Cryptocurrencies: how to mitigate risks and surge profits
Curious about how to navigate the volatile world of cryptocurrency investing while minimizing risks? This article dives into strategies to help you navigate this landscape with confidence. Discover the importance of thorough research. Learn how online analytics tools can be your go-to ticket for insightful on-chain analysis, helping you make informed decisions with ease.
1. The Rise of Retail Investors in Cryptocurrencies: Opportunities and Risks
It turns out there are quite a lot of people who are already involved in the world of cryptocurrencies. According to the most conservative estimates, there are more than 100 million active users of cryptocurrencies over the world. What is important for us here is not the number, but the fact that the open world of cryptocurrencies has generated a huge number of retail investors in cryptocurrencies. To enter this cryptocurrency ecosystem and begin to actively interact with it, you do not need to present documents, go through KYC procedures, sign agreements with banks or a broker, pay regular commissions to the broker, etc. The entry level turned out to be lower than ever, both in terms of bureaucratic delays and in terms of financial resources with which ordinaries can start investing in cryptocurrencies. And the trend suggests that the number of retail investors from all over the world will only grow.
From the point of view of a conservative observer, all these people look at least naive, because for most ordinary people, cryptocurrencies are strongly associated with two things:
1. scam,
2. high volatility.
And these people are not far from the truth, in fact.
The lack of regulation of the cryptocurrency sector of economic relations by government agencies, as well as the inherent anonymity and decentralized nature of cryptocurrencies have made them attractive to scammers and fraudsters. There have been numerous cases of cryptocurrency-related scams, including Ponzi schemes, phishing attacks, and fraudulent initial coin offerings (ICOs). These incidents have tarnished the reputation of cryptocurrency in the eyes of the public.
Even those instruments that are not formally pure scam are essentially gambling for the retail investor: either they will bring winnings or they will not. At best, it’s 50/50. We are talking about DeFi tools such as Liquid Pools, Yield-farming, Leverage Lending, and others. And as you know, only the Casino wins, i.e. in the case of cryptocurrencies, DeFi protocols.
If we are talking about investing in cryptocurrency, then such a scheme is common here. To begin with, a marketing buzz is created on social networks around a certain crypto-project. The token of this crypto project is then pumped with money, creating artificial demand. The token is showing rapid growth, by tens or even hundreds of percent. Due to the small trading volume of such one-day tokens, this is quite easy to do even without serious investments. Retail investors, hypnotized by the hype on social networks and the forecasts of various “successful millionaire crypto traders,” are starting to invest their money in the next shit coin. After some time, when the organizers see that enough money has already been raised from retail investors, they begin to sell off their tokens, fixing their profits and at the same time taking away liquidity from those who fell for the hype. This is exactly what all meme-coins are. And unfortunately most cryptocurrencies.
And of course, the huge volatility of any cryptocurrency today is a deterrent. This is due to the immaturity of this market. Compared to traditional financial markets, cryptocurrency markets are relatively small and less liquid. This means that even a relatively small amount of buying or selling activity caused, for example, by a negative or positive news background, speculation, general market sentiments, news about exploited security vulnerabilities, etc. can have a significant impact on prices. Among other things, regular market manipulations by big participants cause such price jumps.
However, behind all these scams, hype and bias for thinking and proactive people, cryptocurrencies open up great opportunities in the areas of financial services (investments, trading, loans, passive income), access to capital (crowdfunding platforms, initial coin offerings (ICOs) and token sales), in tokenization of the game industry/social networks/real-world assets, and in terms of establishing decentralized self-governing organizations. It’s not for nothing that there is a common expression that the higher the risk, the higher the reward.
2. Strategy to minimize losses.
So what should a retail investor do? How to minimize risks when investing in cryptocurrencies?
That’s the strategy:
(1) Refrain from the fear of missing out to suddenly get rich with skyrocketing tokens, speculative meme coins, or any hype. Steer clear of anything that appears overly promising, of assets promising effortless profits. 1% / day? or 100% APY? — Invariably scam! Invariably, such propositions are deceptive.
(2) If you want to test the statement from the point 1 and play with DeFi-instruments that promise high and quick profits, go-ahead, try it. But use rational thinking. Bet how much you don’t mind losing and see how many times this DeFi-instrument will actually bring you the promised profit.
(3) After you have played enough with “highly profitable” DeFi-instruments that offer hyped shitcoins in exchange for your real money, pay attention to conservative DeFi-instruments:
- stablecoins lending and
- investment in leading blockchain platforms.
(4) Do Your Own Research (DOYR) & Stay Updated
2.1. Stablecoins lending
Stablecoins are a type of cryptocurrency designed to maintain a stable value relative to a reference asset, typically a fiat currency like the US dollar or a commodity like gold. Tether (USDT) and USD Coin (USDC) are popular examples. In this case, each issued stablecoin is backed by one US dollar held in a bank account held by a central entity.
Currently, this DeFi tool (stablecoins lending) offers more interesting rates than banks. You can read more about this topic here:
and here:
2.2 Investment in leading blockchain platforms.
Among the variety of cryptocurrencies, tokens of leading blockchain platforms are the optimal choice for long-term investment in cryptocurrency and swing trading, based on a number of factors:
- Leading blockchain platforms like have well-established technologies and networks. These platforms have been around for several years, proving their stability and reliability.
- Platforms like Ethereum support a wide range of use cases beyond simple currency transactions. They enable the creation of smart contracts, decentralized applications (DApps), decentralized finance (DeFi) protocols, non-fungible tokens (NFTs), and more. This diversification of use cases increases the utility and value of the platform’s native token. In a word, they provide the very environment on which decentralized applications run.
- Tokens of leading blockchain platforms typically have high liquidity, meaning they can be easily bought or sold on various exchanges. High liquidity reduces price volatility and allows investors to enter or exit positions without significant slippage.
- Tokens of leading blockchain platforms are a good choice for long-term cryptocurrency investing because they provide volatility hedging mechanisms in the form of staking. Staking rewards typically offer stable and predictable returns compared to other forms of cryptocurrency investment. Staking allows cryptocurrency holders to earn passive income by participating in the network’s consensus mechanism. Instead of relying solely on price appreciation, stakers earn rewards for helping to secure the network.
2.3 Do Your Own Research (DOYR) & Stay Updated
We must not forget about the trivial Sturgeon’s law (or Sturgeon’s revelation). In accordance with this law, most existing and launched blockchain platforms today, even well-known and having stable client base, will lose the battle for the audience and cease to exist. There will be literally a few leading blockchain platforms that have proven their unique usefulness over time.
Therefore, it is very important not to succumb to marketing pressure, the frequency of mentions of cryptocurrency on social networks, the mind-blowing increase in the price of the token, and the like. Before making a long-term investment decision, it is important to monitor the dynamics of the “health” of the blockchain platform.
In this context, it is fundamentally important to gain insights into wallet activity, transaction volume and other on-chain metrics. This practice is called On-Chain Analysis. And when it comes to long-term blockchain investments, it seems to be more suitable than other techniques. Because in long term perspective, these metrics are less influenceable by market sentiments and speculators pressure. In the blockchain world, On-Chain metrics are a kind of real sector of the economy. From this perspective, if this real sector grows, then the economy of the blockchain project will grow. It has sense, hasn’t it?
Stay Updated.
Cryptocurrency markets and projects evolve rapidly. Stay updated with the latest news, developments, statistics and updates related to the project you’re interested in. Regularly review project announcements, roadmaps, and progress reports to assess its ongoing development and trajectory.
How long does such research take?
Simple answer. A lot of. The thing is that by its nature, blockchain is open and accessible to all interested people. There is a huge amount of data available for analysis in open sources, large analytical platforms like TokenTerminal, Dune, BitQuery, DappRadar, Coinmarketcap, blockchain-scanners and others.
You can collect and build on your own any data slices you are interested in for any blockchain. This is a fascinating activity in a certain context. But this takes hours, if not days, of your precious time to collect and process the results.
Is there a way to minimize the time spent on blockchain analytics?
It would be simply wonderful if someone had already collected all the necessary metrics and interpreted them, and provided me with the results of such an analysis, you say.
In secret, there are such resources on the Internet.
Blockchainmetrics (https://blockchainmetrics.online),
Messari (https://messari.io)
Nansen (https://www.nansen.ai) ,
Of course, such services are not free. But this is already a question of your priorities.
Conclusion
To minimize risks when investing in cryptocurrencies, avoid hype-driven investments and overly promising returns. Experiment cautiously with high-yield DeFi instruments using money you can afford to lose. Focus on stablecoin lending and investing in leading blockchain platforms like Ethereum for long-term stability.
Conducting thorough research is crucial. Use reliable tools like Blockchainmetrics to gain insights into wallet activity, transaction volume, and other on-chain metrics. Blockchainmetrics provides comprehensive analysis and interpretations, saving you significant time in data collection and analysis, ensuring you make informed investment decisions based on accurate and up-to-date information.
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