Investing in cryptocurrencies
Investors are always looking to put money into different assets to satisfy their diversification requirements. Equity investors are often seen maintaining a percentage of their portfolios in slightly unrelated asset classes such as gold and real estate. A small section of investors are also interested in buying artworks, antiques, and old coins, as they represent a completely different class, generally unaffected by today’s global turmoil. Now, the time has come to embrace another asset class called cryptocurrencies, which includes the likes of bitcoin, litecoin, dogecoin, and many others.
Investing in cryptocurrencies requires an unprecedented level of research and analysis, because a majority of these cryptocurrencies are still new to the digital ecosystem and present huge investment risks to less-researched investors. Data regarding the leading cryptocurrency bitcoin is readily available, making it a viable investing option, after necessary due diligence.
But, with no fundamental backing, technical analysis is the only tool with which some level of study can be conducted regarding the future price performance of the cryptocurrencies. And we have earlier put out a detailed report as to why trading bitcoin with technical analysis is tough. What can be said of other altcoins?
So, how do you really invest in cryptocurrencies? Do you simply put equal amounts in the top 10 leading cryptocurrencies and? Or do you first understand the technicalities of each coin first (as you would do in stocks by first understanding the business models), and then decide if it is a worthy investment? How do you protect yourself from scamcoins, which have emerged over the past few years?
Here is what I recommend:
- Understand the Coin – I believe there is a good incentive in understanding how the altcoin works. We are witnessing a hoard of companies launching their cryptocoins in the expectation of a quick rise in price as investors look for undervalued cryptocurrencies in the digital currency space. The euphoria surrounding new coins can be compared to IPOs in the stock market, where each new IPO opens at a huge premium.
But, intelligent investors will look at the transparency, record-retention, periodic audits, AML policy, and information dissemination to the public on a timely basis before taking a stake in the altcoin. This practice helps them avoid the embarrassment and the agony of losing money in a scamcoin.
For cryptocurrencies such as bitcoin and litecoin, events such as the block-reward halving, many witness heavy fund inflows.
- Understand the Pair – Each cryptocurrency pair needs to be understood before an investment decision is made. A perfect example to understand this case would be the BTC-Yuan pair. Just yesterday, The People’s Bank of China (PBOC) devalued the base currency, the Chinese Yuan even further, providing a strong boost to the BTC-CNY pair which shot up 6%.
Old School Advice
Do not put all your eggs in one basket. In my opinion, it is very hard to give a true price prediction for cryptocurrencies in the long term. Many may vanish or may scale new heights; it is a gamble. But, it’s better to make an intelligent gamble rather than just leaving all your money to luck!