Many traders dive into the market without a real plan, or any idea how they want to approach the market: the 4Ws of cryptocurrency can be used as a framework to set up your approach.
The 4Ws of cryptocurrency can be used as a framework to help you create a better approach to the market before diving in. The framework consists of four pillars: the WHY, the WHAT, the WHICH and the WHERE. Let’s get into it!
Before we do though, this article is about investing. There is a fundamental difference between trading and investing. Even though the framework can be applied to trading as well, the explanation given is focused on investing. Keep that in mind when reading this with your trading goggles on.
W1: WHY do you want to invest in crypto?
This is an important question to answer. Many traders enter the market with the idea of making a fortune in mere months. Especially during bull markets, crypto can feel like a gold mine during the late 1840s, when everyone was trying to get their hands on the shiny nuggets.
In the end, let’s not forget that everyone invests to make money, but the stronger your answer to this question is, the better off you will be.
W2: WHAT is your risk tolerance?
Investing involves risk. Contrary to savings accounts with guaranteed interest, your investment may go up in value, but it can also go down. In return, the profits (when the investment does go your way) are generally more fruitful than the savings account.
There are multiple kinds of risks, some of which you can protect yourself against, some of which are unavoidable. A global recession, for example, will affect almost all of your investments, while a single crypto project pulling the rug will have a much smaller impact on a diversified portfolio.
To answer the WHAT, you’ll need to figure out how much risk you are willing to take, and how much money you are willing to put on the line (and therefore potentially lose!).
W3: WHICH cryptocurrencies do you want to buy?
You know you want to invest in crypto, and you know how much risk you are willing to take. Using your investment thesis, the next step is to figure out what cryptocurrencies you want to buy. Find projects that match your reasoning to get into crypto, and perhaps find a few speculative investments where you take a little more risk, looking for high rewards.
This is a crucial step in your process, as the decisions you make here will dictate the course of your portfolio in the months or even years to follow. Keep your thesis and risk tolerance in mind and put together a portfolio that works for you. It doesn’t have to be completely set in stone, but an investment portfolio performs best when it's left alone.
W4: WHERE — and how — do you plan to buy crypto?
At this point, you have figured out your WHY and your WHAT, and you know what tokens you want to buy. It is time to figure out WHERE (and HOW) you want to buy your crypto.
Figure out whether you want to go on the chain, or if you want to use a centralized platform. Centralized exchanges (CEXes) hold your crypto for you and go to great lengths to keep your crypto safe. Decentralized exchanges (DEXes) are places where people can transact without giving up their private keys, which means that you as the user are responsible for keeping your coins safe. Both have their risks and benefits.
From there, you can decide to store your coins on the exchange or move them to a cold wallet. If you opt for the latter, make sure you know what you are doing, as boating accidents are always around the corner.
The plan is complete!
We went over your reasoning to buy (or not to buy) crypto and the amount of risk you are willing to take (and how to reduce it). You have figured out what your portfolio looks like, and then came up with an approach to how and where you want to buy and store that portfolio. It’s time to put things in motion!
From here, stick to the plans you made. You made decisions for a reason, there is no point in planning if you do not hold yourself to it. Good luck!
Writer’s Disclaimer: This article is based on my limited knowledge and experience. It has been written for educational purposes. It should not be construed as advice in any shape or form.