The only rule in investing is never to lose money. Financial products like stocks, bonds, and cryptocurrencies are vessels used to multiply capital sitting around in a bank or under the mattress. These products can also wipe out entire accounts due to a lack of financial planning.
The 5 Crypto Investing Principles
Before buying into any crypto project token, an investor should:
- Know how much they are willing to lose (Risk Capital and Allocation)
- Know how to find projects of interest (Project Discovery)
- Understand the crypto projects (Project Analysis)
- Know when and how to acquire the tokens (Acquisition and Custody)
- Have a profit-taking strategy (Profit Taking)
- 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
Ethereum (ETH) Investment Example
Taking the Ethereum project as an example, ETH draws demand as people use the network for transactions and interacting with dapps. The Tokenomics of Ether (including token burning and low issuance) also helps limit supply, encouraging price appreciation.
The demand for crypto projects is cyclical, meaning there are periods of extreme exuberance and sometimes very little market participation. In theory, an investor would buy into Ether when the price of the coin is depressed, and there is little network usage.
As the crypto market heats up and participants re-enter the space, ETHs price should rise. At that point, the investor can take profits.
There is a macro downtrend in prices, and an investor has $1,000 to spend on crypto tokens. Their goal is to multiply this capital by two using the price volatility of ETH.
The cryptocurrency currently trades at $1,500 per ETH. Making the $1,000 investment on Binance leaves the investor with 0.67 ETH in their digital wallet on the exchange.
Using historical price and network usage data, the investor assumes ETH can reach its previous highs of around $4,000 once demand returns for crypto overall.
Months later, demand for dapps on Ethereum is on the rise. ETH prices push past $3,000, and they sell all of the ETH on an exchange. The 0.67 ETH bought for $1,000 is now worth $2,010. The investor has doubled their money.
Ethereum Investment Plan Breakdown
Looking at our ETH investment example, let’s discuss how the five crypto investor principles apply.
The investor allocated $1,000 for crypto purchases. In the example, the investor was looking to deploy the entire pool of capital on one project at once.
A drawback to this approach is the possibility of further downside below the $1,500 ETH price. Spreading the capital over time using a few buy orders would allow for averaging down.
Ethereum is currently the 2nd largest cryptocurrency project by market capitalization. Ethereum likely is one of the first projects the investor encountered, as it’s frequently included as an example in courses, on coin lists, exchanges, in the media, etc.
The investor knows the impact the overall crypto market has on Ethereum. Many projects rely on Ethereum to function (thus requiring ETH). During periods of demand for these projects, Ethereum’s native currency benefits.
Acquisition and Custody
Before allocating funds, the investor identified a macro downtrend for the crypto market. This downtrend presented a buying opportunity (low demand).
Opting for convenience, the investor decided to trade ETH on a centralized exchange and store their holdings in its digital wallet.
Pro Tip: While some exchanges have insurance, many don’t offer such protections in case of a hack or insolvency. It would be a better practice to self-custody the coins.
The investor decided on a price target for ETH based on the number of dollars they wanted to make. In this case, they chose to double their holdings.
Pro Tip: To suck more value out of the trade, the investor could have sold half of the 0.67 ETH at $3,000. Doing so would have left them with $1,005 to cover the initial risk capital. The investor would hold the remaining 0.335 ETH as the macro uptrend continues, allowing for profit-taking at potentially higher valuations.
The five principles discussed above are critical components of successful crypto investing. As we advance, we will discuss these principles in greater detail.
Remember, there is no guarantee that a project’s token will appreciate in a particular time frame (regardless of the methodology used for evaluation).