do not have an exit strategy, with all its consequences. Because of this, many crypto investors sell their cryptocurrencies too early, or too late. Investing in cryptocurrencies is very interesting, but the question is when and in what way you are going to exit. To find this out, you need a strategy which is related to your investment goals and your personality.
What is the purpose of your crypto investments? Do you want to profit in the short term from a rising market, or do you want to build a crypto portfolio in the long term that generates so much passive income that it secures you a good retirement. The objective with which you invest therefore also partly determines your exit strategy. Try asking yourself why you are investing in cryptos in the first place.
Ask yourself what kind of personality you actually have. Does this personality fit with the way you invest in cryptos? What kind of investor are you really? Are you more of a trader, or are you more of an investor? Also take a look at the long-term goals of the crypto projects you invest in. Are you investing in a crypto that is very popular at the moment, but of which you don’t know what it will be like in 5 years, or are you investing in a smart-contract platform that clearly communicates where they want to be in 5 or 10 years?
If you fail to plan, you are planning to fail – Benjamin Franklin
The crypto market is not that old yet, but we can learn from the last bull market of 2017, for example. You will come across stories of people who made a lot of money during this period, but also just as many stories of people who lost money or were unable to profit from this bull market. The problem is that many people did not take profits and thus were left with little or even less than their initial investment when the bull market ended. So when your position shows a nice profit, it may be wise to liquidate your initial investment again and let your profits run further. In this way, you will never be faced with unpleasant surprises.
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