Cryptos — Who to Trust (with your money)
Hey guys, I am back as I promised to discuss cryptos a little bit more before we can take an informed decision about investing in Cryptos. If you recall, in the previous two blogs we discussed the new technology called BlockChain along with probably its first application BitCoin. We also discussed that it is a virtual currency having no underlying asset such as gold backing and presently it has very limited real-life usages except for storing wealth which if kept in legal tender (currency notes) of any country will only depreciate with time due to uncontrolled printing of currency notes by governments and central banks. While on the other hand, Bitcoin in specific and many more such Cryptos, by design are limited in numbers, and hence theoretically its demand over a period of time is likely to increase while supply remaining constant. We also examined investing in cryptos from a moral and legal point of view and came to the conclusion that while there certainly are no moral issues involved in crypto investing, because of the very nature of cryptos which makes it immutable and uncontrolled, the majority of governments world over are not comfortable giving it the status of legal tender. This implies that for the foreseeable future, government currencies such as ₹, $, €, £, ¥, etc are likely to be the mainstay of the financial system while cryptos may coexist catering to storing of wealth.
Whether it is a safe option???? My initial gut feeling says certainly not……..but as the case is with most, risky investments……..this too gives extremely high returns and this surely may lure many investors such as you and me. Then the last point we discussed in the previous blog was ……what should be our strategy, if we decide to invest in it, and for this answer, we alone have to do some soul searching as to what is our appetite for risk-taking and how much losses we can bear while taking a blow on the chin. In simple words it means that, don’t bet everything on cryptos even if you are one of the cult followers. Limit your exposure based on knowledge and appetite for risk and certainly not more than 10% of your portfolio in any case.
Now the question, for which you have been waiting for a week. Which crypto to choose as a winning horse and which all are to avoid as a rabid dog? Please do a google search first, as to how many cryptos are actively trading worldwide ????????? Spoiler alert!!!!!!!! The answer may dissuade many of you from investing in this asset class……..I am sure, the google search must not have provided any definite answers, instead it might have thrown different figures quoted by different sites. But, it did lead me on to my favorite site for all crypto matters ….’CoinMarketCap.com’. As per this site, at the time of writing this blog, there were 6598 cryptos actively being traded. This is a hell lot of cryptos in a relatively short period since 2009 isn’t it???????? Along with this the question which naturally pops up is …will all these currencies survive such a steep cut-throat competition not only among themselves but also from new cryptos being launched every day???? This too can be easily guessed….of course not….and this exactly should instil some discipline and caution in us. Please always keep in mind the comet-like success story of OneCoin and its founder Ruja Ignatova who in 2014 claimed it to be BitCoin killer. OneCoin had everything, a large cult-like following, a promise of a stable currency, crypto-wallet, and this even claimed utility, wherein purchases could be made within the community by using OneCoin. Then suddenly in 2017 after collecting investments of more than $4 billion, she disappeared, forcing all her investors to lose all their wealth.
Ok….so, what can we do to make sure that we don’t fall into a trap similar to OneCoin. Let's see, what we as an investor, with some exposure to investing in the stock market can do to minimize our risk….
Step 1 — Vintage — Since the idea of cryptos is no longer a novelty, it may be helpful to check the vintage and its growth since its launch. While the newer currencies may be cheaper, they certainly have a higher risk of folding or being manipulated. In case you are attracted to newer crypto and still want to manage your risk, then the only solution remains to dig deeper in its white paper and to see for yourself if you are convinced about the idea or not. For lesser studious people like me, simply choose a crypto that has been around for some time and about which google or youtube will reveal every detail worth knowing.
Step 2 — Market Capitalization — In my view, this alone will cater to more than 50% of risk management. Higher the market capitalization, more chances of it being stable and riding the future insecurities. Cryptos being a newer asset class for investment, there still is a large variance between professional advice as to what should be the ideal market capitalization. I personally would recommend that If we choose the cryptos with more than $ 1 billion market capitalization, it is like investing in Large Cap stocks in the stock market. These will offer lesser volatility as well as a lesser risk of duping by some ultra-smart individuals or organizations. For the beginners, I would strongly recommend restricting themselves to the first page of CoinMarketCap which lists the top 100 cryptos with respect to market capitalization.
Step 3 — Supply vs Demand — Depending upon white papers and its philosophy, there are various types of coins. BitCoin which at max will be capped at 21 million, is limited by number and no matter how much the demand increases, its supply will remain frozen. Therefore for wealth storage, this ranks very high among other cryptos. However, this has one the highest transaction charges. On the other hand, there are many cryptos that are limited by how many new coins can be added per year. They offer reasonably lower transaction charges while still retaining the favorable supply-demand ratio making them an attractive investment option.
Step 4 — Choosing Between a Storage (Coin) vs Utility vs Security Crypto — Simply worded, Storage token most commonly referred to as Coin can be imagined as physical coins. In essence, these can be used to either store wealth or to pay for a product or service. While Utility Tokens are restricted to the purchase of products and services of issuing companies alone, these too similar to coins can be cashed in real physical currencies. For example — Uber token is a utility token and can be used for booking a cab from Uber but if you want to buy a Tesla car with it, you would either have to exchange it with physical currencies or Coins such as BitCoin. The last in this category is Security Token which is a form of investment in the parent crypto company. This can be considered as a digitized share and will give you almost similar rights such as voting and share of profits. Which category interests you will decide among which all cryptos to choose your potential investment from. For beginners, it may be safer to start with either Coins or Utility tokens and progress on to Security only after gaining sufficient knowledge of this field.
Step 5 — Diversify Your Crypto Portfolio — As is the case with the stock market, never ever put all your eggs in one basket. I would recommend dividing your money into five equal parts and invest in the best five potential cryptos which you choose. Monitor these from time to time and readjust if needed.
Step 6 — Buy Low and Sell High — My final recommendation is again drawn from experience in the stock market but it is more applicable to cryptos because of their volatile nature. Irrespective of how much you are attracted to one particular crypto, look at its price chart and use inflection point lines (support — resistance theory). It is certainly no fun buying at high and then seeing it tumbling down. Have patience, sooner rather than later, it will come down by at least one inflection point line, assess its momentum, and then either wait for prices to touch the lower inflection point line or invest with rising momentum.
Step 7 — Have Patience — Once again irrespective of anxiety because of high volatility in selected crypto, have patience, and even if you want to exit by selling, exit at high. As a broad guideline, like tides in the ocean, most cryptos make one high and one low within three months' time. For the few, more volatile ones, this period may be shortened to a fortnight. Therefore, have patience and if you are not happy with the progress of your investment, give it at least one cycle’s time to perform before taking any decision.
Ohhhhh……this certainly has been one of the lengthier posts and we still haven’t discussed how to choose Crypto Exchange to commence our journey in this field. Therefore, friends see you next week with a discussion on Crypto Exchanges as well as some recommended cryptos to begin our investment.
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