Do You Spread Your Risk?
This is a follow on from my previous post, How will YOU profit from this paradigm shift??
Speculation/Investing WARNING!
Firstly, let me make this very important statement regarding any sort of financial speculation. You should ONLY be speculating with risk capital (money you can afford to loose). If you are considering speculating with money that you will need in the next few years, DON'T DO IT. And definitely, DO NOT use a credit card to finance your speculation! Any investment or speculation capital should be considered tied up for at least the next seven years.
Diversification
Many think that buying different cryptos is diversifying their risk! But you see, many of these cryptos are positively correlated, meaning, they will move in the same direction at the same time. Currently Bitcoin is the market leader, meaning the other cryptos generally follow the movement of Bitcoin. And so even though you may have ten different coins in your wallet, it doesn't mean you are diversified. Diversification means spreading your capital across different asset classes that are not correlated. So as one asset falls in price another rises in price. This keeps your investment/speculation portfolio balanced. I would also suggest being very clear about what percentage of your risk capital you want to speculate with in the crypto currencies asset class. This will depend on your own risk tolerance.
Trading with Technical Analysis
While I like to keep abreast of the fundamentals in a market, they are only useful for investing or speculation, not for trading. You see, as I have written about before, markets move on sentiment, and it is this sentiment that we actually trade. This is what technical analysis is all about. It is using price movement, represented by bars or candles to form a chart, and this chart represents the trader sentiment in a market. When I look at a price chart, I look beyond the price, and I read the underlying market sentiment that it represents. Through the charts I am attempting to read the minds of the larger players (investment banks) in that market. I know that if they want to sell a market then they need buyers on the opposite side of their sell orders, or there is no one to sell to. So the larger players set about bringing these buyers into the market using smoke and mirrors, and this is why trading is so difficult. The lower the liquidity in a particular market, the easier it is to manipulate it, and this is why you shouldn't be trading it. It is OK for speculation purposes though.
I do hope the information provided in this post goes somewhere towards keeping your hard earned money a little safer.
Disclaimer
I am not a financial advisor, and I am not responsible for any losses you may incur as a result of acting on any of the content contained in this article. I make no recommendations to buy or sell, and this post is purely for information and education purposes. Opinions expressed in this post are my own, and you should seek advice from a professional financial adviser.
I've always heard the term diversification but truly didn't grasp the meaning, thanks for making it clearer.
Thank @admiralsp, it's good to hear you found this post useful. Thanks for your feedback.