The cryptocurrency industry is well-known for its ability to provide large investment returns. Significant returns, however, always come with a high risk. The capacity to expand your capital while avoiding losses is contingent on employing the proper investing strategy. This article will let you discover 8 crypto investment tactics that, if used in the right way, will help you distinguish yourself from the majority of investors.
The difference between investing and trading
First of all, let's make sure the difference between investing and trading is clear.
Trading is focused on leveraging the short-term volatility of a certain token or currency. Investing means holding a given token or other assets for a longer period of time.
Your trading performance is primarily determined by your understanding of the so-called technical analysis, which allows you to forecast where the market is currently headed. Being a successful cryptocurrency investor requires a solid understanding of the underlying variables that influence the value of a certain asset, as well as takes a great deal of patience.
Rule number one: Scam Due Diligence
Raise the development capital
Conducting a scam due diligence is the first and foremost stage for everybody stepping into crypto. There are more fraudulent projects in this industry than almost any other, which means that losing money is incredibly simple, and you need to be particularly cautious. This is a natural side effect of high returns.
There are two red flags that can help you set apart scam projects:
The team and founders are not public
If the team and the founders behind the project are not public figures, you cannot demand responsibility from them.
Pay attention if the company is trying to turn on greed by promising outsized unrealistic returns without providing a precise explanation of how they are going to be achieved. Generally, the higher returns promised, the bigger is the risk that the project is a scam and, in turn, the more severe due diligence you have to apply. Look for practical evidence such as working products, calculate token economy and the market size, pay attention to the competition as well. Notice that this is not only about the requirement that projects back their claims by evidence but also about the general style of communication, whether it is targeted at turning off your thinking or treating you honestly and letting you make an informed decision.
Suppress emotions when making investment decisions
Switching off the emotion is a highly appreciated skill, which is exactly what you'll need to do when making investment decisions.
The most common emotions that you may be manipulated with are greed and the fear of missing out, which is related to it. Other emotions include the fear of loss, which is shown by Nobel prize-winning research to be even greater than the desire for gains, the halo effect or authority effect which makes a person follow a given project only because it was supported by somebody reputable; the admiration that a beautiful business model or a vision can evoke in you even if it is not supported by the real traction grounded in reality; and the so-called sunk cost fallacy, which makes you attached to an unprofitable business or investment even if it has proven to be unsuccessful in recovering the losses.
Wise investment decisions is the confirmation bias
Confirmation bias is another major issue you must overcome in order to make sound investing decisions. It is our natural desire to seek evidence that supports our pre-existing perspective, regardless of how randomly that idea or impression was formed. This implies that if a project or token makes a positive or negative first impression, that perception tends to strengthen over time, even if it is not backed up by data.
There are two approaches you may take. First of all, you should be aware of the opinion you have, and after you have formed it, look specifically for disconfirming evidence, and adopt an opposing viewpoint for a certain period of time in order to find the disconfirming evidence easier as now it becomes confirming. Secondly, whether you're investing as part of an organization, a group of friends, or as an individual investor, you should have a devil's advocate who will push an alternative viewpoint to the majority. These pointers can help you assess evidence more objectively and make better judgments on the outcome.
The next pillar of good investing is diversification. At the outset, diversification reduces both your risk and your potential return, improving the risk-return ratio in the meantime. It also makes the overall investment portfolio more statistically profitable. After that, this tactic reduces your psychological attachment to a given token, making it easier to have a good judgement about it. The crucial condition of good diversification is the absence of correlation. That is, the tokens you invest in should not rise or fall together because this would mean that you have no diversification at all. Ergo, you should allocate your money to different industries, as well as different types of tokens.
Make investment decisions based on math
This next investing strategy is a competitive advantage that nearly no trader or investor is aware of. Most people make financial decisions based on their gut instincts and intuition. It's easy to outperform them if you base your investing selections on math, such as calculating the token's future market size and demand in relation to its current price. This does not even require complex statistical models or some higher calculus, only a simple school algebra and the ability to be good at estimation, which can be developed over time.
In order to utilize math, you need to understand the different types of tokens because they have various factors that drive their value and demand. If you'd like to learn more about this topic, please see our video “Wrapping your head around cryptocurrency and crypto investing: Bitcoin, Ethereum, Litecoin, Cardano”.
Look at the supply side of the token
The second related point is to consider the token supply as well as demand. Even if the project is very good and you project high growth for the token demand but the economics is unbalanced and the supply will rise as well, the token price will not go up.
Bookend your estimates
Any of your calculations would involve making estimates, to which a human factor can be an obstacle. The strategy for making estimates more precise and your calculations more justified is to bookend your assessments, which means to look for a lower, middle and higher value of the parameters you're taking into consideration when making an investment decision. Besides improving calculations, this will also help you consider the project and the evidence from both an optimistic and pessimistic perspective to take more evidence.
Utilize the tripwire
The last tactic is to utilize the tripwire. Regardless of how good your decision-making process is, there is always a chance to end up wrong. Set up a tripwire to protect yourself from losses: this may be a certain date or a milestone, achievement or non-achievement, which will make you reconsider your previous decision regarding a given token.
Today, the crypto industry is experiencing immense growth. There are many successful businesses out there, however, the number of scam projects is high as well. To invest in cryptocurrency the best way possible and avoid irrelevant projects, remember to remain your head cold and conduct all the necessary calculations.