Small Crypto: Where To Invest And How To Start

Investing in cryptocurrencies is a risky business. It's an emerging area with more than 9,000 crypto projects in existence as of March 2024, and the market is highly volatile. However, if you're willing to take the risk, there are some ways to invest smartly.

First, do your research. Carry out a deep study of the obvious coins so that you understand the utility they contribute to the crypto world. Be aware of the risks – in December 2017, there was a dramatic decrease in bitcoin and altcoin prices, which caused serious losses for many investors.

Second, don't invest based on hype and noise. A smart crypto investor doesn't follow the crowd but makes decisions based on calculated risks. Ask the right people for guidance and arm yourself with knowledge before you invest.

Third, understand your risk appetite and invest only what you're willing to lose. If taking risks makes you nervous, don't invest in crypto – there are plenty of other, less volatile options out there.

Finally, a good strategy for reducing risk is to spread your investment across cryptocurrencies. It's unlikely that all cryptos will fail simultaneously, so proportioning your money across more than one coin can mitigate the risk of losing all your money.

Research the market and specific coins before investing

Researching the market and specific coins is an essential step before investing in small crypto. Here are some detailed guidelines to help you navigate this process:

Study the Basics

Start by familiarising yourself with the fundamentals of cryptocurrency and blockchain technology. Read the original Bitcoin whitepaper by Satoshi Nakamoto and consider exploring books such as "Mastering Bitcoin" by Andreas Antonopoulos. This foundational knowledge will give you a clear understanding of wallets, addresses, keys, blockchain transactions, and other essential concepts.

Identify Areas of Interest

With thousands of cryptocurrencies available, identifying areas of interest can help narrow your focus. Use platforms like CoinMarketCap or CoinGecko to browse different coins and tokens. Assess their market capitalisation, price charts, and historical performance. Look for coins with healthy economic activity, strong liquidity, and a dedicated community.

Analyse the Project Website and Whitepaper

For smaller coins, information might not be readily available, so it's crucial to dig deeper. Start by evaluating the project's website. Check for important information such as contact details, terms of use, privacy policy, and content quality. Be wary of poor grammar and spelling errors. Next, read the whitepaper, which should outline the technology, goals, and development roadmap of the project. A well-written whitepaper will explain how blockchain technology will be used to solve specific problems and outline the coin's utility and value proposition.

Assess the Team

Many cryptocurrency projects are anonymous or semi-anonymous, but it's still important to evaluate the team behind the project. Look for information about the team members' experience, achievements, and qualifications. Check their presence on social media and platforms like LinkedIn. Reach out to them with questions to gauge their responsiveness and dedication to the project.

Understand the Coin's Utility

Evaluate the actual use and value of the cryptocurrency or token. Is it just an object of speculation, or does it have real-world applications? Understand the problems it aims to solve and whether blockchain technology provides a genuine upgrade to existing solutions. Assess whether the coin has the potential for wide adoption and long-term success.

Research Competitors and the Broader Market

Analyse the project's competitors and how your chosen coin differs. Understand the industry it operates in and the challenges it aims to address. Research the market conditions and how your chosen cryptocurrency fits into the competitive landscape. This will help you identify its unique selling points and potential advantages over other coins.

Evaluate Social Media Presence and Community Engagement

Examine the project's social media presence on platforms like Twitter, Telegram, Discord, and Reddit. Assess the level of community engagement and sentiment. A positive, active community that goes beyond price discussions is generally a good sign. However, be cautious of overly hyped or emotionally charged environments.

Check for Potential Scams

Scams are prevalent in the cryptocurrency space, so it's essential to be vigilant. Look for red flags such as fake websites or social media accounts impersonating legitimate companies or individuals. Use tools like Scamsnipper, BSCheck, or RugDoc to help identify potential scams. Always prioritise the safety of your investments.

Understand Purchasing and Storage Options

Finally, research how and where to purchase the cryptocurrency. Assess the risks associated with different exchanges, especially smaller ones. Consider the market cap and liquidity of the coin, as smaller coins may be more susceptible to price manipulation. Additionally, research hardware wallet compatibility and explore dedicated wallet options to ensure the safe storage of your coins.

Don't invest based on hype

When it comes to investing in small cryptocurrencies, it's crucial to remember that your investment decisions should be based on careful research and analysis, not just hype or FOMO (Fear of Missing Out). Here are some reasons why you should avoid investing solely based on hype:

Pump and Dump Schemes

Pump and dump schemes are common in the cryptocurrency world. These schemes often involve a group of people launching a token and using social media to spread hype, misinformation, or rumors to generate buying interest. Once there is an increase in buying interest, the price of the token will spike. Unsuspecting investors, noticing this sudden price increase, will start buying, driving the price even higher. However, during this frenzy, the group behind the scheme will start selling, cashing in on their profits. Eventually, the price will crash, leaving investors with worthless tokens while the group makes off with significant profits.

Short-Term vs Long-Term Gains

Investing based on short-term hype can be disastrous. While a company may show promising short-term gains, it doesn't necessarily mean it will perform well in the long run. Good companies with solid fundamentals may experience temporary bouts of underperformance but will eventually reward their shareholders handsomely over time. On the other hand, companies that make a lot of noise in the short term often fizzle out and decline over the years.

Emotional Investing

Allowing your emotions to drive your investment decisions can lead to poor outcomes. Acting on hype or FOMO can cause you to initiate positions on cryptocurrencies without thoroughly analyzing the situation. It's important to separate your emotions from your investments and make decisions based on rational analysis.

Due Diligence

Before investing in any cryptocurrency, it's crucial to do your due diligence. Research the team behind the project, their roadmap, and whether they are solving any real-world problems. Check for red flags and be wary of projects that seem too good to be true. Remember, if something sounds too good to be true, it probably is.

Managing FOMO

FOMO is a common emotion in the investment world, and it's important to learn how to manage it. Remember, investing is a marathon, not a sprint. Don't feel pressured to invest in every new coin that comes along. Take your time to research and understand the project before committing your funds.

Understand your risk appetite and invest accordingly

When it comes to investing in small crypto, understanding your risk appetite is crucial. Risk appetite refers to the degree of risk an investor is willing to take on to achieve their financial goals. It's important to note that everyone has a different risk profile, usually shaped by factors such as age, lifestyle, income level, and investment objectives.

There are generally three types of risk appetites: aggressive, moderate, and conservative. An aggressive investor with a high-risk appetite is often willing to lose large amounts of money to chase potentially huge returns. They may be looking for a get-rich-quick opportunity or be highly knowledgeable about the market and remain unbothered by market conditions.

On the other hand, a moderate risk investor carefully weighs their options and only invests what they are willing to lose. They are comfortable with taking on risk but are cautious about losing too much money.

A conservative investor, or one with a low-risk appetite, prefers small and steady profits and is primarily focused on preserving their capital. They tend to build their investment portfolio with low-volatility instruments that provide gradual returns.

To understand your risk appetite, ask yourself the following questions:

• How much money do I have to invest?
• How much money am I willing to lose?
• How worried would I be if the crypto market fell dramatically?
• Do I plan to track my investments daily?
• Am I open to investing in different types of crypto?

Your age is a significant factor in determining your risk appetite. Younger investors, with a longer time horizon, are typically more willing to take on greater risk to earn higher potential returns. On the other hand, older investors with a shorter investment timeframe tend to be more cautious as they need their investments to be more liquid and have less time to recover from losses.

Income level also plays a role in risk appetite. Individuals with higher disposable income can generally afford to take on more risk with their investments.

Your investment objectives are another crucial factor. Are you investing for the long term or short term? Do you need the money for retirement, or is it for a shorter-term goal like a holiday or a home deposit? Understanding your investment objectives will help you gauge your risk tolerance and shape your investment strategy accordingly.

It's important to find a balance between risk and reward when investing in small crypto. While shying away from risk may give you steady small profits, taking on more risk can potentially bring larger returns. A well-diversified investment portfolio should include a mix of both low-risk and high-risk investments. Low-risk investments can help neutralise losses from riskier investments, while riskier investments can provide the potential for higher returns.

Remember, your risk appetite may change over time as your financial situation, goals, and market conditions evolve. Regularly reviewing your risk profile and investment portfolio will help ensure that your investments remain aligned with your risk tolerance and financial objectives.

Diversify your portfolio across multiple coins

Diversifying your crypto portfolio is a key part of managing your investments and avoiding overexposure to a single investment or asset class. Diversification in the world of crypto can lower your portfolio risks because different cryptocurrencies perform well at different times.

• Payment tokens: Cryptocurrencies like Bitcoin and Ethereum are well-known payment tokens. Payment tokens can be used to complete transactions wherever that cryptocurrency is accepted.
• Security tokens: Tokens that are backed by an underlying security, such as real estate. HoneyBricks security tokens, for example, represent real ownership of high-quality commercial real estate.
• Utility tokens: Tokens that have a specific use case within a blockchain or crypto ecosystem are called utility tokens. Filecoin, for instance, is a utility token that facilitates decentralized data storage.
• Governance tokens: Tokens that enable users to participate in the governance of a blockchain are called governance tokens. Examples of governance tokens include Uniswap and Compound.
• Basic attention tokens: Users can be paid for their attention, such as to digital advertising, using basic attention tokens. The best-known basic attention token is affiliated with the Brave browser network.
• Gaming tokens: Investors can own coins that both have in-game value and are traded on third-party exchanges. A prominent example of a blockchain-based gaming token is Decentraland’s MANA.
• Non-fungible tokens (NFTs): Investors can own digital tokens that signify ownership of a specific asset. These types of tokens are “non-fungible” because the underlying assets are not interchangeable.

It's important to note that diversifying your crypto portfolio requires time and research. Investors need to devote sufficient time to developing a smart and customized diversification strategy that aligns with their specific investment objectives and risk tolerance.

Consider the long-term outlook

When it comes to investing in small crypto, it's important to consider the long-term outlook and not get caught up in the day-to-day fluctuations of the market. Here are some key things to keep in mind:

Long-Term Investment Strategies:

• Time Horizon: A long-term investment in crypto typically spans at least 6 months to 1 year, and sometimes even 5-10 years. This longer time horizon allows your investments to weather short-term volatility and gives them a better chance to grow.
• Investment Approach: You can choose to invest a lump sum at the beginning or gradually invest over time through a method called dollar-cost averaging. The latter helps reduce the impact of market timing and can be less stressful for some investors.
• Risk Management: Crypto is a risky asset class. Before investing, make sure you understand the risks involved and only invest what you can afford to lose. Diversifying your investments across multiple cryptocurrencies can also help manage risk.

Choosing the Right Cryptocurrencies:

• Market Capitalization: Consider investing in cryptocurrencies with larger market capitalizations, as they tend to be more established and may have better liquidity. However, smaller market cap coins can also offer higher growth potential but come with higher risk.
• Technology and Team: Evaluate the technology behind the cryptocurrency. Is it innovative, solving real-world problems, and backed by a strong team of developers? These factors can impact the long-term success of the project.
• Roadmap and Community: A well-defined roadmap that outlines future developments and a dedicated community supporting the cryptocurrency are positive signs for its long-term prospects.

Holding Through Volatility:

• Price Fluctuations: The crypto market is known for its volatility. Don't panic sell when prices drop. Instead, focus on the long-term potential and hold on to your investments, assuming you believe in the underlying technology and team.
• News and Events: Keep yourself informed about news and events that can impact your investments. For example, regulatory changes, new technological developments, or partnerships with major companies can affect the long-term outlook for a cryptocurrency.

Remember, investing in small crypto is a long-term journey. Do your research, invest wisely, and don't get too caught up in the short-term noise.

Frequently asked questions