Investing in Cryptocurrencies

First and foremost thing to do for investing in cryptocurrencies is educating yourself about blockchain and the major cryptocurrencies including Bitcoin, Ether, Litecoin, etc. Read a lot about Bitcoin and then only you will be able to build the conviction for investing in Bitcoin.

You have to be now realistic about the returns you can expect from Bitcoin. Gone are 2010 times when $1000 invested in Bitcoin would give you a return of several million dollars in 7 years. Nevertheless, one can still expect 2x – 3x return per year for the next 3-4 years from Bitcoin alone, which is higher than the most of the other asset classes. There should be accelerators including regulations by the larger economies viz US, China, Russia, etc. but be realistic with your return expectations with a base market cap of USD 120 billion. At the same time, one can expect higher resilience in the price of major cryptocurrencies. The case in point would be the resilience shown towards the recent China cryptocurrency based exchange ban which is a strong testimony to the depth of the market and investors’ long-term optimism.

A. Diversification: Diversify into the top 3 – 5 currencies

– Invest in the proportion of stability of the currencies: One of the simplest benchmarks is the market cap of the cryptocurrencies
– Bitcoin – 40-50%, Its the bellwether currency and is the safest heaven in cryptocurrencies. Any new country adoption starts with Bitcoin and reflects on the price and altcoins follow suit
– Bitcoin has the strongest miner community support and has deeper penetration
– While Altcoins are followers there are a lot of different countours that drive their price more than that of the Bitcoin.
– Ethereum – 25-30%, is the strongest altcoin so far which is giving strong competition to Bitcoin because of the programmability aspect of its underlying technology
– Litecoin – 20%-30%, smaller version of Bitcoin and more conducive to technological advancements on the back of smaller miner and user base. Hence its easier to adopt changes with a relatively smaller community to agree on the changes
– Ripple 5-10%- While cryptocurrencies capture decentralized phenomenon, Ripple has been primarily centered on assisting the financial institutions in adoption of the blockchain technology

B. Capital allocation:

– Cryptocurrencies, especially Bitcoin, no doubt have only gone north since inception but they are extremely volatile. Hence one needs to have both short-term trading and long-term investment strategy while putting money in Cryptocurrencies.
– Bitcoin is the most volatile currency
– I would recommend allocating 50% for long-term and 50% for the short term
– Don’t consider the current value of the long-term investment and have at least 6 months horizon for this investment. I would submit that you never take this money but if you really feel like withdrawing then take out part of the gains.

C. Trading Strategy

It’s very hard to figure out the bottom and peak of Bitcoin. Hence its important that we assign a buying and selling range of the cryptocurrencies.

One should compare the current value with the all-time peak value.

Everyone should have a short-term trading strategy for Bitcoin. For example below is the strategy that I follow

For example: Say current Bitcoin price at the time of writing this article is 6000.

SELL: Anything within 10% of the peak pricing is a sell. (5400 – 6000)
BUY: Anything below 20% of the peak price can be a buy. (Below 4800)
HOLD: Anything between would be a hold (4800 – 5400)

You need not be completely cast and stone on the above stances and can still make a different decision based on the way you envisage the price movement. But try to make sure that bulk of your bets fall in the above defined brackets, not to mention you can also define your own brackets.

D. Triggers for Buying and Selling:

As it is difficult to predict the peak and troughs for cryptocurrencies, you need to have a well defined and buying and selling triggers as your price gets into your buy or sell zone:

BUY zone: On further downward movement in your buy zone, one should have a well-defined strategy to make buy decisions.
– Retain losses at 10% between 20% and 30% of the peak price
– Retail losses at 5% below 30%
That way you are buying more at lower price points.

SELL Zone: On upward movement, you can start taking gain out (Current Value – Invested Value)
– Take 1x gain between 10% discount and peak value
– Take 2x gain between peak and 20% premium
– Take 3x gain above 20% premium


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