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Crypto Basics

How to Invest in Cryptocurrency

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Published on:
March 1, 2021

Without giving any financial advice, here are some things to keep in mind if you're thinking of investing in any cryptocurrency.

Table of Contents

The crypto market may look like a sea of green in 2021, but make no mistake, it is a treacherous sea where both bounty and peril await at every Elliot wave. Stories abound of vast riches going to early adopters, to fortunes lost on misplaced hard drives, forgotten private keys, bad trades and uhmm… pizza?! 

In order to accumulate sweet profits instead of morale-sapping losses, you need to be patient, consistent and information-driven more than anything else. One thing is for certain, if you invest in cryptocurrencies, you are in for a wild, wild ride. There will be days when you’ll be jumping for the moon, and days where you want to pull the hair out of your head. 


Luckily, there are also many more conservative investment options in crypto available in 2021, such as staking, where you fixed passive interest on your staked funds. 


In this article, we’ll take a look at different types of crypto investments you can make in 2021, and some strategies to know when to load up, cash out or stop. 

Things to Consider Before Investing In Cryptocurrency

How Much Are You Willing to Lose?

The golden rule of investing is to only invest what you can afford to lose. That way, you won’t have dire consequences should your return on investment (ROI) go south. 

The deeper you go into the market, especially when it comes to buying newly-launched tokens, the more disciplined you should be in following the golden rule.

Something hugely important to consider here: do not chase losses due to bad decisions or emotions. Make sure you understand the concept of sunken cost fallacy (basically it equates to “don’t put more good money into bad investments”)  and put your funds to work with a clear and objective mind. 


FOMO and FUD Are Your Enemies

Cryptocurrencies are extremely volatile, with unforeseen ups and downs. FOMO (fear of missing out) usually happens during a price run, but what goes up must come down. Eventually, market conditions will change due to overbought conditions or bad news, and FUD (fear, uncertainty and doubt) will take over and drive your investment’s price into the ground. All it takes is a well-timed Elon Musk tweet or an SEC announcement to bring on huge volatility. 


Fear, or any emotion, is not a reliable base to hinge your investment decision. Therefore, never act based on FOMO. Investing in a project based on hype is both risky and stupid. 


Factor in the Tax

Some jurisdictions like the United States and other parts of the world consider crypto a taxable asset. Consequently, they administer capital gains tax. Tax is a critical aspect to consider before investing in cryptocurrency. If not done right, it could eat into your profits or get you charged with tax evasion.


How to Invest in Cryptocurrency

To invest correctly in the cryptocurrency market, you need to combine extensive research with strong risk management. And to minimize taking a wrong turn, here are the things you need to consider before investing in crypto:


  1. Research extensively.
  2. Manage your risk.
  3. Decide how you're going to invest


Research Extensively

A lot of newcomers invest in crypto because of a friend, or worse — because a random person on the internet said to. While a recommendation from a friend or stranger is not inherently wrong, chances are they are not 100% honest with you and only emphasize the potential upsides of crypto investing. This can be because they want you to invest to further drive up their existing investment, or because they entered the market mid-way in a bull cycle and have only seen prices go up. 


The concept of survival bias, when applied to crypto, describes the logical error of focusing on people who have made profits instead of losses simply because winners tend to share more about their experience, while losers would rather not talk about them.


Therefore, never take other people’s word for anything regarding crypto investments, nor should you believe anything at face value. Some key areas to study include the different cryptos with a positive ROI.


Manage Your Risk

Take all the steps necessary to ensure that your capital won’t get burned. As much as possible, avoid using over 10% of your working capital in one trade. Professional traders know that no matter how perfect you execute a trade, the possibility of losses is still there.


Don’t put all your eggs in one basket, either. Always remember that different cryptocurrencies carry different risks and have varying ROIs.

Again, the golden rule: never invest more than you can afford to lose. 


Decide How You Are Going To Invest

The crypto market is broad, with tons of money-making opportunities popping up everywhere. Consider all opportunities to try and see where you could fit and focus on that. In the next section, we shall illustrate the different ways to invest in crypto.


Consider two different approaches:


Dollar-cost averaging (DCA) is a popular method for investors with less experience and a lower risk tolerance. Investors buy the same dollar amount of crypto in predetermined intervals (say monthly) to ensure that whatever the market does, their investment stays in line with the long-term average price. 


Average down is another useful approach where an investor aims to lower the cost of his overall investment by buying more heavily in price dips. For example, someone who initially bought 10,000 USD of an asset when it was 2 worth dollars, may wait to buy another 10,000 or 20,000 dollars worth when the price drops to USD 1.50 or lower. When the price returns to 2 USD, they can sell at a profit. 


Different Ways of Investing In Crypto

Trading

Technically not an investment, many confuse trading and investing. While both are speculative in nature, trading presents more risk but also more opportunity. 


Trading on a crypto exchange can be very profitable, or make you want to jump off a bridge. Day trading has become especially popular as a result of COVID-19 and the Work-From-Home (WFH) trend, but most traders are ill-equipped emotionally and knowledge-wise to swing trade effectively on especially shorter time frames. Scalp trading, where you enter and exit the market after a few percentage points’ gains, can add up quickly, until a big price drop swallows your profit. 


To give yourself the best chance at success, apply a combination of technical analysis (TA), where you study Japanese candlestick charts and draw lines for perceived resistance and support level breaks, and fundamental analysis, where you research the project and try to gain insights on their future performance based on their team, partnerships and roadmap. 


Unless you have taken a proper TA course and extensively practiced to read charts with a small investment amount, avoid swing trading unless you’re looking at 4h candles and longer. Fundamental analysis is hard as well to conduct in crypto, as projects are very young, hyped up and there are almost never audited reports and documents available. 


Leverage trading is a high-risk, high-reward strategy, where you can pump up your trade up to 125 times. First made famous by BitMEX’s 100x leverage trades, this strategy can be disastrous when the market moves against you quickly, like we saw during March 2020’s Bitcoin meltdown. 


Trading can be extremely profitable if you do it right and remove emotion from the equation. If not, chances are you’ll be buying high and selling low. If you are going to trade, do your fundamentals research, look for coins with a “network” effect and a utility case, and always, always, apply a stop-loss. For example, Binance’s One-Cancels-The-Other (OCO) option allows you to set a sell or buy order with a targeted price higher and lower than the current price. Whichever is reached first will execute. 


For example, if Bitcoin is $50,000 and you either want to buy more at $40,000 or $60,000 (both prices will represent a trend reversal), you can set an OCO order and forget about it, letting the market do its thing and the dojis fall where they may.

Staking

Staking is the process of locking crypto in a wallet to participate in validating transactions on a specific crypto protocol. Consequently, you can earn incentives in the network’s native currency. Note that staking is possible on blockchains using a proof-of-stake (PoS) consensus mechanism.


Popular platforms leveraging staking include Ethereum, Cardano and EOS. Depending on the type of PoS employed, there are two ways crypto investors can stake their coins. 


One way is through direct staking, where an investor locks their coin and directly participates in securing the network. The second one is called delegated staking. Often, delegated staking involves paying a small fee. 


However, it also allows people, who otherwise can’t afford to spend thousands of dollars, to participate in staking with whatever amount they have.


HODLing

HODL is another term for buying and holding. Some investors prefer to purchase cryptos like BTC and keep them for a long time, waiting for the price to increase so they can sell — аnd this actually worked out for several people.


But to pull this off, you need to be patient and disciplined enough to hold on to your coins even when the price plummets. Therefore, HODLing is best-suited for investors who have a strong data-driven conviction to a particular project, and strong nerves to pull them through market slumps. However, keep in mind that with the wrong assets, you’ll be stuck forever. After the previous 2017 bull run, most altcoins lost over 95% of their value, and most have not come close to their previous peaks. 

DeFi

Decentralized finance (DeFi) has taken the cryptosphere by storm, with roughly $40 billion of assets locked. 


The most lucrative DeFi investment scheme by far is liquidity mining, where a user deposits crypto in a decentralized exchange to facilitate trading. In return, a user gets a percentage of the fees. The leading DeFi platforms that enable liquidity mining are Uniswap and SushiSwap, but Pancakeswap and Bakerswap are also growing fast.


To know more about DeFi investing, click here.


Non-Fungible Tokens (NFTs)

NFTs are tokens that cannot be exchanged by another identical item since each of them are unique. NFTs can represent either tangible or intangible items like artworks, collectibles, virtual real estate, trading cards and much more.


Unlike fungible cryptocurrencies, NFTs presently are only tradable on specialized marketplaces such as OpenSea and Rarible.


As the fastest-growing subsector of the crypto space, NFTs present a new and hot way to invest. Between January and February 2021, more than $100 million worth of NFTs were sold. Top on the list were CryptoPunks and Hashmasks.


There are two ways to make money from NFTs. One is to mint and sell them. For instance, if you’re an artist who can create digital paintings or 3D artworks, you can sell them on the aforementioned marketplaces. Or, you could simply buy other people’s NFTs and sell them at a higher price later.


Crypto Fund

If you are a rich investor that shivers at the thought of directly holding cryptocurrency, then a crypto fund is your best bet. Among the leading funds is Grayscale, which provides indirect exposure to major cryptocurrencies, including BTC, ETH and LTC


Closing Thoughts: Crypto ETF Coming in 2021?

Of all these investment options, there is one option that trumps all others in the impact that it will create. Only problem is, it’s not a reality yet. 


An SEC-approved Bitcoin ETF has been on the wishlist of BTC investors for years, as many believe that it will surely bring massive adoption and price increases to the market and provide a much safer investment vehicle for mainstream investors. 


Don’t believe me? Just look at what Canada’s first Bitcoin ETF did recently. 


Several companies have applied in New York and failed, but hopes are very high that 2021 is indeed the year. Fingers are crossed that the Morgan Stanley-backed NYDIG application gets the greenlight.  If that’s the case, it could make any investment up to this point look good!


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Author(s)

Werner Vermaak

I'm a technical writer and marketer who has been in crypto since 2017.

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