My first thirty days of investing in crypto have been quite rough - I entered the market at the end of the exponential growth wave of early 2017 that brought Bitcoin to over 3000$ and Ethereum to over 420$ with them subsequently crashing to as low as 2200$ USD and 180$ USD in recent days.
This led to quite a few sleepless nights for me and a couple of decisions that were not optimal to say the least. Thankfully I decided to do a bit of soul searching and research and I feel that through what I learned I come out of this experience a stronger, wiser investor. Below is a summary of the key points that I would like to share with you in hopes that maybe they can save you some of the hassle I had to go through and that can lead to better ROI on your investments.
Control your investment, don't let it control you.
Paraphrasing Muhammad Ali, everyone has a plan until the value of your holdings falls by 50% in the span of a week. It is one thing to read about how at one point the market price of bitcoin decreased from 1000$ USD to 200$ USD, but it is a completely different cup of tea to experience such a situation first hand with some large % of your hard earned money going poof. There is nothing that will prepare you for this emotional rollercoaster but through heeding sound advice you can lessen the impact. This is precisely what the advice in this article strives to achieve, but before we get to that let us set the stage first and look at investing from a broader perspective.
Investing and your life
If you are reading these words, chances are that you are new to crypto or have only made a minimal investment thus far. This is good. If you are taking it slowly, this is the way to go. Yes, riches have been made by people who got into bitcoin long, long time ago, but this is not the situation we find ourselves today. The downside to going slower are limited but if you overextend yourself and start investing money you cannot lose, this might lead you to catastrophic consequences.
Why do we invest in the first place? We do so to increase the quality of our lives. Yes, for a short period of time it might make sense to endure suffering if there is a large likelihood of life changing gains at the end of the tunnel, but this is not the situation with crypto. The important realization here is that for every moment you spend obsessing about your investment, you are trading a chunk of the most valuable commodity you posses - your time. Your time is how your life is measured and for all of us, life is in short supply.
If you agree with the reasoning above, what does it mean for investing in crypto? The message is clear: understand your priorities and structure your strategy appropriately. And some suggestions as to what a balanced approach might entail is what I cover in the latter part of this article.
Do not invest more than you can loose
THIS is paramount. It is not that crypto will disappear any time soon. Yes, the technology is likely to grow and take over the world of finance on all levels, starting from personal banking (including those currently unbanked), to enterprise dealings and budgeting, to allocating government funds. This is all likely to happen. But when the value of your portfolio falls by 50% this is not what you will think about, this is not what you will feel. If you invest money you are not okay with loosing your judgment will become clouded. You will obsess. You will look at the charts constantly. Yes, it will be painful. But also you might be led to make very bad decisions based on your emotions and hence fall into the trap of buying high and selling low.
But hey, there is hope. As you start slowly and experience the volatility of crypto having invested money you feel comfortable with losing, you will start to slowly become more and more indifferent to the swings. This is when you will start to be making rational choices even in the heat of upswings and downswings and when you will be in a position to start thinking about investing more.
You are not unique
We all share a basic set of genes. Our minds are surprisingly similar. No, you will not be able to make sound decisions under prolonged stress. And by prolonged we are talking bout downswing lasting for weeks. Think again how much you can invest and reconsider if it wouldn't make sense to start with a lower amount at first.
You will get better
As you get acquainted to the mechanics of buying and storing crypto, you will start being less emotionally involved. But for this you need time - take things slowly.
Protect your ROI
By stressing over crypto and spending time obsessing over market forces that you cannot predict nor control, you are not only giving up your time, you are also giving up monetary value. Imagine what your day at work will look like after a sleepless night. Now think of a stretch of 5 sleepless nights. Make it 10. What could you have done with this time that is now wasted? I'll tell you what I could have done. I could have started blogging 2 - 3 weeks ago. I could have spent that time on learning about developing on Ethereum and reading up about EOS. Guess what - it is damn hard to learn anything when sleep deprived and constantly looking over charts.
Set reasonable expectations
When investing in mutual funds or stock good outcome is a ROI of 5% a year. 5% annual return! 7% is great. This is the perspective you should take when thinking about crypto. It is not a magic bullet. It is highly volatile and still its adoption is uncertain. In particular, the adoption of any particular coin is uncertain - what will happen to all the people who got into Ethereum if EOS wipes the floor with ether? What if quantum computing becomes a thing and suddenly the cryptographic base of current blockchains is not as secure as we believe it to be? What if there are developments in math with regards to prime numbers and factorization and once again the cryptography that we currently rely on becomes weaker?
Honestly, I do not think anything of this will happen in near future. But thinking about potential risks is important to better gauge how much money you should be investing.
More importantly though, the exponential gains from the early days of crypto can no longer be reasonably expected. There is way more capital now and projects are no longer as groundbreaking vs current state of affairs as bitcoin or ethereum were at the time of their inception. Add to that network effects and first mover advantage and it will be very hard for any new project to cut out a big part for them of the total crypto capitalization.
All this signifies that it is unreasonable for any regular human being living paycheck to paycheck to become comfortably rich from getting into crypto right now. Even if bitcoin will be at 20 000$ USD in two years (highly unlikely) how many bitcoins can you buy today? And the newer a coin is the higher inherent risk. But you say, ICOs. Fine - but you have to compete with whales and the craze around ICOs means that they already have a lot of future growth priced in.
Summary
You can call me a crypto pessimist but in fact I consider myself to be a great crypto enthusiast. This is why I joined Steemit and why I am planning to spend considerable time learning about developing applications that would reside on / talk to blockchains. But in all of this, balance is a key ingredient.
I wished I read words as I wrote above before buying my first batch of ether and I wished I was wise to take such words to heart. It is true that we learn best from our mistakes. But it is my hope that maybe some of you will come across this post at a time in your crypto journey where you will find those words useful.
Thank you for reading and please stay tuned for more! My next two posts will be about what I learned from two great books that I read during my research, that is The Intelligent Investor and Diary of a Professional Commodity Trader.
All the best in your investments!