Crypto Investment: The Right Time To Enter The Market

Cryptocurrency is a hot topic, with some people making millions and others losing it. But is it a good idea to invest in it?

Cryptocurrency is a digital currency, such as Bitcoin, which can be used as an alternative payment method or speculative investment. It gets its name from the cryptographic techniques that allow people to spend it securely without a central government or bank.

There are several risks associated with investing in cryptocurrency, including volatility, an unproven rate of return, and fraud. It's also important to note that cryptocurrency isn't legal tender in most places and is subject to regulation and taxation.

On the other hand, some people argue that cryptocurrency is a transformational technology that offers passive income opportunities and removes central banks from managing the money supply.

So, when is the best time to invest in cryptocurrency? The answer may depend on your risk tolerance and investment goals. Some people use a strategy called dollar-cost averaging (DCA) to reduce the impact of market volatility by investing smaller amounts regularly.

Before investing in cryptocurrency, it's essential to do your research and understand the technology, risks, and potential rewards.

Volatility

As a relatively new asset class, crypto is widely considered to be highly volatile. In one day, Bitcoin's value dropped by 30%. Cryptocurrencies with lower trading volumes, such as emerging crypto assets like DeFi tokens, tend to be more volatile.

There are several reasons for the volatility of cryptocurrencies:

• They are a young market backed by new technology.
• They have not yet reached mass adoption, so their value is fuelled by hype and speculation.
• They have low liquidity relative to other markets.
• They are largely unregulated, making them susceptible to market manipulation.

The extreme volatility of cryptocurrencies was highlighted by the market crash in 2018, when prices fluctuated vigorously and the market capitalization of cryptocurrencies fell from $813 billion to $100 billion.

Cryptocurrencies are the riskiest asset class, but they also offer the potential for significant returns. The high volatility of the crypto market presents a great opportunity for traders and investors to make money.

Timing the market

Market Dynamics

The cryptocurrency market operates 24/7, without the traditional trading hours of stock and bond markets. This presents unique challenges for traders, as they need to identify periods of maximum liquidity and trading volume. Unlike traditional markets, crypto trading activity is influenced by global factors, such as the involvement of Western institutions and the impact of cultural events like the Chinese New Year.

Data Analysis

Analysing historical data can provide insights into market patterns. For instance, crypto trading activity often coincides with traditional market hours in the U.S., indicating a shift from East to West in crypto investment. Additionally, weekends tend to have lower participation by smarter money, with higher algorithmic trading activity. As a result, weekends may not be the best time to trade for certain traders.

Technical Indicators

Technical indicators, such as the Advance/Decline Line, Rate of Change (ROC), and Relative Strength Index (RSI), can be applied to basket indices to identify market cycles and divergence signals. These tools help traders understand the flow of money through the crypto markets and make more informed timing decisions.

Fundamental Metrics

Fundamental metrics, such as transaction rates, the popularity of new applications, and signs of irrational exuberance, can also influence market timing. For example, high non-speculative transaction rates signal a strong market, while the popularity of certain applications can impact transaction costs.

Dollar-Cost Averaging

Dollar-cost averaging (DCA) is a long-term investment strategy that can be used instead of timing the market. It involves investing a smaller amount into an asset, such as crypto, at regular intervals, regardless of the price. This strategy helps to reduce the impact of market volatility and the risk of investing a lump sum at a peak. DCA is a popular approach for investors who believe in the long-term appreciation of their investments.

Dollar-cost averaging

Here's how it works: instead of investing a large sum of money in cryptocurrency all at once, you would invest a smaller amount on a regular schedule, such as investing $100 in Bitcoin every month for a year instead of $1,200 at once. By investing smaller amounts over time, you are effectively "averaging" out the cost of your purchases, reducing the overall impact of sudden price drops. This strategy can also help to take some of the emotions out of investment decisions, as you are investing according to a schedule rather than trying to time the market.

DCA is a popular strategy for investing in volatile assets like cryptocurrency, as it allows investors to gradually build their holdings and reduce their overall cost basis during dips. It is also a good option for investors who believe their investments will increase in value over the long term but experience price volatility along the way.

However, it's important to note that DCA may not be the best strategy if the market is trending steadily in one direction or the other. Additionally, the repeated investing called for by DCA may result in higher transaction costs compared to investing a lump sum once.

When considering DCA as an investment strategy, it's important to consult a financial professional and carefully consider your unique investment circumstances, risk tolerance, and financial goals.

Risk and fraud

Investing in cryptocurrencies is risky due to the volatility of the market and the potential for fraud.

Volatility

Cryptocurrencies like Bitcoin experience daily (or even hourly) price volatility. This volatility can cause uncertainty, fear of missing out, or fear of participating at all. As with any investment, it is important to be aware of the risks involved and to only invest what you can afford to lose.

Fraud

The decentralised and anonymous nature of cryptocurrencies makes them an attractive target for fraudsters and cybercriminals. Cryptocurrency-related fraud has been on the rise, with losses from crypto-related crime increasing by 79% in 2021 compared to 2020. Scams are one of the most common types of crypto fraud, with an estimated $14 billion stolen from victims in 2021.

• Phishing attacks: Cybercriminals trick victims into revealing their confidential data, allowing them to access and steal funds from their accounts and wallets.
• Website cloning: Cybercriminals create identical clones of popular crypto websites, including exchanges, online wallets, or ICO websites. They promote these cloned websites through social media, emails, and ads, and include fraudulent links to obtain victims' credentials.
• False support: Fraudsters impersonate the support team of a legitimate company and send emails to clients requesting private data, which they then steal.
• Pump and dump schemes: Fraudsters inflate the price of a cryptocurrency through false information, encouraging investors to buy and hold. Once the cryptocurrency reaches its peak price, the fraudsters sell their holdings, causing the price to plummet and generating significant losses for investors.
• Non-existent projects: Fraudsters create fake cryptocurrency projects on social networks or channels, often with fake team member bios and copied technical whitepapers. These projects are designed to disappear quickly after making a profit.
• Fund flight (exit scams): A platform gains the trust of investors and operates legitimately for some time, then the operators block withdrawals and flee with their clients' money.

It's important to be vigilant and cautious when investing in cryptocurrencies to avoid falling victim to fraud.

Blockchain technology

Blockchain has found applications in almost every industry. For example, Walmart has been testing the use of blockchain to track food distribution from its suppliers, making it easier to isolate outbreaks of foodborne illness. In healthcare, blockchain could be used to securely transfer patient medical records, while in real estate, it could be used to record transactions. Blockchain also has the potential to speed up loan processing in lending.

When investing in blockchain, it is important to understand how it works and the risks involved. While blockchain can help organisations become more efficient and reduce the risk of cyberattacks and fraud, investing in blockchain involving cryptocurrency can be risky due to the volatility of crypto prices. It is recommended that investors only invest an amount they are fully prepared to lose, as cryptocurrencies are still relatively new and extremely volatile assets.

There are several ways to invest in blockchain:

• Directly purchase cryptocurrencies such as Bitcoin or Ethereum, or buy shares of a cryptocurrency exchange-traded fund (ETF).
• Buy an ETF that specifically invests in shares of companies with exposure to blockchain, such as the Amplify Transformational Data Sharing ETF or the Reality Shares Nasdaq NextGen Economy ETF.
• Participate in crowdfunding a new cryptocurrency through an initial coin offering (ICO).
• Invest in public companies involved in blockchain, such as Walmart or PayPal.
• Invest in companies with a partial or total focus on cryptocurrency, including cryptocurrency mining companies, mining hardware makers, and companies that support cryptocurrency.
• Invest in cryptocurrency-focused funds, including exchange-traded funds (ETFs) and cryptocurrency investment trusts.

Frequently asked questions