What To Look For When Trading And Investing With Cryptocurrencies
When investing in cryptocurrencies or simply investing in general, you want to allocate your holdings depending on your risk tolerance. Starting out, you should dedicate the marjority of your portfolio to what I call “core holdings”.
Up until early 2016, there was only one choice for holding cryptocurrencies, Bitcoin. You maybe had a few clones of it with minor tweaks, but there wasn’t much else to invest in. The marketplace has since evolved and grown with new platforms launching weekly. With tens of thousands of coins and token to choose from in this Wild Wild West, it can be daunting to pick your first investments.
For newer investors its best to keep a substantial portion in what would be considered larger market capitalization. These are typically lower risk. These have the highest volume and lowest level of volatility in comparison to other coins and tokens. Having an established base of developers is important from a longevity standpoint.
A starting point could be to have between 50–70% of your portfolio in these assets. As you research and get a better feel for the space, you can move your allocation into speculative projects.
• Bitcoin ($BTC)
• Ethereum ($ETH)
• Litecoin ($LTC)
• NEO ($NEO)
• Ripple ($XRP)
As of now, most of the value in terms of market cap is created on the protocol layer — with about 70% of the market cap relate to Bitcoin and Ethereum. One could also classify Bitcoin as an application though but it’s share of total market cap will significantly decrease over time. The more applications are built on top of the underlying systems and the more users become part of the networks, the more the underlying token gains in value.
Thinking in terms of different sectors is also a good place to start. Just like traditional finance, there are projects that fall into different concepts and goals.
Thinking about how much of your portfolio is in each segment is correct risk management.
Platform coins — These are technological platforms that can be built upon with applications.
- Examples: Ethereum, NEO, Ark, Lisk, Request Network
Privacy specific coins — These focus on private transactions and computational applications. The major platform and currency coins have yet to implement privacy solutions like the examples below.
- Examples: Monero, ZeCash, PivX, Enigma
Enterprise specific coins — These projects focus on building solutions for institutions. They are typically seen as a safer investment due to partnerships with existing companies.
- Examples: Ripple, Stellar, NEO, WaltonChain, VeChain
Currency specific coins — While yes, all cryptocurrencies are essentially used for financial transactions. But these currencies were created solely for being a medium of exchange.
- Examples: Bitcoin, Litecoin, Dash
Promising new technology — As experimental as the current range of projects are in the space right now, there are some even on the edge of those. Bitcoin for instance, has been working continuously for over nine years without a single second of failure. In comparison, there are project out there that are re-inventing what Bitcoin aims to solve and have only been live for months.
- Examples: IOTA, Cardano, NANO
There is another way to view these cryptocurrency sectors as well. You have a few basic sections:
Infrastructure — Looking at the current market capitalization of cryptocurrencies, most of the value on the base infrastructure layer. About 65% of the market cap is made up of Bitcoin and Ethereum. These projects are the base layer in which developers can build cool things on top of. They solve the basic functions of money. The more applications that are then built on top of these systems and the more users become part of the project networks, the more the underlying token gains in value.
The majority of the price action is based still in speculation. Traders tend to view the value as how big of a network the coin has. They pull data from GitHub, number of nodes, miners running, transaction amounts and general sentiment. This can all be added together to what is typically called the “utility value”.
Some examples of this sector are:
Holding a majority of your portfolio in these coins of “utility value” is a good start. For the crypto asset space to be successful, these base layer coins need to be mature and well developed. Being in which everything else is built from, they are the most stable and won’t fluctuate as a single project on top would. We see project teams disappear from Initial Coin Offerings every day, but with Bitcoin and Ethereum for instance, there are tens of thousands of developers.
In cryptocurrency, the best way to gauge the safety and longevity for projects is to look at the developer network. You follow where the talent is.
Middleware — Between the basic level of infrastructure and decentralized applications, there is a whole spectrum of software built to mend them. For instance you have decentralized computing and storing like Golem and SiaCoin. With these coins, you have something in which a developer can built the final stage of application on top.
Some examples of this sector are:
- Request Network
Applications — At the far edge of the ecosystem we have specific applications. At this level you will see the widest variety of choices. The potential use cases are only limited to the imagination of the development teams. They range from replacing online ads to changing the way governments function.
A few examples of this sector are:
- Basic Attention Token
- Binance Coin
- Power Ledger
These can generally be viewed as more risky than the underlying technology. These application have focused visions and limited teams.
As a general rule, invest and trade what you understand. If you haven’t researched how enterprise platforms function, then weigh less capital into them. If for instance you love the tech and spend your time researching the latest advancements, allocate more towards the experimental. The point i’m trying to make here is that you should try to invest your medium and high risk picks in a segment you understand well. You should be able to better judge the risk of these projects in the sector.
Figure out what your goals are, what your risk tolerance is and how you plan to construct a portfolio to achieve those goals rather than just chasing the hyped up coin of the week. This will allow you to take some of the emotion out of investing and trading.
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