Crypto Investing: Get Rich Quick Or Slow Burn?

Investing in cryptocurrency is a highly speculative venture. While some crypto traders have become millionaires, many others have lost significant sums. Cryptocurrencies are highly volatile, and their prices are subject to the same risks as traditional high-risk investments. There is a potential to make a lot of money, but it is also likely that you could lose your entire investment. If you are considering investing in crypto, it is important to understand the risks involved and only invest what you can afford to lose.

Crypto volatility: prices can swing thousands of dollars daily

Cryptocurrency is a highly volatile asset class, with prices fluctuating rapidly and dramatically. This volatility can be attributed to the speculative nature of crypto prices, which are often influenced by social media trends, celebrity endorsements, and unpredictable factors.

The impact of this volatility is significant, with prices sometimes swinging by thousands of dollars within a single day. This makes investing in cryptocurrencies a high-risk endeavour, as investors can gain or lose substantial sums in a short period.

For example, the recent downturn in the crypto market saw Bitcoin and other cryptocurrencies fall to their lowest levels since July 2021. This volatility was further influenced by institutional and professional investors, causing Bitcoin to move in tandem with equities markets.

Additionally, crypto markets have historically responded wildly to news and regulatory developments, with press releases resulting in large price swings driven by exuberance or fear.

The unpredictable nature of crypto volatility poses challenges for investors. While it offers the potential for substantial gains, it also carries the risk of significant losses. Therefore, investors considering crypto should be aware of the high-risk nature of these assets and carefully assess their risk tolerance before investing.

To mitigate the impact of volatility, investors can employ strategies such as diversifying their portfolio, conducting thorough research, and adopting a long-term perspective by holding their investments rather than frequently trading them.

Diversification: spread your investments across different cryptos

Diversification is a key principle of investing, and it applies to cryptocurrencies, too. Diversification is a fancy way of saying "don't put all your eggs in one basket". In other words, don't invest all your money in one cryptocurrency.

The crypto market is highly volatile, and it's not uncommon for an asset to see huge gains and losses in a short amount of time. By diversifying your crypto portfolio, you can reduce the risk of losing everything if one particular coin crashes.

• Diversify by coins and tokens: There are many types of crypto coins, including payment tokens (e.g. Bitcoin, Ethereum), security tokens (e.g. HoneyBricks security tokens), utility tokens (e.g. Filecoin), governance tokens (e.g. Uniswap, Compound), basic attention tokens (e.g. Brave browser network), gaming tokens (e.g. Decentraland's MANA), and non-fungible tokens (NFTs).
• Diversify by industry focus: Invest in cryptocurrency projects that focus on different industries. For example, blockchain technology is being applied to the healthcare sector (e.g. MediBloc, Dentacoin), supply chain (e.g. VeChain), transportation (e.g. Mass Vehicle Ledger, ParkinGo), entertainment (e.g. ApeCoin, Reef), and climate change (e.g. Climatecoin).
• Diversify by asset class: You can invest in crypto-related stocks, such as companies focused on the crypto sector or companies with large cryptocurrency holdings. You can also invest in blockchain-based or crypto bonds, and blockchain-based real estate tokens.
• Diversify by investment vehicle: You can diversify your crypto holdings across various investment vehicles and account types, including digital wallets, taxable brokerage accounts, cryptocurrency IRAs, and decentralized financial products (DeFi).
• Diversify by market capitalization: You can invest in cryptos with larger market caps, which may be more stable and have stronger fundamentals, or cryptos with smaller market caps, which might have stronger growth potential. For example, Bitcoin has the largest market cap and is considered more stable, while a smaller crypto like Kusama has strong growth potential.
• Follow the 80/20 rule: If you're new to crypto investing, it's recommended to have a portfolio that is 80% large-cap cryptos (e.g. Bitcoin, Ethereum) and 20% mid and low-cap cryptos. This will give you a blend of stability and the potential for higher returns.

Remember, even with a diversified portfolio, investing in cryptocurrencies is risky. You might make a lot of money, but it's also likely that you could lose your investment. Always do your own research and only invest what you can afford to lose.

Long-term wealth: stick to cryptos with long-term viability

If you are looking to build long-term wealth through investing in cryptocurrencies, it is important to take a strategic approach to minimise risk and maximise returns. Here are some key considerations:

Treat your portfolio like a stock portfolio

Cryptocurrency markets experience significant dips quite regularly. These dips present an opportunity to buy additional coins or tokens at a lower price. If you select cryptos with long-term viability and add to your investment during these price dips, you can build wealth over time.

Diversify your crypto holdings

By nature, cryptocurrencies are speculative and highly volatile investments. To manage this risk, it is important to diversify your crypto holdings across a handful of cryptos that you have researched and believe have long-term viability. This strategy can increase your chances of finding long-term winners while minimising the risk of losing your entire investment.

Research and filter long-term winners

With thousands of cryptocurrencies available to trade, it is crucial to research and filter out the ones with staying power. Read whitepapers to understand how a cryptocurrency is tied to the blockchain, its utility, and how it compares to competitors in terms of better features, cheaper costs, or faster transactions. This research will help you identify the cryptos that are more likely to be successful in the long term.

Understand the risks

Investing in cryptocurrencies is a highly speculative venture, and it is important to recognise that some well-known investors predict a potential crash in the entire asset class. Therefore, ensure that you only invest money you are willing to lose and thoroughly understand the risks involved before entering the crypto market.

Consider day trading with caution

Day trading in the highly volatile cryptocurrency market can lead to significant gains or losses in a single day. While it offers a high-risk/reward option, most amateur day traders lose money in this unpredictable market. Unless you have insight into the trading patterns of a particular crypto, it is a risky strategy.

In summary, building long-term wealth through cryptocurrency investments requires a careful strategy that involves diversification, research, and a long-term perspective. By treating your crypto portfolio like a stock portfolio, investing in cryptos with long-term viability, and taking advantage of market dips, you can increase your chances of building sustainable wealth.

Day trading: a high-risk, high-reward option

Day trading is a style of trading where financial instruments such as stocks, currencies, commodities, or options are bought and sold within the same trading day. Day trading cryptocurrencies can be a lucrative business because of the high volatility of the crypto market. Since the crypto market is a relatively new asset class, it has led to significant price swings.

The high volatility nature of Bitcoin and other cryptocurrencies has made the crypto market like a rollercoaster. This is the perfect environment for day trading as there are enough up-and-down swings to make a decent profit. Day trading smaller cryptocurrencies can also be very profitable, but there are higher risks. Crypto prices can crash just as fast as they have risen.

Before day trading, it is important to have a structured approach and a rule-based strategy. It is also crucial to understand how the crypto market works. Additionally, checking the liquidity of the cryptocurrency you wish to trade is important as not having enough liquidity could lead to substantial slippage and bigger losses.

A day trading strategy that has been suggested involves using the Money Flow Index (MFI) indicator on the 5-minute chart to track the activity of smart money and gauge when institutions are buying and selling cryptocurrencies. The MFI reading of 100 shows the presence of big sharks stepping into the market. This strategy also involves placing a protective stop loss and taking profits within the first hour.

Day trading cryptocurrencies offers the potential for high rewards but also carries significant risks. It requires quick thinking and the ability to process a lot of information. Emotions can also play a big part in day trading, leading to overconfidence or fear of the market.

Mining: validate transactions and receive coins as rewards

Mining cryptocurrencies involves solving complex mathematical puzzles to produce coins. Miners compete to complete cryptographic tasks to process transactions. The process is similar to gold mining in that it is energy-intensive and has the potential to generate monetary rewards.

Bitcoin mining, for example, involves verifying and recording transactions on the blockchain. Miners use sophisticated computing equipment to compete to be the first to verify transactions and earn rewards paid in Bitcoin. The process requires specialised mining hardware and access to a low-cost energy source.

Miners are rewarded with transaction fees and newly created Bitcoin. As of January 2023, a successful miner would earn 6.25 Bitcoin as a reward, in addition to a transaction fee. However, Bitcoin mining is not always profitable due to the high costs of hardware, internet bandwidth, and power consumption.

To increase their chances of earning rewards, miners often join mining pools, where they combine their computing power and share any profits.

Blockchain mining is another method of earning cryptocurrency, which involves using computers to decode blocks of code. This process is challenging and nearly impossible for a single average user. A powerful computer, or "mining rig", is needed to successfully mine blockchain.

Frequently asked questions