Now that we have an idea of the crypto projects we want to invest in, we must consider when and how to buy them. We should also consider the safety of our assets, as theft is a growing concern.
When to Buy
A key factor for making a profit through investing is knowing when to buy.
Making purchases during periods of overexuberance could leave you holding a bag of assets that are constantly falling in price. On the other hand, “buying the blood” (aka undervalued or discounted assets) could lead to explosive portfolio growth.
- Cryptography – A study of secure communications techniques in an adversarial environment
- Metadata – Data that describes some other data. Ex. the caption describing an image
- Whitepaper – Information document used to promote or highlight the features of a solution to a problem, product, or service
Market Sentiment and Price Analysis
If you spend enough time watching crypto influencers, news, or Twitter discussions, you will begin to “feel” the market’s sentiment. Market sentiment refers to the overall emotion of investors in the space.
Like a pendulum, emotions swing back and forth from highly positive to overly pessimistic, and price tends to follow.
Bullish market sentiment means market participants are optimistic about the future. You’d see people talking positively about developments in the space.
Negative news would have less impact on prices, and project token prices would generally trend upwards for a period.
Bearish sentiment is just the opposite of bullishness. There is a large influx of negativity and people talking about the death of crypto.
No amount of positive news in projects seems to pump prices, even if nothing is eroding the industry’s foundation.
Sentiment and Risk
Successful investors know how to countertrade the majority of market participants. In other words, when the majority is bullish, the savvy investor is bearish. The opposite is also true.
In theory, you should make the bulk of your crypto purchases during macro bear trends when most retail token holders have left the market. When everyone who wants to sell has sold, prices often reverse to the upside.
The higher the price, the more optimistic investors become, and they all flock back to buy up the supply. High prices make buying crypto riskier and less profitable overall. Selling in this environment is like giving the hot potato to someone else, as experienced investors leave the market in droves while dumping supply on overly excited retail investors.
Dollar Cost Averaging In
One of the most popular methods for scaling into a crypto project is to dollar cost average (DCA) into it. DCA refers to making incremental purchases over time regardless of price.
This method is most potent when investing in a project you plan to hold long-term–especially if you conclude that the project is undervalued. You don’t have to analyze short-term price movements or wait for a specific valuation to get into the market.
Example: If you had $1000 to invest in Bitcoin, you would buy $50 worth of BTC every day over 20 days.
Acquiring Digital Assets
Sometimes it’s challenging to get a hold of specific digital assets. Some require accredited investor status to own them, while others are only available on decentralized exchanges without fiat onramps. Others may be on centralized exchanges that require a strict KYC/AML policy, and crypto ATMs may not always be available.
In the next section, we will look at some common places to exchange digital assets.
Centralized Exchange (CEX)
A centralized exchange is a marketplace where the trading of digital assets is coordinated and controlled by a third party, like a business or organization. Centralized exchanges are the most common way new users first interact with web3.
Onboarding investors this way makes sense for several reasons, but there are also some glaring disadvantages.
A CEX tends to list assets from across many public blockchains. They act like a general store for tokens, not an exchange focusing on one crypto ecosystem. Additionally, CEXs often have deep liquidity, reducing slippage costs.
In the United States, centralized exchanges have strict regulations, making it difficult for businesses to misuse deposited funds.
Regulation is a double-edged sword as KYC (know-your-customer) policies conflict directly with user privacy. KYC allows digital wallets to be linked back to their original creators. The centralized nature of these exchanges also creates a honey pot that entices thieves. Breaches of security have cost web3 investors billions of dollars. The trove of personal user data (like names and addresses) is constantly at risk of being hacked and the data stolen.
Regarding custody, the CEX holds your private keys, which forces you to trust the exchange not to do anything fraudulent with your funds.
Decentralized Exchange (DEX)
A decentralized exchange is a marketplace where the trading of digital assets happens in a peer-to-peer fashion. Using a DEX is a more private, faster experience to swap coins on a particular smart contract platform.
Since a DEX operates using smart contracts, a DEX is not obligated to collect private user information to carry out transactions. A DEX also does not typically hold funds on a user’s behalf. Both factors significantly limit the risk of identity leaks and the formation of honeypots.
Adding to the benefits of a decentralized exchange is that most altcoins launch on a DEX first. A CEX listing requires an application process, whereas a DEX listing may not. The availability of new tokens is advantageous for getting into altcoins early.
However, decentralized exchanges have their flaws. A lack of centralization means a lack of customer support when things go wrong. Relying on immutable smart contracts to carry out processes 24/7 requires that there was no error in the original smart contract code.
Also, a lack of regulation and infrastructure creates hurdles to a DEX’s ability to convert cryptocurrencies to and from fiat.
Cryptocurrency ATMs are computer systems used to buy cryptocurrencies, typically placed in public locations. Like a CEX, you can use an ATM to convert fiat into crypto. The crypto is then sent directly to the digital wallet of your choosing.
Initially, cryptocurrency ATMs did not require KYC. They were the de facto means of trading cash for Bitcoin anonymously. More recently, cryptocurrency ATMs have required strict KYC compliance to use. Unlike a CEX, ATMs don’t hold user funds.
Now that you have purchased the assets you want, you need to store them for safekeeping. Just like physical cash, digital assets are vulnerable to theft.
Due to the variety of blockchains and asset types, it’s impossible to store all tokens in one way. Each storage method has inherent risks, like leaving your money under a mattress versus in the bank.
Online storage of cryptocurrencies or NFTs is considered hot storage. Online means the digital wallet connects directly to the internet.
This interfacing allows for faster transactions, making these wallets more convenient. Examples of hot storage are centralized exchanges and browser-based digital wallets.
Using online storage solutions also opens the door to many online attacks. Such attacks may include keyloggers, compromised nodes, interactions with malicious smart contracts, etc. The only way to throttle this risk is to store digital assets offline.
Cold storage is a digital wallet stored offline (off the internet). Examples of cold storage include USB-like devices, metal plates, and paper wallets.
While it is more burdensome to use an offline device for transacting, the keys stored on these devices are much more secure. You must physically control the storage device to move digital assets off of them.
In conclusion, the decision to store digital assets using hot or cold storage comes down to convenience and risk tolerance. A hot wallet may be the best solution if you plan to trade a particular token or make a purchase soon. We recommend using an offline storage device to hold crypto long-term.