Seems like everybody is jumping on the altcoin investing bandwagon lately, doesn't it? And why not? There is a lot of money to be made. But, if you're not careful, you can also lose a lot and very quickly.
I'm not a pro investor by any means, but I have been around the block a few times and I've already made a lot of the beginner mistakes. I wanted to write this little article to help others avoid those beginner mistakes and get off to a better start than I ever did.
So, let's begin with the basics.
Your First Altcoin Trading Exchange
I've tried most of the major exchanges. They all have their strengths and weaknesses. But for the beginner I believe Poloniex to be the best choice. It has many advantages for the beginner investor. Here are only a few:
- Clear and intuitive interface
- Supports a large selection of altcoins, from the most popular to very obscure coins
- Margin trading (Yes, this is an advanced trading method, but beginners need to be exposed to it at some point)
- Supports multiple base currencies (BTC, ETH, XMR, USDT)
- Most importantly, it has huge trading volume. This means lots of other traders wanting to buy and sell 24 hours a day, 7 days a week, 365 days a year.
I won't go into detail about how to register an account and transfer your first deposit into your new Poloniex account so that you may begin your new trading adventure. There are tutorials galore all over the internet for that.
So go ahead, create a new account on Poloniex and then come back here. I'll still be here when you return.
Get Your Feet Wet
See, that wasn't so bad. So now you've got a new account at Poloniex and you've deposited a little bit of currency into it to get started. So where do you go from here?
Well, let me tell you what I did and then I'll explain why it was a bad idea. And then I'll point you in a more profitable direction...
My first experience trading altcoins was not good. I fell into a very common trap that is designed to attract and wipe out new traders - the pump and dump.
Once I made my first deposit, I began looking over all the altcoins that were available. Poloniex lists each coin's trading symbol, current price, 24-hour volume and 24-hour change in price in a nice chart in the upper-right hand corner.
I thought "This is awesome! I can already see which coins are going up and down in value. I want to be on the winning team so I'm going to invest in the coin that's trending way, way up and watch my profits soar!"
This was wrong. Very wrong. Let me elaborate.
I sorted the coins by the % change column, found the coin at the top of the list which was up over 50% in the last 24 hours and (stupidly) bought all of it that I could afford.
And it was awesome for a while. The value of my newly bought coins went up. And up. And up. And then a funny thing happened on the way to the stratosphere...It then began to go down. And I mean WAY DOWN. And Fast.
My friend, I had just blindly participated in my first "Pump and Dump" scam. And of course I found myself on the wrong side of the scam.
The Pump
So let me give you a crash course on what a pump and dump is, and why a new investor needs to avoid it like the plague, at least until you've seen them occur many times and can begin to recognize the different stages of the process.
A pump and dump goes like this:
A person, or more likely group of people, with lots of funds between them, choose a coin whose price has been relatively flat for several days. (e.g. it's price hasn't changed much in quite a while)
They then begin to buy up a huge amount of these coins over several hours/days, being careful not to buy too much at once so as to prevent triggering a buying spree from other users on the exchange. They keep accumulating more and more of this coin.
Once they have their stockpile built up, they then go into the Trollbox (chat box) at Poloniex and start talking up this particular coin. And keep talking it up. This is very easy to spot. Just look for comments like this (Substitute the coin name which they are about to pump and dump for 'XXX' in the remainder of this article):
- XXX to the moon?
- Have you heard the latest news about XXX?
- I've sold everything I own to buy XXX! It's about to explode!
- XXX is the new Bitcoin!
- And so on ad nauseum.
And then this group of people, let's call them Whales, start making HUGE buys of this coin. And they do this very quickly. With each buy the price they pay goes up, up, up.
But they most likely are buying this coin from themselves using 2 different Poloniex accounts. They have a huge pile of XXX and they also have a huge pile of Bitcoin. And so even though the price they're paying for each buy transaction keeps rising, they are using their own Bitcoin to buy their own shares of XXX, so all they are really losing is the 0.15% or 0.25% Poloniex trading fees.
In reality, what they are buying is increased interest from other traders on Poloniex. They're creating a false panic buy for XXX.
So now they've set their trap, and all they have to do is wait. It won't take long.
All these unsuspecting traders who have been watching the Trollbox begin to watch the % change and the current price on XXX start to rise. They put 2 and 2 together and figure some big news must have come out about XXX and the people in the know are already buying it up as fast as they can. And these poor souls (And I was one of them way back when) jump on the easy train to huge profits.
So these whales are now selling their coins which they bought at rock-bottom prices over the past few days to these gullible traders who are now pumping all their Bitcoin into the new hotness that is(n't) XXX. And the price keeps going up, up and away.
The whales will let the price climb and climb and climb. And they keep raking in profit hand over hand.
And these traders (victims) think they're getting a great deal. XXX has doubled in price over the last 24 hours and it looks like they're getting in at the ground floor. They begin to bask in the glory that is their newfound trading prowess. They didn't know they had it in them. This investing thing is so simple! Who knew?
The Dump
All good things come to an end...eventually.
Remember those whales who started this panic buy? Yeah, those guys.
These whales were feeding XXX to these panic buyers little by little as it's price climbs to the moon. So they were making money all the way up as the price spikes.
Once the price gets to a certain threshold these whales begin placing huge sell orders of XXX at prices a little below the current asking price. This is called a sell wall. It is strategically placed so that anyone who bought XXX near the top of the spike would have to take a loss in order to sell at this point. The whales know this and in fact planned for this well in advance.
Their coins were bought at a much lower price, so they can afford to sell at these levels. Everyone who got in late can't.
So the whales are now selling coins off at a lower price than anyone else can afford to sell at. And then they lower their sell wall price a bit more. They continue to sell and lower their price.
They made money as the price went up the spike, and now they are making money as the price comes crashing back down.
The vast majority of the other traders are losing money now. They bought high and are in a panic. So now they are selling at a huge loss. More than likely the whales are buying the coins back from them in preparation for another pump and dump a few days or weeks later. They are a crafty and thrifty bunch.
A massive transfer of wealth is happening. This happened to me, and it was not fun.
Traders who find themselves in this position are called bag holders. They were caught holding the bag at the end. If they have any XXX left, it was bought at a much higher price than what it can be sold at now.
They have a tough choice to make. They can sell what they have at a loss and consider it a lesson learned. Or they can hold onto it and hope that someday, somehow, the price will come back up enough so they can possibly break even.
A Better Way
So now that you've lived vicariously through that horror story, let me show you a better way. It won't make you huge profits like the whales just made off of XXX, but it will most likely turn a nice profit for you. And it is a lot easier and much less stressful.
First you need to accept the fact that you are not Gordon Gekko from the movie Wall Street. Markets in general are unpredictable by their very nature, but altcoin markets are even more volatile.
In a real stock exchange, pump and dump is considered market manipulation and is punishable by law. Altcoin markets are not regulated as the real stock markets are. This fact makes altcoin markets targets for predatory behavior by the above mentioned whales.
However, in general, altcoins at the time of this writing tend to produce a much better return than anything sold on Wall Street. More and more people are hearing stories of the insane profits to be made on altcoins and massive inflows of new capital is constantly being introduced into altcoins daily.
As a result, the value of many coins, over a short period of time, is increasing at a high rate. You can take advantage of this in a very simple and effective manner.
Buy And Hodl
No, that's not a typo. (Well actually it is, but I didn't make the typo just now, it was made by someone else a while back)
"Hodl" is actually an internet meme that gained popularity in the last few years. If I am not mistaken, it was introduced by an inebriated Reddit user when she made a typo in a post. She was trying to say "Buy and Hold", but the alcohol got the best of her and thus a new star was born.
The gist of her post was that the majority of people aren't genius investors and for those people the best thing to do with altcoins is to buy and hold. Odds are they will rise in value over time and give good returns.
It really is this simple, or at least it has been for me the last few months.
Here is what I would suggest:
- Go to http://coinmarketcap.com
- You will immediately see a list of altcoins arranged by their market capitalization
- Choose a handful from the top ten, making sure to include Ethereum and also be sure to keep a good portion of your funds in good old Bitcoin as well. Bitcoin is your hedge against the unknown. It is the most stable and consistent store of value thus far in the altcoin world. Think of it as similar to municipal bonds in the real stock market. It will act as a hedge against possible but unlikely altcoin market crashes so that you aren't in danger of losing all your investment.
- Invest your funds into the coins you chose. Distribute the funds however you see fit. I would suggest a significant % should be in Ethereum and Bitcoin (maybe 30% bitcoin, 40% Ethereum and the remaining 30% invested in all the other coins you chose), but that's just my opinion.
- Wait.
- Wait some more.
- Don't check the price every day - it will rise and fall for each coin and you don't want to be scared into panic selling all of your investment if you happen to see it suddenly drop in price during a pump and dump.
- Wait a little longer.
- Tired of waiting yet? Don't be.
- Ok, so you've waited lets say 3 months. Go and check on your investments. Just a little peek. Notice anything cool yet? I bet you have. I'm guessing your investment has grown. A lot. Nice.
- If 1 or 2 of the coins have increased a heck of a lot, you might sell say 10% of them and use those funds to speculate on some other coins from the top 10 market cap listing
- If 1 or 2 of the coins have lost quite a bit, you should really consider buying more of them. I'm not kidding. Over time all of those coins are likely to increase in value. So if they have dropped down a bit, that just means they're cheap and you should buy more of them. Trust me, just do it.
- Check back on your investment again at 6 months. Prepare to be amazed.
- Rinse and repeat.
I hope that this little article will be helpful to someone.
In my own defense, I am not a professional writer, nor do I profess to be. As a result I expect this may not have been the most pleasant article to read. Sorry about that.
But my intention was not to wow you with proper grammar and elegant prose. I want you to avoid the mistakes I made and earn a good profit like I do now on a regular basis.
(Legal disclaimer)
I am also not a financial investment guru. I'm just a regular guy who lost a lot of money investing in altcoins, learned a thing or two, and finally stumbled onto something that has been working for me quite well.
I think this simple and easy method will work for you too. Give it a shot! Let me know in 3-6 months how you did.
I'm not sure how often I'll be posting articles on here, but why not follow me just in case? Who knows, I might have another few ideas to help you out down the road a ways. Good luck and have fun!!