Crypto fell off a cliff in 2018 and no one really knows why. You’ll find a hundred different rationalizations on the net. If you had to ask me, I think that the crypto market got ahead of itself in 2017. That’s what happens every time a new technology comes along (just like dot.com era). A lot of hype and prices rise too fast. And the faster the price of Bitcoin and other coins rose, the more fragile the bull market became. Investors who bought Bitcoin for $50 were not sensitive to price changes at $10,000, $15,000 or $20,000.
However, Bitcoin holders who bought at $19,000 probably rushed to sell their holdings when the Bitcoin price dropped to $15,000. As the bull market progresses, the risk of a major sell off increases. And this is what happened.
At the end of 2017, investors started realizing their gains which caused a minor correction. Then investors who came late to the party saw red in their crypto portfolio so they also started selling their holdings. Further selling means further price declines and that’s how a deep market correction develops.
The market correction brought down everything with it and you ought to be particularly careful with your crypto investments, especially if you participate in new ICOs. You are investing your hard earned income in crypto so make sure you get all the help you need.
To get you started, have a look at the 5 basic rules you need to know about investing in crypto.
1. Understand the risks you’re entering into
Make sure you understand the inherent risks you’re undertaking when buying crypto currencies (more specifically utility tokens).
- When you buy into an ICO, you are buying into a startup. Most startups fail.
- Most crypto (especially tokens that can’t be used yet because the platform is not live yet or in its infancy) is illiquid and easier to manipulate than securities
- Crypto tokens (bar security tokens) don’t pay a dividend
- Crypto markets are unregulated so a few big boys might corner the market at your expense
- Also, what the Whitepaper states is rarely reflected in the Smart Contract and even worse, the founders sometimes keep the back door open in case they wish to amend the Smart Contract in the future (e.g. they allow themselves to change the supply of a coin after the ICO; or the Whitepaper mentions a lockup period but the Smart Contract doesn’t have any logic that locks up founders’ tokens). See here if you’d like to read more about this
2. Don’t be Silly
I get it – you see a few token shooting through the roof and you want to join the party. Crypto is risky – for the reasons I mentioned above. Start with small amounts and don’t go all in.
Keep your exposure to crypto to a reasonable level (and stick to it!). My current exposure to crypto is 5% of my total investment portfolio. I might consider upping it to 10% if the market goes much lower but 10% is my hard limit. Of course my exposure limit should be different to yours and your exposure limit depends on your age, your income, your level of wealth and in which asset classes you’ve invested your wealth in. Don’t copy my exposure limits!
Also, diversify your crypto holdings – especially in an asset class that largely depends on the speculation that a certain DLT platform will become popular. The more you spread your coins, the more likely you’ll hit the jackpot.
3. Be choosy
A deep market correction (including the crypto correction) brings everything down: good and bad tokens. Given that you’re within the exposure limits you’ve set yourself, buying during a severe market correction means you have the opportunity to shop around for great tokens at a deep discount.
Look at the drivers that support the price of a token
Go after those tokens with a strong, fundamental demand for the platform they support. Let me give you an example to show you what I mean.
You buy computation power on Ethereum by paying for Ether. Creating a new Smart Contract on Ethereum costs Ether; executing smart contract logic costs Ether and so on. Given that Ethereum seems to be the platform of choice to run Smart Contracts and in a world moving to automation and decentralization, one may take a position in Ether on the expectation that the demand for Ether (to execute even more Smart Contracts on Ethereum) will be strong.
If the thesis is correct, strong demand for executing Smart Contracts on Ethereum will underpin the value of the token in the long term.
Look for large economic moats
I’m not reinventing the wheel here – I’m borrowing the term from Warren Buffet, one of greatest investors out there. Economic moat refers to the degree of competition an Issuer faces (or will face in the future).
There are some business models which are harder to emulate than others. It’s hard to copy the brand loyalty that Apple has and it’s also not easy to build a double sided market place like eBay. On the other hand, it’s less difficult to build an Android-based phone and compete with Samsung. And, LED TVs are sold at low margins in a saturated market. Get the idea?
And this links to the point I made in Section 3.1 above. Most popular Altcoins execute the same function, have similar levels of market capitalisation and are (generally) equally accepted. In other words, they’re interchangeable. Buy coins that give you access to unique platforms if you want to sleep at night – especially in the current market conditions.
4. Don’t be Lazy
If you really insist on buying into ICOs, you need to get a lot of dirty work done. Around 600 ICOs went to market in the first half of 2018 (and I’m not mentioning those ICOs which didn’t reach their soft cap!) . That’s a lot of Whitepapers to analyse. Being a hard worker isn’t enough though:
- You need to make sure you’re good at distinguishing a good startup from a bad one
- You need to look at the founders, their expertise and their track record
- Determine if certain major organisations are backing the blockchain application or otherwise
Or you can engage an advisor which does this. Really and truly, you need a team of analysts to sift through Whitepapers on an ongoing basis.
5. Technical Analysis is key
In a token world where no dividends are paid and no earnings are attributed to (utility or payment) tokens, it’s quite impossible to determine the fair value of a crypto asset (in the traditional finance world, the price of equity is a function of the future dividend that the Issuer is expected to pay). How much, say is Bitcoin worth? Coming up with a reply is impossible. If you can’t value an asset you can’t determine if you’re over paying for it or otherwise. It’s like walking blindfolded.
Technical analysis may come in handy (but trust me, it’s not a perfect science). Technical analysis is basically a study of how the psychology of the market is manifested in how a chart for an instrument looks. For example, when prices are going up and volumes dry up, you ought to be very careful with that price movement because it indicates that a very tiny portion of the market is participating in that price increase. Conversely, if there’s a market correction accompanied with large volumes in that token, then it should mean that the correction is supported by a relatively large portion of the market.