Image source: Jim Makos, CC BY-ND 2.0
In 2011, a study of academics by the University of California indicated that most individual investors achieve results that are worse than standard investment benchmarks. One of the main reasons was that people were trading emotionally, rather than following a clear strategy. Simply put, if in the past they entered a trade that “coincided with pleasure” they would try to repeat those actions and avoid those that “generated pain.”
It has nothing to do with a well-thought-out investment strategy that will take into account elements such as company results or factors that may affect the stock performance. It is also impossible to pick an appropriate investment strategy without analyzing the investors’ risk tolerance, i.e. the level or amount of capital they are prepared to lose. These are just some of the many things to consider before entering the crypto market.
Four investment personality types
There are four main personality types of investors according to the CFA Institute: cautious, methodical, spontaneous, and individualist. These categories represent investor willingness to take the risk.
- Cautious investors are very sensitive to losses of their portfolio value. Their actions and decision-making process are often driven by fear. It also makes it hard for them to design a forward-looking strategy and take investment advice.
- Another type of investor is the methodical one. These guys follow discipline, make decisions that are based on detailed facts, and do not allow emotions to overtake their strategy.
- Spontaneous investors usually trade following their feelings, which may result in risky investments (which they do not always understand).
- Individualists tend to trust facts and their own market research, they are also more risk averse in general.
Three crypto investment strategies
There are also several crypto investment strategies to choose from.
Buy & hold (long-term investment)
The main way of minimizing investment risks when dealing with cryptocurrencies is by forming a basket of several coins and holding it for a long time. This allows the trader to balance risks and maximize a probability that the average portfolio value will increase over time.
Another advantage of this approach is that the investor does not need to constantly monitor exchange rates and spend loads of time on market analysis. Checking prices occasionally is enough. The optimal investment term for this approach is 1 to 2 years.
Exchange trading (short-term investment)
This strategy involves the daily monitoring of exchange prices and conducting multiple trades in the hope of making a profit from coin value fluctuations. This way you can get a regular income, but this requires lots of time and knowledge.
ICO investment
The most sophisticated investment tool in the crypto world right now. According to CoinDesk, in 2017, initial coin offering campaigns raised more than $5 billion, and in just three months of 2018 this threshold was surpassed as startups collected $6.3 billion.
ICO investors face multiple risks as they put money into a project which may be at the early idea stage rather than a finished product. The token sale participant can only analyze openly available information about the project and study its white paper, materials from the website, and text/video reviews.
The risk of unsuccessful investment is pretty high in such a scheme, as it is difficult for an non-professional investor to assess the prospects of a particular business.
How to map a personality to crypto investment
Personality typing is an important tool in investment. Fiat financial advisors and fund managers often use it to offer customers a better strategy tailored to their mindset.
To define this they use custom questionnaires which help to explore aspects such as age and size of the current investment portfolio or profession. For example, it is considered that retired elementary school teachers tend to fall into the cautious group of investors, architects and engineers are usually placed to the methodical group, while salespersons are more spontaneous in their investments.
So, before starting crypto investment you should understand that it is crucial to analyze your own life experience, factors that drive your decision-making process, career and any financial background you’ve ever had. Once you have defined your investment personality, it is time to choose an investment strategy tailored to it.
If the analysis shows that you can take bigger risks, then crypto trading may be for you. Should you decide to enter the crypto market, you will need to choose the exchanges to trade on. There are currently almost 200 cryptocoin exchanges, so you will need to conduct additional research to pick the best option. Usually, traders analyze commission, overall reliability, jurisdiction, and financial stability of the trading platform.
The latter is very important, as situations where investors lose their funds due to hacks and security breaches happen quite often. This is why traders try to pick exchanges which can offer insurance (like Coinbase does) or have some sort of reserve fund to cover expenses if something happens. For example, Bithumb exchange which was recently hacked, promised that it would fully compensate users out of its fund of $450 million.
If you are more interested in spontaneous investments and would like to support a promising ICO project, don’t forget to do your homework and carry out due diligence on the project. There are a number of factors that experts recommend you analyze, including team members’ profiles, market numbers presented in the project’s white paper etc.
In the case of less risky users which prefer long-term investment, it is important to build a diversified cryptocurrency portfolio. Fiat investors usually use benchmark indices such as S&P500 and Nasdaq Composite as they allow the opportunity to trade whole sectors easily and manage complicated portfolios in a straightforward investment, thus reducing the risks and volatility of the portfolio.
There are also similar tools for the crypto market — for example, Cryptoindex 100 (CIX100) is an automated index calculated by a machine-learning algorithm which analyzes cryptocurrencies. This tool allows traders to build sophisticated portfolios of 100 coins with reduced volatility and risks. Due to automation, human influences are reduced to a minimum. After the portfolio is built, an investor can track coins via specialized platform services from time to time.