The best time to buy was 10 years ago, the 2nd best time to buy was yesterday.
This is a common situation that you will probably encounter soon in your day to day life; you could be talking about investments with friends and colleagues and the moment you start talking about digital currencies, you may face some mixed reactions.
There is general concern among seasoned investors that anyone who isn’t already knowledgeable in stock markets and commodity exchanges should not dabble with cryptocurrencies – it’s too risky.
Let’s set the record straight – cryptocurrencies can be an investment and they can be profitable.
While cryptocurrencies were initially thought to be the currency of the future, it is more of an investment nowadays in hopes that it will ultimately be worth more than what it initially costs.
In other words, cryptocurrencies may give you a better (which is understated) ROI over traditional stock market investing.
Here’s the catch; while knowing the basics of investing is nice, you don’t need to have that knowledge for cryptocurrencies. Despite its recent boom, the industry is still in its infancy stage and we should look forward to the next 10, 20 years instead of tomorrow.
Don’t worry though; you’re in safe hands. The cryptocurrency community is a large network of fellow investors who are more than happy to help you with your cryptocurrency questions, like us!
In today’s post, we’re going to cover the basics of identifying and investing in profitable cryptocurrencies for new investors.
Is cryptocurrency a bubble?
Before we move on to cryptocurrencies, let’s rewind to a time when the hype over investing was this big (arguably bigger).
During the days of the dotcom boom in the late 90s, IPO (initial public offering) was introduced to the public as another channel for investments. Investors could toss money into any IPO and be guaranteed superb returns almost every time. Huge early gains by companies further fueled the hype but we all know what happened a few years later when the bubble burst.
With the exception of some companies like Amazon and eBay, most IPOs went bust after all-time highs were reached. The bubble burst served as a reminder to investors that nothing in life especially in investing is fail-safe. Over 20 years later, the new ‘bubble’, as quoted by financial experts, came. Working very similarly to the IPO craze of the 90s, cryptocurrencies began to offer ICOs (initial coin offerings) which garnered interest from major publications early this year.
Instead of raising money the traditional way, startups raise money by offering tokens or digital coins which fund the firm’s operations. This means startups do not need to rely on complicated funding rounds and pitches to secure investments for their ventures.
Investors who invest in these ICOs bank in the hope that the token rises in value over time. Many of these ICO’s are offered at fractions of a penny, in hopes of rising exponential in value down the road.
For example, if you’d have invested $1,000 in Ethereum during its ICO, you would have had at least a million dollars with you right now in terms of value.
Speaking of Ethereum, it was the platform itself that showed this new form of startup investing to the world. An ICO works similarly to a crowdfunding campaign; think of it as a Kickstarter for start-ups.
An ICO allows projects to raise money for development, whilst simultaneously providing a token to backers. The tokens resemble shares or stocks in a traditional stock market.
While ICOs are exploding in popularity, they are still in a grey area.
They are unregulated by the authorities and is therefore not guaranteed to actually provide good returns to investors. Additionally, tokens are not considered securities which are a problem with authorities like the SEC.
There is no guarantee that the development team will deliver their promises and there is also no guarantee that your investments are secure down the road.
However, no investment, even in the stock market, is a sure thing. ICOs are a new industry venture and have many unique risks that make them different (and potentially more profitable) from an IPO you will find on the stock market.
Is it speculative?
Based on the huge amounts of money that have been pouring into ICOs this year (over $1bn in less than 6 months), there is no doubt that speculation is strong in the cryptocurrency scene among investors.
Despite news of early investors turning thousands of dollars into millions(!) in under a year, the truth is that every cryptocurrency (including established ones like Bitcoin and Ethereum) is still highly speculative.
While the total market cap of every cryptocurrency in existence is just about $150 billion dollars, all of that has happened in a rapid rise which is also known as a bull run in less than a year.
However, we’ve mentioned that the crypto scene is still young. Despite its abnormal rise, we don’t know for sure whether this is acceptable or not for digital currencies. Bitcoin famously crashed in 2013 and recently in June 2017.
It has bounced back to reach an all-time high value of $3,200 – something that is impossible to achieve for shares in the stock market.
Hence, no one really knows what’s normal or not in the cryptocurrency scene. It’s best, however, to take a more conservative approach if you don’t want to lose your funds quickly.
The top factors to look out for when investing in a cryptocurrency
Make sure the coin has a purpose
When investing in any cryptocurrency or ICO, it is important to identify the core features of a project that differentiate it from every other coin on the market.
For instance, when Bitcoin was first introduced, there were many clones of the original Bitcoin with minor tweaks such as an increased supply, quicker transaction times, or just a name change.
Fast forward to today and you’ll find out that most of these clones are dead. The only ones who made money were the creators of those copycat coins.
The best example to prove this point is by looking at Ethereum. Unlike Bitcoin, Ethereum’s focus was not only to become another digital store of value. Instead, the founder realized that the same technology used to perform transactions digitally (the blockchain) can also be used to transfer data and information.
Because of Ethereum’s innovation and unique use case, it warrants a rise in value as shown by Ethereum’s rise from $10 to $400 from January to May 2017.
Ethereum allows developers to build platforms based off cryptocurrencies, develop smart contracts, as well as being a store of value at the same time. Smart contracts work exactly how they sound; terms of contracts that execute automatically based on wether conditions are met or not.
Another series of innovative cryptocurrency projects include MaidSafe, Storj, and Sia. Again, instead of being another digital currency, these projects aim to become the cloud storage of the future.
The general idea around investing in a good and profitable currency is this:
- Make sure the cryptocurrency or token has an actual use case. If it’s just as a store of value, Bitcoin does that well and there are unlimited other coins that do the same thing
- The more generic a token’s use case is, the less likely its going to succeed. If a token is just another ‘decentralised token for blah blah technical jargon’, stay clear. Remember, decentralized is a buzzword, not something that actually states what the coin is used for
- Make sure the use case is logical. A coin can have unique use cases, but not everything has to be decentralized and be done on the blockchain. For example, you may come across an ICO that markets itself as a decentralized social media platform. How can decentralization work when the whole purpose of a social media platform is to literally provide your information for it to actually become social? Use your common sense when looking at coins; if you know that there is absolutely no need for an ICO or token to use cryptography, ditch it.
Make sure the development is competent, reputable, and transparent
Whenever you find an ICO or coin that you’re looking to invest in, go straight to their website and look at the developer or team page.
Make sure that the developers and team members of the ICO or coin have their real name, picture, and credentials. If there is no information or if the team is anonymous, stay clear.
There is absolutely no reason for a competent startup team to not include information about themselves on the website or any other company website.
Tip: Reverse image search photos of team members on Google. If you find out that the image is fake or duplicated, avoid the project.
Once you find who the people behind the project are, Google their name and find out as much as you can about them. LinkedIn profiles are a great way of gauging whether a coin has a good team behind them.
Some good information to look out for include:
- Where did they go to school?
- What did they study/area of expertise?
- What is their work experience?
- Were they a part of an influential company before?
- Do they have any experience in this industry?
- Do they have any previous positions that shows their potential and skills?
Two other platforms to look out for other than LinkedIn is the team’s Github and Twitter profiles.
While we don’t suggest you to become internet sleuths, finding out a team’s achievements on their Github and Twitter is a good way of finding out whether a project will succeed.
Let’s say that you find a developer’s Github and they have nothing special on there, nearly an empty page.
Would you trust that developer with YOUR money to run the project?
In regards to the credibility of developers, there is a lot to be said (in a good way) if a team or developer has their credentials set to public. When a development team is public, they are regarded as the faces to the organization. Hence, they hold the responsibility and accountability of the project’s success or failure.
You could potentially have ICOs or coins built by anonymous developers, some of which may have a strong background. Common sense, however, indicates that it would be wise not to contribute to projects with anonymous developers.
There are two ways anonymous projects can go very wrong:
- There is no accountability if the developer cuts and runs, and, with no former projects to look upon
- There’s no way to know if they’re capable of delivering their promises as you know nothing about them
A good thing to look out for when considering an ICO investment is identifying the organization in charge of handling the escrow for the ICO.
Reputable development teams will enlist organizations with a solid reputation within the finance industry to act as trustworthy holders of raised funds. With their reputation on the line, these individuals are less likely to cut and run with the raised funds.
Additionally, solid development teams will have set in place a condition where, if a certain level of funding is not achieved, the individuals who contributed will be refunded. This acts as a fail-safe in the event a project ends up underfunded.
Good teams will also have policies in place to make sure that they do not sell the tokens raised immediately. Instead, they will sell it gradually to raise funds for their project to avoid market shock.
For example, the Ethereum team raised thousands of BTC amounting to millions for their ICO. However, the team only sold 10% of their BTC each year as capital for their project.
They knew that if they were to sell all their BTC instantly, they could potentially drop the value of BTC and crash the market which is bad for cryptocurrencies. In general, good developments care less about money and more about making sure their vision is a success.
Does the whitepaper make sense?
When a cryptocurrency raises money for an ICO, the team will come up with a document called a whitepaper.
The white paper simply includes:
- What the project is about. The white paper will explain the vision of the project, the goals it hopes to achieve, and the technology of the coin.
- The amount of money needed to be raised for the project.
- The number of tokens or coins allocated to investors. For example, Ethereum allocated about ~80 million ETH for its ICO. In general, the fewer tokens issued, the higher its value will be due to limited supply.
- The length of the ICO campaign.
If you’re going put money into an ICO, the white paper must be the first thing you read. It may be boring or too long to read, but the white paper lays out the company’s risks and opportunities, along with the proposed uses for the money raised by the ICO.
For example, the white paper will explain if the coin holder is going to have voting rights, or if the coin pays out dividends based on a number of coins you hold and when those dividends are paid out (monthly, yearly, etc.).
If a white paper is overly optimistic, stay cautious as inflated goals often lead to disappointment. Also, if a white paper is needlessly complex (too much jargon, vague explanations, complex English, etc.), be wary as they may hide the team’s incompetence by deliberately making the project hard to understand.
Gather reviews and insights from cryptocurrency discussion boards
BitcoinTalk is the biggest message board for cryptocurrencies. The forum is a place where people interested in the technical details of the development of Bitcoin and other cryptocurrencies come together to discuss and form opinions.
New and existing cryptocurrencies usually have an Announcement thread (also known as an [ANN] thread) on the BitcoinTalk forums. This is usually the best way to find the first announcement of an ICO, what the coin has to offer, ask questions with the developers of the coin and other members of the forum.
When researching a coin, find the thread of the coin and read every single page in the thread. Many common questions (both negative and positive questions) are usually answered in the ICO’s announcement thread.
Make sure to read answers given by the official developer accounts of the thread. Are they answering all questions and concerns with genuine responses or do their posts seem canned, vague, and shady?
A simple trick to use when searching on BitcoinTalk is searching the thread with certain keywords. Negative words such as “con”, “scam”, “scamcoin”, “MLM”, and “shit” (pardon the vulgarities) are usually indicators of a poorly-run coin.
If any posts are found with these words, read the threads carefully and do your own research to see if it’s worth investing or not.
On the other hand, if a thread is too positive (almost no negative comments), double check the accounts to make sure they are legit. A team can easily pay for bots and users to fabricate and post positive comments about their coins.
Another place to find out information about a coin is by looking on Reddit. Cryptocurrencies usually have their own subreddit (e.g Ethereum’s /r/ethtrader, Bitcoin’s /r/BTC) which contains information about the coin such as upcoming events, updates from devs, as well as analysis and forecasts on the coin’s value.
Spread your assets, don’t put all your eggs in one basket, and only invest what you can afford to lose
Just like with any other investment, having a portfolio with multiple assets as well as spreading your risks is a sound choice. Don’t put all your eggs in one basket and invest in one coin thinking it is going to rise substantially. Instead, find 3 or 4 coins that you think is good and invest in them.
A good strategy in cryptocurrencies is to have an 80/20 or 70/30 ratio.
80% or 70% (the bulk) of your cryptocurrency investments should be put in established coins like Bitcoin and Ethereum. This amount should be kept and held by you; do not trade it unless you know what you’re doing.
After that, depending on your remaining coins and how likely it is you will reach your goals, you could put them in a diversified portfolio of riskier investments (coins that have potential but are not established yet).
Some coins that are a good shot at holding in the long run include:
- Bitcoin (BTC)
- Ethereum (ETH)
- Litecoin (LTC)
- Stratis (STRAT)
- Waves (WAVES)
Don’t watch the price everyday;
buying and holding is the still the best strategy in the long run
Day trading and looking at charts and buy/sell orders is not feasible for 99% of cryptocurrency investors.
Unless you have a huge capital, the gains that you get from day trading and making your decisions off small changes in a coin’s value is minimal. Not only do you not gain much, you also have a higher risk of losing your net worth along the way if you make a bad trade.
There’s also a saying in the market to never time the market. While events and development updates are decent ways of determining a coin’s future value, trying to time your way by buying and selling at the ‘right time’ will always lose your money in the long run.
For TA (technical analysis) trading to be worth it for cryptocurrencies, you should have at least $50,000 in cryptocurrencies for it to be profitable.
Instead, the best strategy for most investors is to buy and hold. You should believe in your investment and only invest money that you can afford to lose; with these two factors achieved, you don’t need to watch the price of your investments every day like a hawk.
If you made a rational investment decision, don’t let your emotions take over and negate your decisions during a price drop or rise.
We suggest checking your net worth and the market weekly, monthly, or quarterly. It’s fine to check the market every day but remember to not to get emotionally invested in it.
Not only are you risking your well-being on (technically) intangibles, you are also risking your social life and relationships by being too attached to the market and not giving enough time and attention to your personal life.
For instance, just under a month ago, Bitcoin crashed from almost reaching $3,000 to $1,800 per BTC.
1 BTC is already equal to $4,000 – nearly a 100% increase in value if you would’ve kept your calm and held your coins.
Don’t time the market.
There is not good or bad time to buy and sell
Again, the rule of not timing the market is so important that we have to mention in twice.
Unlike stock markets, there is no general rule when to buy or sell cryptocurrencies because the industry is so young and unknown.
If you have to follow a set of rules, these are general guidelines that will work most of the time as long as you don’t panic sell or buy:
- Only sell when you achieve your goal. If you’ve set a goal of $50,000 for your investments, sell only when you hit that figure.
- Don’t panic sell. Again, Bitcoin dropped to $1,800 from nearly $3,000 under a month ago. Ethereum fell from $400 to nearly reaching $100 in the same timeline. Today, Bitcoin and Ethereum are both worth $3,300 and $250 respectively. Not only would you have lost plenty of money by panic selling during this period, you would’ve also been in the red for your investments.
- Do not have FOMO. FOMO is an acronym for the phrase fear of missing out. Don’t buy just because everyone else around you is buying cryptocurrencies. Instead, do your own research and make your own decisions.
- Only invest what you can afford to lose. This should be taught to all investors, in all honesty. Investing in cryptocurrencies is very much like gambling. There is no guarantee for you to turn a profit; likewise, do not get emotionally invested into it.
Another reason to never time the market is that you never know what’s going to happen to the values of cryptocurrencies.
For example, when Bitcoin was $1,000, there was talk about the ‘bubble’ and how Bitcoin is overvalued. The same thing happened when Ethereum reached $50.
It’s safe to say that both currencies have proved their doubters very, very wrong.
It’s also beneficial to not compare crypto bubbles to traditional financial bubbles. A 10% change in real financial markets can wreak havoc but it’s completely normal (and expected) for cryptocurrencies.
Likewise, a 100% rise in stock prices is nearly impossible in the real world while 1,000% changes in cryptocurrencies happen regularly. Bitcoin has grown from less than a penny per unit to $3,300 for one – let that sink in.
5 red flags for cryptocurrencies:
Don’t invest if you see these signals
Here are 6 red flags to spot if you are unsure of whether a coin is legit or not.
As the scene is not regulated (yet), there are many scamcoins popping up as a quick way to burn investors and make the founders money, don’t be fooled!
Huge returns that seem too good to be true
If it sounds too good to be true, it’s not.
Legit cryptocurrencies do not try to raise funds based on the potential returns of your investment. Instead, they take pride in their technology and goals, NOT the potential value of their coins.
This is, in general, the biggest telltale sign of a cryptocurrency Ponzi scheme. In general, the greater the rate of probable returns, the higher the risk. If a coin’s marketing campaign is all about promoting the value of the coin, steer clear of it.
Whether it is through cloud mining websites, investment programs or cryptocurrencies with no real foundation, no investment can consistently generate high returns with no risk or guaranteed returns.
Returns are highly dependent on referrals and new members
If the primary way of earning money through a coin is through referrals or commissions, it is a Ponzi scheme.
Again, legit coins do not grow based on how many people own their coins. They do it through proper execution of their goals, good teamwork, and good technology. You do not have to play a part in their growth by getting more referrals to the coin, that’s not your job.
Unclear or anonymous ownership
Are the founders or the team anonymous?
As we’ve mentioned earlier, a coin with no information about the team behind it is sketchy, to say the least. Even if there is a team behind it, do a Google search on the individuals to check out their history.
There have been multiple ICOs in the past few months that were led or founded by individuals who have a history of fraud before e.g scamming investors off their money, money laundering, and stealing funds from cryptocurrency exchanges.
Only invest in coins where the team is reputable, highly skilled, and respected by the community.
You have to invest first to get more information
To go under the radar of authorities, many websites of scamcoins pose as legitimate businesses such as a coin wallet service, marketplace or cloud mining platform.
However, to get more information about the service, you have to either invest or signup as a member to learn more.
After your investment, the website’s material and focus appear to be different from what their main focus which is recruitment and ‘investment’ – exactly like a Ponzi scheme.
Closed source and having a private blockchain
For scamcoins, almost all of them are a closed source which means the code behind the coins is not released to the public. This is stark in contrast with coins like Ethereum where 100% of the source code is available for the public to see via their Github.
Similarly, scamcoins may also have private blockchains to ensure that no one except them has access to transactions on the blockchain. This is against the initial vision of the blockchain to a public, digital ledger.
You can do a quick check to see if they are listed on CoinMarketCap (although many scam coins are listed there so it’s only a minor check) which requires coins to genuine, traded on a public exchange with an API available, and must have a public URL that shows the coin’s total supply.