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What are cryptocurrencies?
Cryptocurrency investment has become very popular in the last few years. This popularity and numerous success stories have attracted millions of people to venture into an industry that was nonexistent a decade ago. Currently, the total cryptocurrency market valuation exceeds $2 trillion.
This explosion of the crypto industry has made it among the best-performing investment assets globally. The market has been very rewarding to the investors who got in early and those that have the experience.
However, there has also been a huge number of casualties in the process because the cryptocurrency market operates differently from the traditional markets. It is highly volatile and remains largely unregulated. The majority of the losers are investors with little understanding and experience of the market.
They get into the market to avoid missing out on the ride but without any knowledge or skills to invest in these assets.
Although there is no accurate rule-book on how to succeed in this market, there are some characteristics necessary to increase your chances of success. In this article, I will be highlighting the 5 characteristics that are key to becoming a successful cryptocurrency investor.
Investing in cryptocurrency is highly risky. This is because the market has minimal regulations and the prices are highly volatile. Normally, all investments have a certain level of risk. The only difference is that some have a higher risk level than others. Investment in cryptocurrencies is riskier in comparison to other assets such as Forex and stock. However, the more risk an asset has, the higher the rewards.
The best approach to manage risk is to always invest what you are willing to lose.
· Minimal regulations
Inadequate regulations have a contribution in making the investment of cryptocurrencies risky. This kind of environment makes it possible for activities such as;
- Development of fraudulent cryptocurrencies
- Price manipulations
- Cryptocurrency theft
- Limited legal remedy
There have been numerous reports of price manipulation and cyber-attacks in the market. As an investor, you should be aware these issues can affect you resulting in losses.
· Price volatility
This relates to the erratic movement of an asset price. A key characteristic of cryptocurrencies. It is common for crypto prices to move by over 50% in a matter of a few days. Huge price movement is a big risk to the traders without proper risk management plans and may lead to huge losses. Trading in such markets needs experience and an elaborate risk management strategy.
Hence, before you invest in cryptocurrencies, you need to ensure your risk management plan is functional and reliable.
The reason why risky markets are attractive is that they are highly rewarding if the approach is correct. Some cryptocurrencies have seen their prices multiply by over 10 times within a short time. This results in an equal gain for the investor. Very few investment assets can give this type of return. Hence, if you are a strategic risk-taker, this type of investment is for you.
Knowledge is a key ingredient for a successful investor. You should only invest in the assets that you understand. Various factors influence the prices of cryptocurrencies. As an investor, you need to be up to date with these factors to enable you to make correct investment decisions. Some of these factors include;
- Government regulations
- Influencer actions
Some factors affect the prices daily. Achieving this level of awareness calls for constant research and investment in information. Only those that are well informed gain an edge in the market.
Let us use an example of government regulations. Early in the year, Bitcoin’s price fell by over 50% after the Chinese government banned all its mining and transactional activities. This form of news indicates a potential bitcoin price fall. As an investor, you are supposed to target sell trades as the market has a higher chance of heading in that direction.
As predicted, the market fell. For those investors without this information and entered buy trade positions, they immediately went into loss positions.
Knowledge is a constant element you need to become a successful cryptocurrency investor.
The modern investment market involves the use of mathematical and statistical tools. These tools assist the investors in making investment decisions. Combined with the general market knowledge, they are effective in helping the investor get an edge in the market.
To interpret and use these tools optimally, you need to have great analytical skills. Cryptocurrency price action is represented in graphs and candlestick chart patterns. These are the basic tools in use across other markets including Forex and stock markets.
Trading using market analytical tools is known as technical trading. These technical indicators assist to identify areas of market entry and exit. Some of them include;
- Moving Averages
- Support and resistance zones
- Stochastic indicators.
Most of the trading platforms provide these tools. You should always ensure your broker has them before opening a trading account. Your role as an investor is to identify the ones that fit into your trading strategy. This requires numerous market back-testing until you find one that is profitable.
Patience is an important virtue during investment. Profits take time to come. There is a famous quote in the investment world that “market rewards those that are patient”. Most investors are usually after quick riches. An approach that rarely works in the cryptocurrency market.
It took Bitcoin over 10 years to get to the $50,000 mark. This is an indication that profits take time to come. You might be lucky once in a while to make quick returns. However, most of the time it takes longer for the returns to grow.
Long term investment
As an investor, you should invest in these markets for the long term as cryptocurrencies are new assets in the market. Currently, only a minority of the global population know about them, and even fewer invest in them. There is no doubt acceptability will grow in the future as more investors embrace them. This will result in a growth in demand helping drive the prices higher. Hence, resulting in bigger returns to the patient investors.
As long as you have undertaken adequate due diligence and have faith in your trading strategy, there is a higher chance the market will pay off ultimately.
Investment is a high emotional game. It requires adequate time and experience to gain the right emotions needed while investing. Some of the reasons making it emotional are;
- Inability to take losses
The ability to control emotions is a necessary trait while making investment decisions. To achieve this, you need to have the right mindset. A common mistake investors without emotional control make is to have the Fear Of Missing Out (FOMO). This occurs when the market has been moving in one direction for a long time. Hence, to avoid missing out, you decide to invest in the trend direction. Unfortunately, soon after the market reverses.
FOMO causes the investor to get into the market at the reversal point. Instead of riding on the wins, it results in losses. One of the best strategies to control emotions is having an investment plan.
This is the most important tool to have before you start investing. An investment plan works as a rule book. It defines all the aspects of investing for the trader such as;
- Market entry criteria
- Market exit criteria
- Cryptocurrencies to invest in
- Amount of capital to use.
Before coming up with a plan, it is paramount to test these parameters on a demo market to ensure they are giving the results you desire.
Once you are comfortable, only then you should implement them in the real market. Just like any business, a plan or a strategy is a tool to guide the investment process. It helps maintain discipline and minimize emotions while investing.
Market entry and market exit
Market entry and exit criteria should also be clearly defined in the plan. Most investors base this on the number of profits of losses they make. To become profitable, the reward ratio should be higher than the risk ratio. This gives room to accommodate losses if they do incur. Defining the entry and exit point minimizes the chances of entering the market due to influence.
Choosing the right cryptocurrency
Choosing the right cryptocurrency allows you to concentrate and specialize on a few options. Cryptocurrencies are priced differently and operate differently as well. This means that it requires different strategies to invest in them. Because you can not invest in all the currencies in the market, it is advisable to only concentrate on a few. Once you establish the preferred assets, they should form part of the investment plan. Investing in the right cryptocurrencies is the first step to succeeding in the industry.
Investment in cryptocurrencies requires adequate time, resources, and strategy. These characteristics represent some of the key ingredients in making a successful cryptocurrency investor. However, they are not a guarantee to success but they do increase the chances of becoming a successful investor.