Sirwin
Sirwin

Understanding Digital Assets: The Basics of Crypto Investing


With Bitcoin tracking over $50k and Ethereum closing in on $3000 it's definitely an exciting time to start learning about cryptocurrency and exploring opportunities in this emerging space. If you are new to crypto and investing and want to know how to get started, this essay will give you a foundation to build a sound investment strategy on.

The 101 of the Crypto Landscape

Do you feel like a stranger in a strange land?

Do you feel like a stranger in a strange land?

The world of cryptocurrency involves many new concepts and terms that may be unfamiliar to those just starting out. However, understanding the core components of this emerging digital financial system is essential for navigating the space.

Let's begin with the big two - Bitcoin (BTC) and Ethereum (ETH). $BTC was the first cryptocurrency, created in 2009 through blockchain technology. As a decentralized digital currency, no single entity controls it. $ETH later launched its own blockchain platform in 2015, allowing for decentralized applications or "dApps" to be built on top of it. Due to their longevity and large market capitalizations, BTC and ETH are considered the 'blue-chip' cryptocurrencies.

I strongly recommend that you thoroughly research the history and evolution of these two blockchains before diving into the crypto market.

Beyond the top two, there are thousands of other "altcoins" competing for a share of the crypto market. Altcoins, a portmanteau of alternative and coins, are cryptocurrencies other than Bitcoin. There is another less PC term for these coins, but I'm trying to keep this article suitable for all ages.

Some notable altcoin examples include Cardano (ADA), Solana (SOL), and Polkadot (DOT). These blockchain networks aim to improve upon Bitcoin's technology through innovations like smart contracts.

Another important concept is that of an "NFT" or non-fungible token. NFTs use blockchain technology to record ownership of unique digital items like art, collectibles, and more. While cryptocurrencies are interchangeable, NFTs represent singular digital assets that are not mutually interchangeable. Some notable NFT's are the Cryptopunk and Pudgy Penguins PFP collections.

Identifying Trends in the Cryptocurrency Markets

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Now that we understand the basic components that make up the cryptosphere, the next step is learning to identify trends that can impact digital asset prices. Much like traditional financial markets, cryptocurrency markets experience both short-term cyclical trends as well as longer-term secular trends.

Cyclical trends, which can last from a few months to a couple years, are primarily driven by fluctuations in market sentiment. Periods of exuberance and FOMO buying are often followed by crashes and bear markets. Leverage, or borrowing to amplify gains, plays a big role in fuelling these boom and bust cycles. News events like major announcements or regulation changes can also trigger shorter-term moves.

On a larger timescale, secular trends reflect the overall adoption curve of cryptocurrency and blockchain technology. As the underlying tech continues to develop and find more real-world uses, the sector experiences long-term growth. More companies and institutions entering the space as well as increasing geographic expansion point to bullish secular trends.

By understanding both cyclical and secular influences, investors can identify opportunities during market fluctuations and benefit from the overarching growth trajectory of the industry.

Remember the adage: Time in the market > Timing the market

Valuation Strategies for Cryptocurrencies

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Research is key!

With an understanding of the different types of digital assets, the next step is learning strategies for valuing these innovative investment vehicles. While valuing individual cryptocurrencies can be challenging given their volatility and speculative nature, there are common approaches that experienced investors employ.

One valuation method examines the tokenomics, or economic model, behind a cryptocurrency. Factors like total coin supply, inflation rate, token burning, and revenue allocation provide insight into a coin's potential long-term value. Technical analysis of price charts is also widely used, with indicators like support/resistance levels and trend lines giving clues to future price direction. A very useful and free tool for doing research into specific tokens is coingecko.com

Risk management is paramount due to crypto's high volatility. Only allocating a small percentage of one's overall portfolio to digital assets helps mitigate risk. Diversifying across different coins by market cap and use case is also prudent. Taking some profits during bull cycles to lock in gains helps rebalance risk. Dollar cost averaging by regularly buying a fixed amount is an effective strategy for the long run.

By thoughtfully researching projects, understanding valuation approaches, and practicing disciplined risk management techniques, investors can potentially profit from the growth of cryptocurrency while minimizing downside. 

Risk Management and Discipline are Key

We want to avoid setting your wealth on fire.

We want to avoid setting your wealth on fire.

While the cryptocurrency sector presents opportunities for outsized gains, its high volatility also poses risks that investors must manage carefully. Proper risk management and discipline are paramount to successfully navigating this unpredictable market over the long run.

Perhaps the most important rule is to never invest more funds than you can afford to lose. Due to crypto's speculative nature, there is risk of principal loss. Only risk capital that would not impact your financial well-being or long-term goals if lost should be allocated to digital assets.

Diversification is also crucial to mitigate risk. In addition to holding different coins, diversifying across market caps and use cases helps reduce volatility. Rebalancing periodically ensures riskier holdings don't become too large a percentage of one's portfolio.

Discipline in sticking to position sizing guidelines and taking some profits during bull markets to lock in gains helps manage risk. Emotions should not drive investment decisions - reactions like panic selling or overextending due to FOMO can be costly.

By thoughtfully researching projects and trends, practicing prudent risk management techniques, and maintaining discipline, investors can potentially benefit from cryptocurrency's growth over the long run while minimizing downside risk from volatility.

Conclusion - Putting it all Together

While cryptocurrency presents opportunities for high returns, it is also a highly volatile asset class that carries risk of loss. Proper risk management through techniques like diversification, position sizing, and taking some profits during bull markets is crucial. Maintaining discipline and not letting emotions drive decisions can help mitigate downside risk over the long run.

Some suggested next steps would be to practice analysing specific coins and projects using tools like CoinGecko. Start with small test investments to get experience navigating exchanges and wallets. Consider dollar cost averaging by regularly investing small amounts to take advantage of volatility. Also continue educating yourself on new developments, regulations, and trends by following credible crypto news sources.

With a foundation of knowledge, focus on risk management, and an ongoing learning approach, you will be well equipped to benefit from the growth potential in this innovative digital asset sector while minimizing risks.

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Gryphonboy
Gryphonboy

Small-time nerd. Publishing my book online for free! Check back every Sunday for the latest chapter. If you have any suggestions, corrections, criticisms, or just want to say hi please feel free to make them in the comments.


Gryphonboy's Crypto Journey
Gryphonboy's Crypto Journey

Dedicated cryptocurrency advocate! I hold the majority of the assets I discuss. This is not investment advice. Views and analysis expressed are my own and pertain to projects that I am invested in and passionate about. Support my work by tipping what you can here or you can support me directly by donating to gryphonboy.eth

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