Invest In Cryptocurrency: Here Are 3 Tips To Help You Do It Smarter

2017 saw a rush of capital into the cryptocurrency markets, and there’s no sign 2018 will be any different. And millennials are keeping the frenzy booming.

According to a recent survey conducted by Blockchain Capital, 30% of those in the 18-to-34-age range would rather invest $1,000 in Bitcoin than $1,000 in government bonds or stocks. The same study also indicates that 42% of millennials have heard about Bitcoin, compared with 15% awareness among those aged 65 and up.

The millennial interest in trading cryptocurrencies is hard to ignore, yet they are not the only ones interested in this market. The competition for the coin is expected to become tougher in 2018 as new players enter the domain.
​
It’s safe to say that this year, more institutional investors will start trading cryptocurrencies, especially Bitcoin. Yet, at the moment the bitcoin market already faces a significant supply and demand imbalance despite the high price.

According to Timothy Tam, an ex-hedge fund trader and co-founder of CoinFi, an advanced market intelligence platform for cryptocurrency traders, it looks like the existing equation might force prices even higher. “There’s limited supply because, aside the fact that there will only ever be 21 million Bitcoins in circulation, most of the holders of Bitcoin are long terms holders. The demand on the other hand keeps soaring,” he explained.

Yet, Bitcoin isn’t the only investment-worthy coin on the market. Ethereum, Ripple and Litecoin prices keep climbing up as well. If you want to invest in cryptocurrencies, here are the essential tips to do it the right way.

1. Beware of the bots

Financial markets are prone to speculations and cryptocurrency trading is no exception. Some “savvy” players are now using bots to artificially inflate the coin prices and manipulate the markets.

Timothy Tam points out that bots can seriously hamper your investment. “In 2017, Neo – a Chinese alternative to Ethereum – went from $34 to $3.74 in a matter of seconds, before returning on $34 mark. Trading bots artificially caused the price dip, which resulted in a flash-crash for a number of investors, while the organizing party largely benefited from this.”

Spotting the trading bot, however, is a tough call. You will need to carefully watch the market trading signals and learn to notice the abnormal trading patterns.

According to Tam, the two biggest indicators of bot market manipulations are price momentum and volume. As an investor, you should carefully watch these two parameters and try to notice coordinated buy patterns early on. The alternative is to use a cryptocurrency trading analytics platform that will do "the watch" for you.

2. Allocate your assets based on your risk tolerance

First and foremost, you should set a stop-loss level to avoid financial collapses. A stop-loss is the level of loss where the trade will get closed.

Next, keeping that number in mind, you will need to build up your coin portfolio. Think of this as managing your fund. The higher percentage should be allocated to the least volatile coins, with a smaller percent given to the least stable, yet potentially higher returning currency.

“You should keep in mind the price correlation between Bitcoin and most Altcoins to account for volatile market conditions,” Tam said. “What we noticed at ConFi is that bitcoin and the majority of other coins have an inverse relationship in their value. Once there’s a dip in the bitcoin price, everyone rushes into buying other coins and vice versa, This volatility can cause serious losses for inexperienced investors”.  

The best strategy is to always keep an eye on the market signals and use those insights to adjust your trading strategy on a daily basis.

3. Resist overtrading and FOMO

Tam says both novice investors and their more experienced peers are often prone to these two mistakes that come hand in hand.

First, there’s the trading FOMO – fear of missing out on buying the new hyped coin and “losing” some potential profits. Investors often feel urged to buy a certain coin when the price is being pumped up and end up allocating a lot of over-hyped and often, illiquid assets. Also, remember the Neo case – the price may be artificially inflated by bots and the shining coin may quickly lose its value.

Next, there’s overtrading – immediately selling your coins if you see a small price spike e.g. 10-20 percent. In most cases, this could be a temporary occurrence encouraging smaller currency holders to sell their coins, before the price goes up further.  

Trading a certain asset just because it's in profit is not a viable long-term strategy as it can diminish your future gains. After all, if the coin rises 10 times in price over a year, an 80% loss will wipe out that 400% gain you have initially made. Additionally, overtrading will result in a significant chunk of your assets being eaten up by exchange fees.

Disclosure: This blog post is not intended and should not be taken as investment advice.