If you’re completely new to investing but you’re interested in cryptocurrencies, Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond is the book you NEED to read.
But let’s not fool ourselves.,,
So, having your best interests at heart… I’ve gone and read the book for you extracted 10 of the best key takeaways to help you with your cryptocurrency investing goals of 2018.
The book has been split into 3 sections of WHAT, WHY, and HOW for cryptoasset investing and it is geared slightly towards old-school financial investors (i.e. people who buy stocks and bonds).
HOWEVER it still has a TREASURE TROVE of valuable insights, especially for the people I call “pure crypto investors” aka people who don’t own any stocks, bonds, or other traditional financial assets at all..
The 10 key takeaways to follow are the most valuable insights I came across for “pure” crypto investors seeking their share of the glorious bounties that the Wild Wild West of Cryptoland has to offer.
This article is not intended for someone who is totally new to cryptocurrencies and assets, if that is you, do yourself a favor and pick up the book instead by clicking here so you can get the whole picture.
Without further ado, the 10 key takeaways are..
1. “Fear and greed remain uniquely human traits that can and will find a place in cryptoassets.”
As Benjamin Graham touts in his masterpiece The Intelligent Investor, you want to focus on the inherent value of an investment without getting caught up in the irrational behavior (i.e. emotional behavior) of the markets.
(If you don’t know who Benjamin Graham is, he was Warren Buffet’s mentor.)
Managing your emotions is easier said than done but remaining level-headed, rational, and calm during times of chaos will enable you to prevail victoriously when everyone else is losing their shit. I highly recommend picking up meditation if you haven’t gotten on the bandwagon yet.
Once you are better able to manage your own emotions and feelings, you can then advance to the next level, which is to analyze other market participant’s emotions and feelings and what this may indicate for the market and your investments.
2. This isn’t just some ponzi scheme, distributed ledger technology aka blockchain is here to stay and will likely power the future.
I feel fore the people who haven’t fallen down the rabbit hole of crypto, bitcoin, blockchain and how all of this ‘magical’ stuff works.
These people are truly missing out on the good life.
And by good life I’m talking about the life where you forget about everything in your life pre-crypto because you now spend all day, everyday, grinding and hustling it out on all things crypto related.
For those of you who haven’t had the pleasure of getting sucked down this rabbit hole, what you must realize is that…
Emerging technologies always encounter heavy scrutiny and skepticism because people are naturally resistant towards change and tend to be scared of the unfamiliar.
On the other hand, early adopters who express undying faith are the ones that enable these emerging technologies and innovations to see the light of day and who kick start the snowball effect that accelerates the emerging technology towards mainstream adoption.
“You should be taking this technology [blockchain] as seriously as you should have been taking the development of the Internet in the early 1990s. It’s analogous to email for money.”
- Blythe Masters, Presentation to Wall Street Bankers at the 2015 Sandler O’Neill & Partners investor conference
3. Stop calling everything cryptocurrencies! Cryptoassets is a better term because there are in essence 3 broad asset types in crypto:
- Cryptocurrencies (cryptos used as a currency or means of payment)
2. Cryptocommodities (cryptos that offers provision of a commodity such as data, storage capacity, or computing power)
3. Cryptotokens (or utility tokens that provide access to finished goods and services on blockchains — these are essentially tokens that allow you to access and use decentralized applications)
4. Do not forget about the developers and miners! They are vital to the long-term and survival of any cryptoasset you invest in!
Developers and miners are the wizards who tinker away in the background to allow everything to function smoothly.
If you’re in this space, it’s a good idea to understand and get to know the other players in this space, developers and miners are no exception to this rule, I’d even go so far as to argue they’re likely one of the most important players to pay attention to.
In cryptoland, developers are the ones who quickly iterate, fix bugs, and improve crypto networks and platforms, whereas miners provide the hardware and resources necessary to secure a crypto network and keep the blockchain up and running.
[NB: It would be prudent to consider the total amount of computing hash power available in the world and whether this amount would be enough to support all the blockchain projects that are coming out with each passing day.]
From the note to myself from above, my guess is that:
- Miners will either make an absolute killing in the future by setting up mining rigs in empty warehouses China style;
- A lot of these blockchain projects are doomed to die and fail (No sh*t Sherlock!) BECAUSE (1) there simply aren’t that many skilled blockchain developers in the world at the moment and (2) there might not be enough hardware, miners, or resources to support the different blockchains coming out; OR
- A new consensus system may come to fruition that either halts, puts an end to, or slows the adoption of Proof of Work blockchains making miners redundant.
I believe all 3 of the above scenarios are likely to occur… It’s more a matter of to what degree each scenario is likely to unfold.
5. Modern Portfolio Theory and the Sharpe Ratio explains why you scan remain bullish on crypto markets for the long-term
Institutional and traditional investors will eventually WANT to get in on cryptoassets.
With almost near-zero correlations between crypto markets - or in this case bitcoin - and traditional financial markets, adding bitcoin to an investment portfolio will not only reduce the overall risk of the portfolio but could also potentially increase returns too.
What this means for traditional investors is that it would be a SMART move to add crypto assets into their portfolios because this would reduce the OVERALL risk of the portfolio while still maintaining or allowing for an increase in overall returns.
The wizardry behind why this is the case even despite bitcoin’s volatility is explained by the Modern Portfolio Theory (MPT) — you’ll need to read the book or hit up Google to figure this one out as I ain’t got the time or space to cover it here.
6. Dollar cost average into your entries and exits of the market.
If you bought $100 worth of bitcoin in November 2013 when it just hit its all time high back then, that same $100 would be worth only $83 in January 2017!
If you had instead chosen to “dollar cost average” into your position, you would have experienced a much better return (or at least less of a loss).
If you have no idea what dollar cost averaging is, it’s essentially buying into or selling out of your cryptoasset over a couple days or even weeks.
This means you buy or sell the crypto at different price points instead of putting EVERYTHING IN at one single price.
For example if you have $1,000 to invest, you can break down that $1000 into four lots of $250 and purchase bitcoin or any other crypto over a 4 week period so you “dollar cost average” in.
This is a good way to mitigate risk and also helps to minimize regrets in the case you buy the cryptoasset at its all-time high only to see it plummet every day and week following that.
7. What regulations could mean for crypto and ICOs in particular..
With governments making progress on regulating crypto with even regulation compliant exchanges coming to market it would be prudent to consider how these factors will affect the overall crypto market, in this particular case lets considering ICOs as an example.
Ben Evans, an analyst at Andreessen Horowitz, published a report in 2015 about Initial Public Offerings (IPO) showing how investment value had over time shifted more towards private investors.
In 1999 the median time taken for a tech company to undergo an IPO was 4 years and the time taken stretched out to 11 years by 2014.
What this meant was that retail investors — people like you and me — had to wait almost 3 times longer to get the opportunity to buy and invest in these tech companies.
This also meant the private market and investors had a greater amount of time to put more capital into these companies and build up a larger portfolio in them.
This delay in IPO time resulted from increased regulations as well as the financial crisis in 2008. As a result of more regulations, this resulted in more stable IPOs and reduced the risk investors faced when investing into these IPOs however with less risk comes less rewards.
The majority of returns in new tech companies now are taken up by private investors, since Microsoft’s IPO in 1986 private money has grown 20,000% whereas public money experienced gains of 60,000%.
Facebook’s IPO in 2012 however saw private money grow 80,000% with public money growing just shy of 1,000%.
So how about we connect the dots…
IPOs are when a private company sells their shares to the open public and coincides with getting listed on a stock exchange so that anyone can buy, sell, and exchange the company’s shares.
Spotify is a tech company that will soon be undergoing an IPO.
When it comes to ICOs, they share some similarities to an IPO. For instance when a cryptoasset is unlocked and made tradable or when the coin is listed on a major exchange allowing everyone to now buy and sell the cryptoasset/token.
ICOs aren’t exactly the same as IPOs but a lot of people have used it as a point of comparison so I’ma just roll with it for now.
One of the major key takeaways from Evan’s report as illustrated above was the fact that since 1999 due to increased government regulation and intervention this caused an increase in the time tech companies took to undergo an IPO from 4 to 11 years.
We have already seen and will continue to see this same phenomenon occur in the ICO market.
From the very beginning, ICOs did not require any KYC/AML information at all to be collected, but now this is general best practices and has resulted in a lengthier process when it comes to undertaking ICOs.
Returns are Shifting More toward Private Investors
More recently however, more and more value looks to be shifting towards the private investor markets for ICOs and away from the public.
Several ICOs (*cough* Gems *cough* Refereum) have chosen to cancel and forego their public crowd sales because they managed to fill their hard caps through private presales.
Not only are presale investors taking up the majority of allocations, on top of this they’re also given discounts and bonuses so they essentially buy cryptoassets at a lower rate compared to the public crowdsale rate.
With regulations coming into effect, you can expect the ICO process to take more time to undergo then it does now as more and more stringent information and procedures will need to be adhered to.
What this means is investors will face far less risks in participating in ICOs, however returns are also likely to be lower as a result, especially if returns continue to shift towards the private investor market.
8. There are two primary drivers behind the value of crypto assets: utility and speculative value.
Speculative value is driven by people predicting how widely adopted a particular crypto asset may be in the future.
The belief here is that the more widely used and adopted the cryptoasset is, the higher the price will be because of increased demand.
Generally as a crypto asset matures over time, less and less of it’s total value will derive from speculative value because it’s utility value will catch up overtime and begin to “replace” value accrued to the cryptoasset which had once been speculative.
For example, we could say speculative value of a cryptoasset comes from people believing the team will be able to execute and get their main net up, live and running at a certain date.
This “speculative value” would then be priced into the cryptoasset by those who believe this is the case and that also a live main net will produce even more value in the future for the cryptoasset.
When the main net goes live however, there will no longer be any further speculative value in the price due to anticipating the main net will be live and running by that date as the team has now executed and gotten the job done.
The main net now provides utility value for those who access and utilize it.
With that being said however, it is possible for investors to speculate even further now that the main net is live with regards to future opportunities, partnerships or planned milestones the team can continue to execute on.
Once investors believe little speculative value is left in a cryptoasset this would mean the price is now primarily reflected by the utility value of the cryptoasset and has thus reached its “maximum” value for an investor.
At this point most investors would sell out of their positions because little to no speculative value is left and thus there is little potential for further price appreciation.
9. Volatility in the cryptomarket is cray cray
Anyone who’s been around the block in crypto is familiar with just how volatile the markets can be. For the uninitiated however, the volatility of the markets can be alarming to say the least.
The volatility and drop in price of Bitcoin from several of its majors peaks and troughs has averaged out to a 63% decline from its peak prices, with the highest depreciation in price at 85% and 93%.
After Bitcoin reached an all time high of $19,500 USD in December 2017, it dropped 69% to a low of $6000 USD in February 2018.
When a steep drop in price occurs, it generally happens after prices have risen parabolic ally and is followed shortly by a slow steady drawn out decline in price.
In the tulip mania bubble of the 1600’s, the common people, the people with the least experience in investing that got swept up in the madness of the crowd were the people who got rekt the hardest.
Therefore unless you are willing to hodl on for dear life despite how volatile things get in the market, it might be smarter to sit out this market until you gather up some bigger kahoonas or wait until the markets are much less volatile — at that point however rewards are likely to be much lower.
10. Fundamental Analysis boils down to:
- Decentralization edge of a cryptoasset
- Valuation of the crypto network
- Community and developer support
- Relation to crypto siblings (e.g. did they fork, is it an ERC20, new blockchain, who are competitors?)
- Issuance model (how the token or coins are minted, total circulating supply, inflationary or deflationary etc.)
I won’t dive into each of these points as they would require a separate article themselves and this is already long enough as it is!
Hope you enjoyed the read — if you did, please make sure to smash down that clap button (+50) to shower me with your love and appreciation.
(I’ve heard that people who do this tend to see their next crypto investment moon 60% of the time, every time ;)