A Better Question — Investing In Cryptocurrencies

It’s Not About If You Should Invest, It’s About How You Should Invest

Recently, there has been a ton of hype around cryptocurrencies — — and for good reason. After all, there are very few ways to generate four-digit quarterly returns on an investment.

I love it, cryptocurrencies are one of my favorite topics. In fact, before ever entering the market I spent over six months researching everything from the underlying technology, applications of the technology, history of the technology, established and emerging players in the market, and differing opinions of the market from well-established investors ranging from VC to Wall Street.

On top of that, I’ve been actively investing in cryptocurrencies for almost a year. So when I get into a conversation about cryptocurrencies I’m almost always asked the same question, “Should I invest in BitCoin?”

It’s a good question, but I don’t think it’s the right question to be asking.

Before I continue, let me preface this with two things. First, I’m not an investment advisor … This post is simply an overview of how I’m approaching this market. Second, this market is unregulated and untested … There is no FDIC insurance, no government backing, and there’s not enough data to argue the viability of one investment strategy over another.

A Few Things Everyone Should Know

First, don’t be misled by the term currency — As of right now, almost all cryptocurrency valuations are based on two factors, supply and demand of the currency, and an intrinsic value based on future potential. Unlike the USD, it’s not backed by a GDP, and unlike gold, it doesn’t hold a value anywhere in the world.

Second, the hype is real — With these crazy overnight returns, there is a huge pressure to invest immediately. Don’t get caught up in it. Take your time, learn the technology, watch the market, if you buy a BitCoin at $10,000 and it goes up to $100,000 a year later, great. But there’s also a good chance that you buy one at $10,000 and it goes to $1. The only way you will sleep at night is knowing that you made a decision based on your own reasons.

Finally, it’s half-baked — No one in the crypto investing world will tell you this, but the truth is that less than 1% of the population actually uses cryptocurrencies for transactions and only about .001% of businesses accept it. There is a very long way to go before this technology is truly adopted.

It’s Not About If … It’s About How

When it comes to investing in cryptocurrencies, for me it’s not about if you should invest, but all about how you should invest.

1. Manage your risk

The most important question to ask yourself is how much risk are you willing to take? Good portfolios are constructed to achieve a balance and focus on not losing money. Bad portfolios are generally unbalanced and focus only on making money. In my opinion, cryptocurrencies are so risky that I would almost rather use the term gambling than the term investing for them. To manage this risk, I’ve limited my exposure to only 5% of my portfolio. If I lose 5% of my portfolio it’s a bad year, but I can recover.

2. Don’t get greedy

Because I’m limiting myself to only 5% of my portfolio, I’ve had to rebalance almost every two weeks. Rebalancing so often has allowed me to recoup my entire principle and some, in just a few months. For me, that means that if my investment goes to $0, I’ve lost nothing because my principle is safely tucked away in lower risk investments.

3. Buy low, sell high

The cryptocurrency market is extremely volatile, in fact, almost every day there are +10% dips. If you are truly looking to get into the market, take your time, watch the charts, and buy the dips. It might take a few days or even a week, but it will happen.

As I mentioned above, if you make a ton of money that’s great, but if you lose all of your money, it’s a totally different story.

4. Understand what you bought

Finally, there are thousands of cryptocurrencies, they are not all equal, and some (most) are a scam. If you are going to buy a cryptocurrency, take some time and learn about what you are buying. Not all currencies are like BitCoin and they are not all designed to increase in value or even hold value. (You can read more about that here)

In Conclusion

I want to make sure that you understand that though I’m long on cryptocurrencies, I’m short on the existing market and am confident that it will look very different this time next year. If this post does anything, I hope that it saves a few people some heartache and maybe even helps you to take advantage of this crazy bull market.

My final piece of advice is to caution potential investors that cryptocurrencies have almost always been in a bull market. This means that everyone is making money and everyone thinks they are a genius investor. But in the words of Warren Buffet, “Only when the tide goes out do you discover who’s been swimming naked.”

Don’t be that guy. Enjoy the bull while it’s here because it will end … it’s just a matter of time. And even more importantly, don’t gamble with money you can’t live without.

About the Author: Jesse Williams is a young entrepreneur, husband, father, technologist, and SaaS marketing expert. You can follow him on Twitter and learn more about him and his projects here.

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