What the mainstream media doesn't tell you: It is rational to invest in Cryptocurrencies

Investing in cryptocurrencies in 2018 is still controversial, and many people remain very skeptical about it. Despite all the risks that investing brings with it, as an early investor into an emerging technology you have the unique opportunity to multiply your initial investment. However, this is by no means a recommendation you should invest in cryptocurrencies.

Risks

Before you invest bear in mind that you may lose all the money invested. A concept that I personally like is that of a three-bloody-days scenario. I would define it as a correction of the whole cryptocurrency market by 80% within three days. This could be due to a big bug discovered in one of the major cryptocurrencies or to a regulatory shock. You should calculate with a three-bloody-days scenario at any point in time.

This risk, although massive, is not the only one. Besides price risks there are other risks that you face. Somebody might get access to your wallet because of a mistake that you made when storing assets in a private wallet. Additionally you may lose your private key and hence the access to your wallet. On the other hand if you leave your coins on an exchange, the exchange may get hacked and file bankruptcy, as it already happened at various moments in the past. Other than for banks in the Eurozone, there are no public guarantees by states that will return you your money, in case the exchange is not able to do so.

Taking all this into account you need to balance the risks and decide what is best for you. Coinbase (https://en.bitcoinwiki.org/wiki/Coinbase) at the moment seems to be the most trusted exchange, with very good security practices. However, you never can be sure of anything in this space. A Ledger wallet (https://www.ledgerwallet.com/) maybe another hardware solution for storing your money in a private wallet, that you can consider if you invest a significant amount.

Opportunities

After we are aware of the risk let’s consider again the opportunities. Some people argue that blockchain is a new transformative technology that’s impact on society might be only comparable to the internet in the past twenty years. On top they argue that the global adoption rate is still marginal and hence the growth in the area will be tremendous. I personally disclose at this point that I am one of the people that are cautiously optimistic about blockchain technology with a time horizon of the next ten years. Within ten years I would assume we will see the technology significantly impacting the lives of a large share of mainstream people.
Nevertheless, whether you believe in the long term potential of blockchain technology or not, for a matter of fact there are a lot of fantasies in the market. These fantasies make it likely that in early 2018 we have not yet seen the all time of the cryptocurrency market. There are indexes that measure the total cryptocurrency markets and others that are more focused on volatility or developer activity to familiarize yourself with the space: https://en.bitcoinwiki.org/wiki/List_of_Indexes_tracking_cryptocurrencies

What amount should I invest?

Taking risks and opportunities into consideration you can define what is the right amount for you to invest. That said, the amount you should invest rationally is different for every person. Since you may lose all the money you invest, you should definitely not invest more than the amount you can afford to lose. Now think about how much of your money you can put at risk. If you are old and you no longer have the possibility to make additional money and you need all your pension and savings to live, then the amount you should invest in cryptocurrencies is most likely cero. At the same time if your income is just enough to cover all your expenses and obligations, again you might not at all invest in cryptocurrencies. However, if you are young and you will be later on able to make up for the losses that you might incur today the situation is different. Also if your income or savings are high enough to spend some money on something adventurous you can consider what that adventurous amount should be. If in any case you already invested some of your money into assets such as stocks, derivatives, gold, jewelry or real estate you may consider to allocate some of your money to cryptocurrencies as well to remain overall diversified.

Which cryptocurrencies should I buy?

This is probably the most difficult question to answer. If you have no idea about the market that you are investing in, then for stock markets index funds usually are a good idea, since they automatically diversify the portfolio for you. Diversification is a recommended investment strategy since it protects you from negative impacts that single cryptocurrencies may experience. As you invest in them you move along with the whole market. Now note that despite several attempts to establish index funds (https://en.bitcoinwiki.org/wiki/Index_Fund) most of them are not yet available to the general public. Of course, this does not keep you from diversifying yourself. The most conservative investments you can possibly make in 2018 are Ethereum and Bitcoin. They are so to say the blue chips of the cryptocurrency market.

Taking into account the generic risks, such as the three-bloody-days scenario, the hack of an exchange or the loss of funds in your privates wallet, it makes sense for you to pick a coin, that at least has the potential to multiply by a factor of 5 within a reasonable time horizon. Therefore you may consider looking beyond the blue chips at other top ten cryptocurrencies measured by market capitalization such as NEO (https://en.bitcoinwiki.org/wiki/NEO) or Cardano (https://en.bitcoinwiki.org/wiki/Cardano). Both of them have a market capitalization that is just a fraction of that of Ethereum as of today. In general, when you invest you should always look at market capitalization and never at prices. This is because the market capitalization gives you an idea of how much that coin can still grow, whereas the price tells you very little about this. Since Bitcoin is currently dominating the market, the whole cryptocurrency market would need to multiply for Bitcoin to multiply itself. Hence also considering other top ten coins with solid tech, promising teams and good execution could be a good choice since they might show higher returns during bull runs but also will correct stronger during bear markets. As said before, diversification is always a good way to reduce risk associated with one coin, so you may consider to invest into a bundle of cryptocurrencies.

Besides you may even have appetite for more risk and pick a project that is not a top 10 coin yet. In that case you should have a very good technical understanding of the product they are building and the technical fundamentals behind. For this scenario the risk is highest but so are the potential gains.

When is the best moment to buy cryptocurrencies?

So, when is the best moment to buy? Opinions on this are very different. Many people will recommend buying into a rising market. My personal view is that it makes sense to buy during significant market corrections, since these represent the biggest opportunities. The problem is when you buy during a correction you can be never sure how deep the market will drop. So, after you have determined the amount of money you should invest, you can make a plan for gradual investment.

Say you would like to buy Ethereum in 2018. You may start investing 25% of your budget at a point where ETH is below 600 USD. Then you invest another 25% below 500 USD, another 25% below 400 USD and eventually the last 25% when ETH is below 300 USD. Note at this point that you very likely may not invest all of your budget that you set initially, because the market never corrects so much. However, this is totally fine, and it makes you feel comfortable during big market corrections, because you know you still have money on the site you could invest and profit form the correction.

I have invested, what is next?

So let’s say you have invested some of your budget into crypto assets. The best thing is now to keep them long term. Many people tried to beat the market, but the experience that successful and experienced traders share on reddit and other outlets is that it is the best thing to hodl (https://en.bitcoinwiki.org/wiki/Hodl).

Nevertheless, it could be useful for you to determine exit scenarios: One such event could be to sell when your investment reached a multiple of your initial amount. This could be a magnitude such as 3x, 5x or anything else that is meaningful for you and still realistic. Another strategy could be to stay invested at least until a certain point in time. A time related event that could trigger your exit could be a major technological breakthrough such as it would be for example the Lightning Network (https://en.bitcoinwiki.org/wiki/Lightning_Network) for Bitcoin.

Of course, if you are very convinced of the technology behind a coin you may just hold that coin forever. Some things just seem to not have a cap, just compare the Apple share price.

The worst outcome is that you sell at any moment in time emotionally driven by news that affect the market, without having any of your objectives accomplished. These are usually the moments when people later on regret selling. Another thing you should try to avoid by all means when trading are Pump and Dump schemes (https://en.bitcoinwiki.org/wiki/Pump_and_Dump).

Once you have invested, a very good idea may be to unfollow the price fluctuations. Although there are many great sources to stay updated with the cryptocurrency space (https://en.bitcoinwiki.org/wiki/List_of_Cryptocurrency_News_Sites) the best strategy may be to not follow the latest news. If you have never invested in cryptocurrency before you will be shocked by the volatility of the market and the daily or even hourly impact of market fluctuations on the value of your portfolio. Just don’t think about it. It is totally normal like this and will remain as it is for at least another three years. Instead of following the news you may consider using a bot, that informs you when certain prices that you defined were reached (https://telegram.me/cryptocapbot).

Never trade out of an emotions, instead stick to your initially set objectives. If you completed your objectives you set at the beginning, but you missed out on further gains, don’t be sad, since you did an awesome job sticking to your objectives and you accomplished what you wanted initially. So you already did much better than all the other people that traded by emotions or decided not to invest at all in this market.

Also bear in mind that the less time you spend thinking about your investment, the higher is the return you achieve on it, since the your profit is always in relation to the time you spend achieving this profit.