Financial markets, as we all know, are inherently risky. Cryptos are risky assets. Therefore, it follows that losses in the crypto market are unavoidable. The challenge is to find ways to lessen the pain by simply following some investing tips that have stood the test of time. Understanding how the market works is an essential factor that determines the performance of your investments, notwithstanding the quality of your assets. Let’s take a deep dive.
Reducing losses in crypto
There are lots of ways to lose money in crypto. To paraphrase a famous saying, you lose money when you buy, not sell. It is important to know when to enter a market to make profits. If you buy large quantities at the top, there’s a good chance you’ll have to wait for a couple of years to beat your averages. However, if you time your investments right and buy at the bottom, any upward movement would turn your portfolio green.
Making the right investments in a bear market is easier said than done. As investors, our goal should be to exit dangerous positions on time and identify good entry points.
How do we systematically go about the process while keeping a day job?
Tips to avoid losses in the crypto market
Understand funding and backing
Most failures in the crypto space are due to inadequate liquidity and collateral. Well-funded companies and institutions mean enough dough is in the pot to handle mass liquidations. The network doesn’t matter as much as the project’s financial health. Always ensure that the project you’re investing in has money to keep itself afloat in times of crisis.
Get to know the founders
The true identity of Satoshi Nakamoto remains a mystery 13 years after he supposedly created Bitcoin, the world’s pioneering crypto. Reputed and credible founders, developers, and investors backing them at the core should be your criteria when selecting projects for investment.
Think long term
Day trading is not a sensible proposition for most investors. It is complex, high-risk, and nerve-wracking. For those of you looking to make significant profits on your investments, time is your biggest asset. Systematic Investment Plans (SIPs) are a great tool to keep investing in a dynamic market. Through CoinSwitch, you can start a SIP for any crypto asset listed on the platform with as little as ₹100 per transaction.
Avoid “too good to be true” offers
The common sense maxim—If an offer sounds too good to be true, it probably is—holds good for investments. Yet, many newbie investors in crypto tend to have unrealistically high expectations with their capital, making them sitting ducks for scamsters. Just because BTC returned a 1000% profit in 2012 doesn’t mean it always will. The truth is that it’s grown too big for returns to keep pace. The bottom line is that opportunities to make insane short-term gains have become few and far between.
Diversify and rebalance
Diversification is reducing your exposure to any asset class or a token within each class in case something goes wrong. It would help if you diversified intelligently—ensuring your assets aren’t connected to each other’s movements directly. If you have a diverse portfolio, you shouldn’t have a problem hedging your losses when times are tough.
Scan the white paper
A white paper is an invaluable document that provides details about a new crypto project. It spells out everything you need to know—the problem, the solution offered, financials, technical information, developers, etc. For instance, Bitcoin’s white paper heralded a revolution of sorts. We highly recommend you read that and every other white paper before you decide to invest.
The crypto community is powerful—both within projects and on social media. The Dogecoin community, for example, has 2.4 million followers on Reddit. They keep developers in check, invest religiously, and keep up with regulations. Being a part of social communities gives you a sense of belonging and safety.
The market is a good investment indicator too. Parsing a yearly chart will tell you if you’re buying the bottom or the top. It is important to buy low and sell high, not the other way around.
Yet, regulation is the X factor that can alter the investment equation. Investors would do well to remember that cryptos came into being as a libertarian idea with decentralization at its core. Play by the rule book, and things will fall into place. At least in the long term.