With the crypto currency universe hitting fresh 2018 lows over the long Easter break, the question on everybodys mind is whether they buy this dip, or book their losses, or simply stay put – or “HODL”, as the crypto community likes to put it.
During great booms and busts, there is always much more noise than real signals to buy or sell. But a shrewd trader/investor always has the ability to see through the near-term noise and extreme price fluctuations and take a directional bet.
This column believes that while money will still be made in the crypto space, the days of easy money are far behind us. Everybody is a genius in a rising market, but those who can make money or even limit their downside in a falling or sideways market will build wealth over the long term.
Below are some basic steps to follow for active market participants in the crypto space. They are extremely basic but yet require a lot of discipline.
1. Treat cryptocurrencies like you would treat your stocks in an equity portfolio: Investing in a cryptocurrency can be viewed as buying equity stock of a firm from the point of view of risk management and doing your due diligence before buying. Make sure you know your thesis for buying a specific coin just like you would for a company. Read the coin’s white paper online to gather what utility value it proposes to have; do a quick Linkedln search of the founding team and senior management to assess their backgrounds and work experience, and keep a close eye on who their current and potential clients are. The white paper also gives a timeline for the next 12-18 months of the potential business roadmap for scaling up.
2. Diversify and skew your portfolio towards the top 10 coins by market capitalisation: Price is king. The price reflects fundamentals, sentiment, momentum, future outlook as well as past performance. There is a reason that out of the current total market cap of the entire coin universe of approximately $250 Billion, the top 10 coins represent almost 80 percent. And within these coins, you have diversification. Further, although the smaller coins may have a higher beta when the overall market improves, the next bull-run in the crypto space will be led by the leading coins. This is similar to what we witness in equities. Whenever things get beaten down badly, the first leg up is led up by large caps.
3. Technical analysis is elegant, but don’t use it: One sees a lot of commentary pertaining to moving averages, oversold and overbought levels, major support zones and breakout zones online. While technical analysis does provide a good picture of medium term channels or trends, I believe it should not be used as the sole indicator to buy or sell cryptos. Remember that this field of analysis is based on the assumption that markets are weak form efficient and that past price and volume data is a good enough indicator for future price action to earn positive risk-adjusted returns. For a long-term investor in the crypto currency space, this column does recommend using charting.
4. Follow leading analysts and pioneers of the crypto community: Keep updated with the latest developments in blockchain technology and ideas of various thought leaders in the crypto space on Telegram channels, Twitter handles and a host of other crypro-dedicated websites. Remember, true believers and long-term secular bulls of the space are not in the business of predicting prices but rather holding a constructive view on how they see technology affecting the current landscape.
5. Keep updated with the latest news on your coins: There are usually updated blog posts and media-related coverage on the coin’s website. Make sure you stay on top of all the newsflow of your portfolio components.
Take an informed, educated and a high-conviction view on a coin. More importantly, be prepared to change this view if the underlying fundamentals dramatically change.
Always remember: Bulls make money. Bears make money. But pigs get slaughtered.