The 4Ws of Investing in Cryptocurrency

The 4Ws of Investing in Cryptocurrency

4 months ago

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 Investing in Cryptocurrency


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.

It is important to have a solid answer of why you want to invest in crypto, preferably beyond pure money goals. This will help you hold on to your investments over time, even if it takes a while for the gains to show up.
Many investors have a fundamental belief that crypto has a future as a payment system or view it as a hedge against future inflation. Others use crypto to escape the ever-tightening grip of the financial system. Read up on what crypto is before you invest in it, and chances are one of these answers will eventually pop up in your head.

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.

Diversification is a tool that investors use to protect themselves against individual risks, such as the “rug pull”. By putting your proverbial eggs in multiple baskets, the impact of a single project going under is reduced to a minimum. Diversification works best when the investments are unrelated to one another, spread over multiple markets like stocks and crypto.

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.

Firstly, decide on the time horizon of your investments. Do you want to hold on to your investments for multiple years, or is your thesis limited to the next few months?
Then, you should decide at what price level you want to purchase your portfolio. You can choose to buy at market value or wait for prices to hit a level that you consider a good entry. Do you want to buy all in one go, or do you want to use dollar-cost averaging? Either is fine, so long as you have good reasoning for it.
You will also have to figure out where you want to get out of the investment. At what point do you take a loss, or where do you take profit? All of these decisions we just discussed will play a role in the following:

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.

Once you narrowed your search down to DEXes or CEXes, it is time to start comparing different platforms to find one that suits your needs. Each exchange has their own benefits, and range of coins on offer. Here’s our guide on exchanges on CoinMarketCap!

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.

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