Cryptocurrencies are not complicated. They are just different to traditional fiat currencies, which means that a slightly different approach is needed to understand them. Also, given that they are not controlled by any centralized authority means that they are extremely volatile and completely reliant to the investors' emotions.
Thus, volatility and decentralization are two things that investors must be wary of before putting their money in. There are other tips that they can follow prior to investing. Here are my top five.
Look at the fundamentals
I know this sounds a bit absurd, because cryptocurrencies are perceived as not having any intrinsic value. Thus it is very hard to determine the fundamentals, right? Wrong. Each cryptocurrency is merely a product of the underlying blockchain.
• For instance, ETH is the cryptocurrency for Ethereum, which powers the entire world of decentralized finance (DeFi).
• On the other hand, SHIB is the token for the meme cryptocurrency Shiba Inu, which does solve any utilitarian purpose. It only exists as a token for the underlying community.
Whichever cryptocurrency you are buying, make sure to check the blockchain it powers and the problems it solves. Otherwise, it is just a meme-coin that can go up or down depending on the market's sentiment.
Your analysis of the fundaments should also include market cap of the coin, its current liquidity, its trading volume and the circulating supply as well. In some instances, the circulating supply is low even though it does not necessarily affect the price of the coin. An example of this is Solana, where most of the native SOL tokens are staked in the network.
Safely secure your private keys
Whenever you create a "hot" cryptocurrency wallet (the ones you install on your web browser as an extension), you are asked to note down a sequence of words and safely secure them. These sequence of words are nothing but private keys that help you get access to the cryptocurrencies that you have on the blockchain. For any individual who is thinking of investing in cryptocurrencies, this is a prerequisite. Remember:
• If you lose access to your private keys, then you lose access to your funds on the blockchain.
• If your private keys are compromised, then you lose access to your funds on the blockchain.
Thus, you are advised to store your private keys on either a .txt file on a hard drive (and not on the cloud). Alternatively, you can write down that sequence of words on a piece of paper and then safely keep it from the reach of anyone apart from yourself.
If you have some investments that you are thinking of keeping long-term, you can store them on a hardware wallet too.
Always keep some money for gas fees
Let's say that you are transferring some ETH from your MetaMask to a cryptocurrency exchange because you wish to open a position. The asset that you want to buy is seeing a sharp rise in its price, and you are hopeful that it will continue to do so. When you decide to send your ETH, you decide the gas fees for your transaction to be included. However, since the network is too clogged, your transaction keeps failing.
If you have a very limited amount of gas fees, then you would not be able to complete the transaction. And, you will miss opening a position.
To avoid instances like this, it is best to keep aside some amount just as gas fees within your wallet. This could vary between $50 to even $500 depending on the size of your trades.
Do Your Own Research is standard term in the crypto industry and is often thrown around and especially stressed upon for beginner-level investors. This is crucial because there are a lot of emotions that are riding high within the crypto space that can often blur your investment vision.
Everyday, there are new projects that claim that they are the best in town. To avoid losing all your money in such unheard of projects, it is always best to examine the project in detail, read its whitepaper and even examine the source-code if you can. This would give you an idea about what the project is, what problems it solves, who is backing it and so on.
A crucial part of this is to also look at the founders who are working on the project. If they have already worked on a similar crypto-related project before, chances are that they are quite serious about this project as well.
And to top it all off, you must understand that every single project that is launched in the industry has the potential to fail. Sometimes even the seemingly successful projects fail because they get hacked and millions of dollars are lost overnight. Again, remember to do your own research.
Understand the larger crypto market sentiment
The traditional institutional investors and people in the world of centralized finance often look at the crypto market and say that it is driven by investors' emotions. My only question to them is, which market isn't? But yes, investor sentiment is much more prevalent and palpable in the crypto industry than it is in other markets.
Therefore, it is only pertinent that you regularly keep abreast with the predominant crypto market sentiment and use that as a tool to inform your trading strategies. You can rely on the Crypto Fear and Greed Index for this.
Most of the investors and traders that I interact with tell me that it is very hard to determine the crypto market sentiment. And my response to them is, have you ever tried it? The overall market sentiment is definitely very hard to capture and understand. But, if we use strategic tools then we can not only understand the sentiment but also use it to our own benefit.
Simply by keeping up to date with the goings on of the market helps give a clearer picture of where the larger sentiment is headed. For instance, the SQUID game cryptocurrency fiasco was quite predictable. The price was rising rapidly whilst the overall liquidity was quite low. The scammers behind the project simply wanted to use the larger sentiment behind the popular TV show and use that as a way to fool people.
All those investors who had done their fundamental analysis on the token would have certainly not invested - because it clearly had none. On the other hand, the SAND token has been pumping since the announcement of Facebook's rebranding to Meta - this signals an overall enthusiasm around Metaverse. And because the SAND token has a utilitarian value, users who had put in the money would continue to reap profits.
The Bottom Line
All these tips are essential for safer investments in crypto - but it should be noted that they should all be used as part of your portfolio. One cannot be used in isolation from the other. While the fundamentals are hard to track and understand, if investors focus on as much as they can understand, then it will help them in the creation of profitable portfolios.
The author, Manav Bajaj, is Founder at Panther Quant. The views expressed are personal
(Edited by : Anshul)
First Published: IST