Five tips for crypto investing (and staying sane)

• Always do your own research (DYOR)
• Don't invest what you can't afford to lose
• Discover what Survivorship Bias means
  
• Take a slow & steady DCA approach

If you’re looking to invest in crypto you might be tempted to follow colourful influencers on Youtube, TikTok or Twitter, promising massive overnight gains. Sadly, crypto, and life in general, just isn’t that simple. There is no shortcut to success, and a real risk that you’ll lose your investment. You can, however, give yourself a better chance of success, and retaining your sanity, by taking a sensible, realistic and patient approach, that can be summarised in these five tips for crypto investing.

1 - DYOR & don’t invest what you can’t afford to lose

We have to start with two pieces of fundamental crypto investing advice in one - do your own research & don’t invest what you cannot afford to lose. These cannot be stressed enough, especially given this is being published while the market is moving sideways, threatening to turn from Bullish to Bearish sentiment.

If you selectively focus on certain coins, and recent price history, you can easily convince yourself that crypto investing is as easy as shooting fish in a barrel. You may even be tempted to follow random advice with borrowed money, or using other assets as collateral, to get short-term skin in the game. Don’t do any of those things.

Crypto is extremely volatile (see our specific advice on that further down) and though over the long term some of the established coins have returned profit, past performance doesn’t guarantee future success. Many of the coins that rose dramatically in price in the 2017 Bull market sank without trace.

• Learn what the terms Bull & Bear Market mean

Do your own research into any cryptocurrency you are considering investing in. If you can’t explain what the project does to a child, you don’t understand it yourself. 

A good place to start is researching fundamental analysis, and reading respected books on crypto or listening to podcasts.

Don’t take on debt expecting to realise short-term gains - you are playing with fire. It only takes one bit of negative news for sentiment to change overnight, potentially leading to months, if not years, of falling prices. This process will be exaggerated if you are investing in less established projects, or using more speculative techniques (such as DEFI or leverage).

With so much inherent risk you should only invest money you are prepared to lose. That means money that is left after all essentials and existing financial commitments are taken into consideration a.k.a discretionary income. 

You might be driven to risk money you cannot afford to lose by FOMO or a sense that you have missed the boat; you haven’t. You are still very early, with mainstream interest in crypto only just beginning. Crypto rewards patience and prudence. As a simple rule of thumb, If doubling your proposed investment would give you nightmares, you’re investing too much.

2 - Understand Survivorship bias

It is easy to think that crypto is full of winners and that prices only ever go up, especially during a Bull Market, where optimism is high and buyers outnumber sellers. 

Media of all types - social and mainstream - focuses on stories of extreme success, seducing crypto investors into thinking that anyone can do it. 

The reality is that these are crypto’s lottery jackpot winners, with the vast majority of crypto investors making modest short-term gains on the way up, and sitting on significant losses on the way down. 

The tendency to focus disproportionately on the few extreme successes, and screen out everything else, is known as survivorship bias. The most famous illustration of survivorship bias is what is known as the monkeys and typewriters thought experiment.

If you sat enough monkeys in front of a typewriter (which we could update to laptops for the 21st century) eventually, one of them would compose the works of Shakespeare. It is just a matter of mathematics at scale.

The same is true of crypto investing. From the millions of new investors trying different approaches, and combining portfolios of the thousands of coins added to the market, a small number will inevitably produce the investment equivalent of a monkey writing Othello. 

This doesn’t mean they have a particular skill, the same with our Simian writer. Ask them to repeat the feat and they would almost certainly fail, because it was just a fluke. 

Too many new crypto investors miss that dynamic and place faith in Youtube sages, or simply ape into random meme coins, inspired by what is simply an extreme outlier. 

Yes there are investors making significant gains based on their knowledge and skill, but in general, those that know don’t say, and those that say don’t know.

There are investors making significant gains based on their knowledge and skill, but in general, those that know don’t say, and those that say don’t know.

3 - Crypto is a rollercoaster. Be prepared

When you strap yourself in to ride a rollercoaster, you mentally prepare yourself for the extreme ups and downs which you know are coming. Investing in crypto is like a rollercoaster. You’ll experience both extreme highs and stomach-churning lows; the key difference being, you just don’t know when they are coming.

When you’ve gotten used to returns of sub 1% on your bank savings account, it can feel like you’ve hacked the system when your crypto investment returns double-digit growth in 24hours. 

a 50% increase from €1 takes you to €1.50; a 50% decline takes you from €1.50 down to €0.75.

Volatility is baked into crypto investing because the sector is still so immature. Extreme price movement is common-place and works both ways, in fact it is more violent on the way down, hence the expression ‘prices go up the escalator and down the elevator’. Remember a 50% increase from €1 takes you to €1.50; a 50% decline takes you from €1.50 down to €0.75.

You’ll experience this over short time frames and during protracted market cycles known as Bull and Bear Markets. Our article documenting the most dramatic moments in Bitcoin price history will give you a good taste. But here are a few examples

• In January 2021 the no.1 coin by market capitalisation, Bitcoin, dropped 10% in two hours
• In March 2020 Bitcoin dropped 50% over two days as a result of the Covid Pandemic
• In February 2021 news of Tesla’s Bitcoin investment saw a 25% increase in under 24hrs
• On Jan 6th, 2018 Bitcoin was priced €14,572; by the end of the year it had declined 79%
• A year later it was up 72%, having been 200% higher by June 2019.

If you aren’t prepared for this volatility your likely reaction will be panic buying or selling, which in turn may lead to regret and a chain reaction of further bad decisions. 

These feelings will be accentuated if you didn’t follow the first tip in our list - don’t invest what you cannot afford to lose - but help is at hand with our next piece of crypto investing wisdom.

4 - Out of sight, out of mind

One of the best ways to deal with crypto’s inherent volatility, and your own propensity to make rash decisions in the face of extreme short term price fluctuation, is to simply remove it from temptation - in cold storage.

This doesn’t mean sending it to Antartica, but using a type of crypto wallet that is offline by default. Offline by default is cold; online by default is hot. Cold storage prioritises security over convenience, but also has the added benefit of protecting you from yourself.

The most popular method of cold storage crypto is a hardware wallet, a small physical device that gives you complete control of your funds. You can keep that in a secure location, out of sight and out of mind. This will help you ride out the storms that frequently hit the crypto market, and allow you to profit should things recover.

Though hardware wallets are optimised for security, you are fully responsible for your funds, and the fail-safe for accessing them - known as your Seed. So do plenty of research in advance of taking the cold storage route - including how to safely store your Seed - but it could prove the wisest crypto decision you make. 

5 - Cost Averaging: Slow & Steady Crypto Investing

All the crypto investing tips so far underlines the fact that crypto is volatile and risky, prone to intermittent periods of price appreciation and decline, with established coins like Bitcoin and Ethereum having proved profitable in the long run. 

Even if you’ve done your research (as recommended) deciding on the best time to enter the market still presents a potential minefield for a first time investor. 

Everyone would love to buy the dips and sell the tops, but unfortunately market movement is inherently unpredictable, and in such circumstances, the best tip is to take a slow and steady approach aka Dollar Cost Averaging.

Cost Averaging simply spreads your investment over equal, recurring amounts in order to attain an average price. This will smooth out the volatility, and can prove especially effective if you maintain it through a Bear Market, and price recovers. 

Cost Averaging through a Bear Market drives down your average entry price, building your stack faster, which will then be worth proportionately more if the market then returns to a more positive sentiment.

Cost Averaging is prudent, but it doesn’t guarantee that you’ll make a profit, the same is true of the other crypto investing tips we’ve made in this article. It might leave you feeling a little deflated to hear that crypto isn’t the El Dorado that social media has led you to believe, but adjusting your expectations from the Moon, back down to Earth, is the first step in understanding how crypto investing really works.