Follow These 13 Rules When Investing in Bitcoin and Cryptocurrency
In the context of building your financial portfolio, introducing cryptocurrency, in particular Bitcoin, to a wealth building strategy may turn out to be the best investment decision you ever take! Despite a continued mixed public opinion on the young industry, no other asset class can boast such solid – if not exponential – growth over the last decade.
Buying bitcoin/cryptocurrency in January 2016 turned out to be the investment of the decade!
If that title doesn’t grab your attention then let me show the numbers behind the above statement.
Examples of crypto investments during the period January 2016 – May 2019:
- Bitcoin (BTC): from £290.03 to £6,604.21 i.e. an increase of 21,177%
- Ethereum (ETH): from £0.75 to £202.71 i.e. an increase of 26,928%
- Ripple (XRP): from £0.004 to £0.347 i.e. an increase of 8,575%
- Binance coin (BNB): from an ICO sale price of $0.10 (around £0.075 at the time) to £25.91 i.e. an increase of 34,440%.
Take the time frame from January 2016 to January 2020 or even June 2020 and these gains are even more impressive. However, these impressive stats should not make you lose sight of reality: it is always easy to find the investment opportunities of the past that would have made you rich! How does the famous saying go? ‘Would’ve, should’ve, could’ve…’
We cannot all have the same competitive advantage that Biff Tannen, Back to the Future’s sports betting villain, had.
Unfortunately, in the real world, it is uncertainty and vagueness which reign supreme, meaning, at best, we can only make informed bets on the future.
This is also the reason why there are strict laws on how investment products can be promoted, usually asterisked with disclaimers such as “past performances is not a reliable indicator of future performance” and “The value of investments can go up or down, so you may not get back the amount originally invested.”
Everything makes sense now
Nonetheless, Bitcoin and the other main cryptocurrencies such as Ethereum or Ripple are beginning to appear in the very select circle of products looked at by the increasingly growing number of traditional investors. Over the last few years, the flexibility offered with regards to your pension pot once retired (25% tax-free lump sum) as well as the use of SIPPs (Self-Invested Personal Pensions) means in theory an ever growing amount of individuals can invest in crypto assets for their future retirement.
Brits are being priced out of real estate market
Traditionally, Britain is a country full of homeowners, especially when compared to some countries in Europe like Germany. However, since the housing crash in 2007 (where ownership was as high as 73.3%) ownership fell drastically to 63.4% in 2016. As house prices continue to rise and with young people being priced out of the capital, should they be turning to other investments?
For years the Conservative government has tried to promote saving and investing through a string of tax breaks such as increasing the yearly ISA allowance to £20,000. Savings, however, have been plagued with habitual low interest since the global credit crunch, whereas stock markets around the world have seen record highs in recent times. Despite such meteoric gains and the assistance of the government, as of May 2020, only 2.2 million Brits subscribed to a Stocks & Shares ISA, which allows them to sell shares and pay no tax on their capital gains (if they made any). This does not match the statistics that show that 73% of men and 61% of women are considering investing (Finder, 2020).
Investing traditionally comprises investing in a fund (which is either actively or passively managed) or taking the more risky option of investing in individual stocks. The agreed safer option of trusting a fund manager with your money can sometime leave you in an unprofitable position, as fees in your first year can easily total over 5% (entry fees plus platform/management fees), meaning unless the fund outperforms this, you are left with zero profit or even worse: less money than you put in. Suddenly, investing in Bitcoin and other cryptocurrencies seems like an attractive proposition with their recent gains as well as low entry fees.
Boost your Bitcoin and crypto asset investment strategy
Under such unfavourable conditions, it is not surprising that investors and individuals alike are looking for new asset management approaches and products to invest in. Nevertheless, in this quest for better investment returns, cryptocurrency can play an important role, provided that a certain number of rules are respected. Some are universal and frankly common sense, while others are specific to this very particular blockchain environment.
There are rules that will explain why investing in cryptocurrency today guarantees profitability in the medium term, while others that say the whole crypto ecosystem is just a bubble ready to burst and that staying as far away as possible is the best course of action!
As often is the case in life, the reality is more contrasted and everyone will have to decide how much they would like to invest in the sector that promises to revolutionise how we interact with money, yet remains complex to understand.
The Tablets of Stone – no more messing about
Rule number one. Have a plan!
I know it sounds a bit silly but it is common for budding investors to hop on the Bitcoin/crypto bandwagon without knowing exactly where they want to go!
Get your priorities straight and manage your crypto expectations. What will make you rich in ten years? What pleasure might it bring you? Maybe you are just passionate about blockchain technology and, what better way to understand it than to practice it for ‘real’? Would you like to get started because you’ve just read an article online that has mapped out Bitcoin’s ten-year returns?
Your answer to the above questions will naturally point you to the following rule…
Rule number two. Define your Bitcoin investor profile.
Are you more of a ‘holder’ (or ‘HODLer’ as they say in the crypto world) – that is to say you would want to build up a basket of cryptocurrencies that you believe in and keep them no matter what? Or perhaps you are more the ‘trader’ type – price movements are your preference as you see them as a chance to make money.
It all depends on your temperament and your ability to contain the stress that comes with investing. Keep in mind, however, that trading is a real profession and that the vast majority of retail traders lose out in the long run.
Rule number three. The smart investor only bets on Bitcoin with the money they do not need.
This is universal advice! You will rarely see a general pessimistic outlook on TheCoinTribune about crypto assets and the blockchain, that being said you should never rule out the possibility of the complete loss of your investment in the event of an extraordinary event (i.e. disruption of a new technological proposal or loss of global confidence).
It is vital that you never need the funds that you invested quickly and also that those funds (if lost) will not not impact your daily life. As a Bitcoin investor, the money you spend on this activity should appear very, very low in the pyramid of needs, light years away from the categories of rent/housing, food or health/well-being!
You should never invest so much money to the point where if your investment does not go up in value you can’t pay for basic living costs.
Rule number four. Consider what you have invested as lost.
Of course, all of us here at TCT wish you three or even four figure returns (it has happened and could happen again), however leading a peaceful life is sometimes easier. Determine how much you can afford to invest, get started, then consider that money gone… You will only sleep better!
Rule number five. Knowledge and experience are profits too!
Accumulating information is also investing in the future. Take the time to learn from your experiences, ask the crypto community questions (they are very dynamic and well informed of the pitfalls to avoid), fill up on specialised sites and cross-check all the information you read. This way you will create your own news and information portal unique to you.
A frequently used acronym in the crypto space is: DYOR! ‘Do Your Own Research’ complements an important notion of the crypto world: if you are given the keys to financial independence, remember it is an immense power and weight on your shoulders! In the words of Spider-Man’s Uncle Ben, with great power comes great… responsibility!
In short, make sure you’re a doer, not a talker. The serious crypto investor knows all about Bitcoin.
Rule number six. Learn from your mistakes.
“I never lose, either I win or I learn”, thousands of random Facebook statuses could give you the impression that Mandela’s famous quote has been overused… However, it doesn’t stop anyone from being inspired!
You will inevitably make mistakes and suffer setbacks, but use them to your advantage. You can achieve this by creating an environment whereby making an error will not completely destroy your financial well-being, hence why following the next rule is an absolute necessity:
Rule number seven. Determine and plan your capacity to invest in Bitcoin.
Entering the crypto market all at once by saying: “that’s it, I’m buying five grand’s worth of bitcoin and ether”, is probably one of the worst ideas ever!
If by some stroke of luck you earn 30% in a week, you might be drunk off the ‘profit’ highs and start to convince yourself that you are the new crypto Wolf of Wall Street!
The problem is that you simply performed as well as the market did, but more importantly you learned bugger all… This kind of experience will only make you think that you need to invest an even higher lump sum, just like betting on red or black in a game of roulette.
Luckily, avoiding these disappointments is relatively simple when following these universal tips:
- Start by determining what you can afford to invest. This money, as defined in rule number three, should only be what you don’t need to survive, and of course will vary from person to person. You can base it on a percentage or alternatively dedicate the income you earn from side hustles like babysitting or selling your old crap on eBay as your designated crypto investment money!
- Average in your entry into the crypto market. Plan to invest £1000? Split it into 5 (i.e. £200) and invest it on a regular basis. Of course, you might feel like you’ve missed the best moment to enter the market, but rest assured: everyone else has missed it too! This strategy will also teach you to stick to a plan, be rigorous and not give into FOMO (Fear of Missing Out). There will ALWAYS be great opportunities tomorrow have no fear!
Rule number eight. Apply the 80:20 strategy.
There are a lot of possible investment strategies, but if you’re not sure, apply this simple approach:
- Invest 80% of your funds in the established ‘stocks’ (i.e. Bitcoin, Ethereum, Monero, Dash, etc.) If you are not sure which ones they are, have a look at CoinGecko or CoinMarketCap’s top 10.
- The other 20% you can try investing in more the more exotic options, or in ICOs that catch your eye. This way you have the opportunity to put a bet on a coin/token whose value might explode while limiting your risk.
Rule number nine. Take your profits!
Ignoring the portfolios of the pure HODLers who are thinking long-term and therefore do not care about the ups and downs in the market over the next five to ten years, consider taking your profits!
This means having an exit plan. This exit plan can be very similar to the way you entered the market… gradually.
For example, you invested in Bitcoin at £1000 and now it’s worth £1500 (an increase of 50%). Maybe think about taking out £200, £300 or even £500 (either in fiat, or in the equivalent stablecoin). This way you will continue to have £1000 in BTC but have some guaranteed profit and/or the means to reinvest in another coin/token ‘for free’.
Rule number ten. Not sold = not lost.
This is an old trader adage and like all adages it is both a little silly but very true!
As a crypto investor, you are going to experience genuine moments of doubt, perhaps even mini meltdowns! Just take a moment to think about those who invested in Bitcoin in December 2017, at the time of its £15,000 ATH (All Time High)… For months they were over 80% down.
Breathe and wait, because after a storm there is always good weather. Whatever happens, don’t let FUD (Fear, Uncertainty and Doubt) get you down, a feeling of dread that can convince even the best of us to sell, in haste and without reason, all their assets, for the fear of losing even more… the famous ‘Panic Sell’!
Rule number 11. Volatility is not the enemy of Bitcoin investors.
Investing in Bitcoin, and in cryptocurrencies, can be like diving into a tumultuous river. Some of your cryptocurrencies will be up 25% on Monday, down 23% on Tuesday, before staying relatively stable for days – if not weeks – before leaping 100% in a few days.
Take a step back and remember that this is a well-known phenomenon, which can characterise any sector with the youth that crypto has! Assume this volatility is set to disappear over time as the industry becomes more and more normalised and that today probably offers you the best investment opportunities!
Rule number 12. Don’t take anyone’s word for it.
We often speak of the ‘Wild West’ to describe the crypto ecosystem since its emergence with Bitcoin in 2009. This is because the Wild West was an era full of gold mines, conquest and vast territories full of adventure and possibility, however it also had its fair share of robberies and bounty hunters!
The sector, unregulated by its very nature, is teeming with con artists of all kinds, scams and dead ends. Danger can lurk around every corner.
In order to protect yourself, follow this simple rule: doubt before you believe someone’s word! Before you slip into a paralysing paranoia, you should know that the Bitcoin and crypto community is rich in good human values and altruism, however it’s not a bad thing to maintain a certain level of positive mistrust.
Equally, you need to be as wary of those who warn you against crypto as those who insist on showing you how they can double the amount of Bitcoin you own.
Avoid like the plague any direct solicitation via social networks (Telegram in particular) and make sure you put in place tools that can protect you from such scams.
Rule number 13. If it’s too good to be true… it probably is (#soz)
Easy money doesn’t exist, hate to break it to you. Anyone who dangles the ‘guaranteed returns’ carrot in front of you or the opportunity to invest in the ‘new Bitcoin’ tend to spend more on their marketing campaign than the technology… again, avoid them like the plague!
- If it sounds too amazing, it must be a lie
- If you are guaranteed to get rich, you will end up poor or even worse bankrupt
- If it looks like a Ponzi scheme, it probably is
- If you have to make up your mind quickly, you will lose money quickly
- If it smells fishy, it is
Understanding and applying these few simple rules will not guarantee you will get rich in three months, however on the other hand, it will save you from 90% of the mistakes made by the majority of people. In doing so, you might end up being part of the remaining 10% of investors to whom Bitcoin and cryptocurrency will serve up some nice surprises in the near future!
Hey! Just in case you were thinking of mining or buying bitcoin in 2020, check out what the best investment strategy is here.