What you need to know first.
Cryptocurrency or Crypto for short is a digital form of money or a digital store of value that uses a network of computers to manage transfers between different people. So what does that mean exactly? well, it means that currencies like Bitcoin are just like other assets like gold, oil, aluminium. You can hold them and wait for the value to increase or trade them for other assets. So why would you just buy stocks in oil and gold instead? well, unlike stocks, crypto allow you to purchase fractions of a coin so you can own 0.1 of a Bitcoin. This means you don’t have to start out with a large fund, you could literally start with $10 and still be able to buy multiple coins. I wouldn’t recommend starting out with such a small amount though as there are some fees to consider. The smaller amount you use the larger the fees will be in proportion to your initial investment. I started out with just £250 and I had no clue on how it all worked and ended up spending about £30 in fees to transfer it around. There are cheaper ways to transfer your currency which I will tell you about later in this guide. The point I’m trying to get across here is that you don’t need a lot of money to start.
Why would I want to invest in cryptocurrencies?
The short answer is “to make money” and yes you can make money, a lot of money if you’re really good and use the right tactics am methodologies. The long answer is to increase your wealth by investing in currencies that over time can give you returns much higher than you could have gotten by saving it in a bank. I will use Bitcoin as an example as it is the most popular an well-known currency. Last year on 1st January 2016 Bitcoin was worth $430, on January 1st of 2017 Bitcoin was worth $13,900. This means that if you spent $1000 on Bitcoin you would have 2.3255 Bitcoin which on January 1st of 2017 would be worth $32324.45. That’s 32 times your initial investment. Yes, the price could go down but the general trend of the past 4 years has been up and in my opinion, it will keep going up as there is a limit of 21,000,000 Bitcoins. Once all the Bitcoins are mined there will be no more created which gives the coin rarity, unlike gold that can be dug up from the ground. You can view the price charts for Bitcoin on this website https://coinmarketcap.com/currencies/bitcoin/#charts.
So how do I make money?
There are two ways to make money with crypto. One is to invest in a currency and hold for a certain amount of time. As the general trend is up, after 6 months or more you will have made a decent profit from your investment. This method of “set and forget” is the safest way to invest especially when you invest in one of the top coins like Bitcoin, Etherum or Litecoin. Method 2 is to invest in coins that are not as popular. These less popular coins have a more volatile price change so the profits are generally higher and some coins like ripple or Neo have shot up in price over the last year by as much as 5000%. These more volatile currencies are much riskier than the mainstream coins as they can go down much faster as well. Many traders use a 60:20:20 ratio. This means they put 60% in the mains stream coins like Bitcoin and Ethereum, 20% into less popular coins and 20% in very unknown or brand new coins. This ration splits your investment over a larger area and minimizes the risks of a single coin losing all your money.
Before you run off and start investing.
Before you start investing in crypto you should know the market fluctuates up and down. So any money you invest in crypto should be money you are willing to lose. Don’t bet your life savings on crypto . It could make you very rich but it could also make you poor(there are ways to minimize the risk which I will talk about later in this document).
When looking for a currency to invest in don’t look at the ones that have jumped up in price recently, just because they jumped up doesn’t mean they are going to continue going up. Trying to jump in on one going up is like trying to grab onto a moving train, you may catch it but you could also get your arm ripped off. Often when a crypto goes up and will fall again this falling movement is known as consolidation and usually happens right after the price goes up fast. The reason it falls is that people who were already invested before it went up want to sell at the new higher price. This is called taking profits because the people who bought it earlier can still make a profit if it drops a bit whereas you who just jumped in cannot.
How do you manage risk? Well, the first step is to not put all your eggs in one basket. Spreading your investment over 20 currencies means if 3 of them go down the other 17 will make up for your loss. This is why many investors use the 60:20:20 ratio. The 60% in mainstream coins pretty much guarantees they will make some money even if all the other ones fall.
The second method of risk management is knowing when to take profits(selling when the price goes up). If you buy some crypto when it’s at £0.10 and it goes to £0.20 you can sell 50% of what you have. This will mean you get your initial money back and even if the price falls back down to £0.10 afterwards you got your original money back and you still have half of what you bought worth $0.10.
Doubling down is the third method of risk management. This method means if you buy a crypto and it goes down in price you buy some at the cheaper price. This means your average price per coin goes down. This method should only be used on coins you seriously believe will go up in the future because they are doing something that makes them better then other crypto . So how do you know if the crypto is good? check out the next method:
Changing the odds is a way of setting limits for yourself so you lose less when you lose and win more when you win. How do you do it you ask? well, you set a limit for each coin you buy so if it falls past that lower limit you sell out and if it passes higher than you limit you cash out. For example, you buy some coins at £1 and if it falls pas £0.75 you sell. So at most you lose 25% of your investment. If the coin goes to £2.00 you sell 50% of your investment. So, in this case, the most you can lose is 25% and the amount you win is 100%. Even if you lose on half of the coins you invest in you will only lose 25% and in the other coins you win at you will make 100% which covers any of the loses you made in the other half of your coin portfolio.
Research. Yes, the last method of risk management is research. A crypto is nothing until you know what the currency is trying to do and why it is a good coin to invest in. So how do you research a coin? well, all good coins will have at least 3 of the following; a website, a whitepaper, a twitter, a reddit or a telegram group. A good coin will usually have all of these and will try to do something that solves a real-world problem such as Ripple. Ripple aims to reduce the fees when moving money between banks by using the crypto as a form of value.
Now you know the risks but still want to start, how do you do it?
The first step into crypto is to find an “on-ramp”. An on-ramp is an exchange that will trade fiat(real world money such as US dollars or GB pounds) into a crypto like Bitcoin. The one I use is called coinbase ( Registration Guide )and allows you to buy Bitcoin, Ethereum, Litecoin and Bitcoin Cash. Now you could stop here and just invest in these coins. But if you’re like me and want to maximise profits by investing in less popular coins then you need to sign up to some exchanges like Binance, Kucoin, Hitbtc and gate.io.
Once you have signed up with these exchanges you and bought some crypto on your on-ramp you can then transfer some of that currency to your main exchanges where you can start trading the main coins for the less popular altcoins.
Things to be aware of:
There are a lot of YouTubers who say that certain coins are great and you should buy them, but this is generally because those YouTubers will gain from you buying into those coins. If they say a coin is going to make you 10x gains then it’s probably not, they are probably just saying this to get you to buy which will increase the price of that coin which they already bought dirt cheap.
Don’t fall in love with your coin purchase. If you buy a coin because it looks great and all your research says its a hit but then it starts to fall it could be due to another coin with the same idea that is overall better. Set yourself a limit on how far you are willing to go down on price for that coin and if it falls past it, sell it. You can always re-buy it later if it starts going up again and probably cheaper then you first bought it.
Gamblers fallacy. This is a known term for people who think “well I got into five coins and they all lost me money so the next one is more likely to win”. This is not true all coins have an equal chance of going up or down no matter what your previous win ratio was like.