What is the best way to invest in cryptocurrency ?
This article is dedicated to help you create an investment strategy and determine the best way to invest your money into cryptocurrencies. Before continuing, please understand that there is no easy way or method to “get rich quickly“. Let’s be honest and realistic. However, if you keep reading those lines, and stick to the methodology proposed, you will be able to understand :
- Why Bitcoin / Altcoins / Blockchain are a big deal for the future
They are a growing industry with a real added value to our society, with more and more money invested every day, thus making early investors richer.
- How to determine your risk aversion
This is a major point because it will determine how much of your budget you can invest in crypto. This is one of the most important things to understand before starting investing. If you need the money you invested in crypto, there is an extreme chance that you will lose it at some point.
- How emotions affect your jugement and decision making
People are going through periods of extreme FUD ( Fear, Uncertainty and Doubt ), and FOMO ( Fear Of Missing Out ) in no time. If you are able to take a step back to understand why crypto is volatile, how we humans react, you will be more likely to accept it as it is, and take less emotional decisions.
- How bull & bear market works
As a fast growing industry, crypto assets are extremely volatile. Because of the major adoption but still early development, it is difficult to establish a correct price evaluation regarding crypto assets. Consequently, the market is going through a state of overprice to huge correction within a few months. If you take a step back, you will understand that this phenomenon is perfectly normal, and even healthy for the global crypto market.
- How to implement a good DCA strategy
You probably already heard about this hundreds of times. Even though everyone is talking about it as a good strategy, I personally consider that it must be used in a specific way to be efficient.
- How to build a balanced portfolio
A balanced portfolio with good risk management is essential for a healthy investment. As you might already have heard, diversification is key.
- When to take profits
This is probably one of the hardest things to do as an investor. While the price of an asset is going up, you will always think that it can go even higher. Taking profit at the right time requires discipline. Focusing on what you earned and not what you “could have earned” if you would have kept your coins, is a crucial point in investor psychology.
- How to secure your assets
Security is probably the most important part when talking about cryptos. You need to understand what risks you take when buying cryptos on an exchange, and keeping them there. Furthermore, you need to understand the difference with a cold wallet such as Ledger. You will understand why everyone says “not your keys, not your coins”.
After reading those lines, you may think how risky it is to invest on cryptocurrencies. However, with that risk, comes a greater potential return. Because you are willing to take those risks, you might also multiply by 10, 20, or even 50 your investment.
What separates people loosing money to earn a lot, is all the key points listed above.
Now is the time for you to choose which person you want to be.
With all this being said, let’s dive into this fascinating topic !
How to invest in cryptocurrencies
Before investing you money into various projects, it is really important for you to understand them. If you want to buy Bitcoin but you have no idea what it is, or how it works, this is a dangerous path. Not because Bitcoin is dangerous, but because your decision making will make you do mistakes.
You don’t have to understand all the technical details, as a computer guy would do. But there are certain points that can’t be missed by general public.
Here is some of the major points to understand about Bitcoin, altcoins, Blockchain, and cryptography in general. If you feel like this is something you already master, feel free to skip this part and go to the next chapter.
Before investing money : general understanding of the topic
Bitcoin, Altcoins and Blockchain technology are some of the most revolutionary developments of this century. They have the potential to completely revolutionize the way we think about money, finance and commerce, and have already begun doing so.
In addition to the article you are currently reading, i highly recommend reading this article, which will go deeper into details about this matter :
Bitcoin and Altcoins offer a decentralized, secure and transparent way to store and transfer wealth, while Blockchain technology provides a secure and immutable ledger for tracking and recording transactions.
The implications of these technologies are far-reaching and can have a significant impact on the global economy, from reducing the cost of international payments to improving financial inclusion in the world’s poorest countries. As these technologies become more widely adopted, the possibilities for increased efficiency, transparency and trust in our financial systems are immense.
Overview on Bitcoin & altcoins
Bitcoin is the world’s first cryptocurrency, a digital asset designed to work as a medium of exchange. It was created in 2009 by an anonymous person or group known as Satoshi Nakamoto and has since become the most popular and widely accepted form of digital currency.
The idea behind Bitcoin is to remove the need for a central authority to manage the currency. No banks to regulate / control the exchanges between people.
This means that transactions are verified and recorded on a public ledger, known as the blockchain. The blockchain ensures that no one can spend the same Bitcoin twice. This makes Bitcoin incredibly secure and reliable, as well as completely decentralized.
Bitcoin has many advantages over traditional currencies. It’s fast, secure, and pseudonymous. Transactions are irreversible, so there’s no risk of fraud. It’s also incredibly easy to use. All you need is a Bitcoin wallet and you can start sending and receiving payments.
Bitcoin is different from others cryptocurrencies that exists. There is Bitcoin, then altcoins.
Why is Bitcoin different from altcoins
Bitcoin was created by anonymous people. They never claimed fame or wealth. They have an ideology that has spread all over the world. On the countrary, altcoins always have a person or a group of persons representing the project. Even though it is sometimes a non profit organization structurally speaking (Ethereum foundation for example), they are represented by someone (Vitalik Butterin in ethereum), and he became rich by owning a lot of ethereum tokens.
Satoshi Nakamoto, the creator of Bitcoin, owns millions of Bitcoin on the first ever created wallet on Bitcoin blockchain, but he never touched it. (this is public knowledge, the blockchain being transparent).
Furthermore, Bitcoin has a simple purpose :
- Value storage
- Value transfer peer to peer (between users only, no intermediaries : decentralization)
- Protection against inflation (on the long term)
Most of the altcoins were created in different purposes. They have different values, which can have a different impact on finance and our society. (Decentralized finance, Smart contracts, Oracle services…etc)
In addition to this information, i highly recommend reading this article :
Benefits of blockchain technology for businesses
Bitcoin is the mother of all altcoins. Furthermore, Bitcoin can survive without altcoins, but the opposite is not true. Altcoins are so young they are really dependant to Bitcoin success. We don’t know what will happen if Bitcoin disappear, but all altcoins will most likely disappear as well.
Altcoins added value
Altcoins have a different added value than Bitcoin. I won’t review all af them right now because this is too much work, but you need to understand that their purpose is different. If you want to invest in a certain type of crypto project, you absolutely need to understand why this projects exists. Does it add value whatsoever to our society ? Is anyone ( professionals or individuals ) going to use it ? For what purpose ?
The ability to survive through years for a project highly relies on that. Speculation is a part of any project value estimation. However, for those who only rely on speculation, the long term survivability is close to 0%.
For example, Ethereum has developped smart contracts on its blockchain. If you don’t know what a smart contract is, please refer to this article i wrote :
Ethereum has a strong added value, which is one of its key factor to survive through a long period of time.
Obviously, this is not the the only factor deciding if a projects lives or not. We will get back to this later on.
Now that you have a better understanding of the overall aspect of Blockchains, let’s dive deeper into the subject. Before buying anything in crypto, you first need to ask yourself a couple of questions about yourt risk aversion.
What is that and how does it work ?
How to determine your risk aversion
This key point is really important and is different to any of us. That’s why anyone willing to invest money in crypto must do it before anything else.
First of all, you need to understand that risk is highly correlated to the amount you invest , in proportion to your total assets / income. The important key here is how much you invest, not what you buy.
I have written a full guide about risk management, that you can find here :
How to manage risk in crypto investment
Make sure to read this first before continuing. Here is a small summary of what is in this article :
Key factors influencing risk aversion
To determine your risk aversion, here is a couple of question you need to ask yourself :
- Do you have credits that you must pay back each month
- How many people do you have in charge ( parents / children )
- How strong is your actual job
- What are your self financing capabilities
- How fast can you find another job if you loose your actual job
- Do you have a plan B if you cannot pay your rent anymore
- How much pressure can you personnaly handle
If you are not a risk taker, i would not recommand going into crypto field.
Concrete example of risk aversion analysis
Those questions must be answered very precisely and objectively in order to determine your risk aversion. Let’s compare two example in order to understand the stakes here :
- Example 1 : You are a young student going to college, living at your parents house. You have a part time job. No credits, no chilren in charge, your job is doing well, manager is happy about your work. Low daily expenses, you don’t pay rent. Your parents own their house, and are about to retire from a full working carrier.
Even though you only earn for example 500$ a month for your part time job, you could easily invest 20 to 50 % of it each month, with low risk (depending on various additional factors). You could afford to loose it with no negative consequences to your actual life. In this example, investing 150$ a month is not risky.
- Example 2 : You are a happy father of one kid, and your wife is pregnant for a second one. Your just bought a house, and pay a credit for it. You both work, but the financial status of your company in unsure. Let’s say you personnally make 2 500 $ a month. You also have a car and a credit for it. You don’t have much savings because you invested a lot in your house. Your parents could not really help you, they live far from where you live and they have a small pension.
In that situation, investing more than 5 % of your income in cryptos seems like a risky business. 5 % of 2 500 $ is only 125 $.
As we can see, comparing these two examples : Example 1 is earning way less money each month, but has very low charges / credits. Example 2 theoretically earns more each month, but has way more expenses he can’t avoid.
If these two people would have done their own risk aversion analysis properly, I would personnaly consider that the example 1 (student) could afford more in raw investment than the second example.
Now take some time to do your own analysis through all of these questions.
How emotions affect your jugement and decision making in crypto investment
Emotions are a big influence on your decision making. It is really important to analyse and understand them, in order to anticipate how they are impacting you in your final choice.
Here are some of the most important psychological biases that have an impact on your decision.
Dunning Kruger effect
The Dunning-Kruger effect is a cognitive bias in which people with low ability in a certain domain overestimate their own ability. This can lead them to make poor decisions, as they may underestimate the difficulty of a task or overestimate their own ability to complete it.
In the world of cryptocurrency investment, the Dunning-Kruger effect can have significant consequences. For example, someone who is new to the cryptocurrency market and lacks a deep understanding of how it works may overestimate their own knowledge and make poor investment decisions as a result. They may believe that they have a good grasp on the market and are able to accurately predict which cryptocurrencies will perform well, when in reality their lack of knowledge is leading them to make poor decisions.
Overall, it is important for anyone involved in cryptocurrency investment to be aware of the potential impact of the Dunning-Kruger effect and to take steps to mitigate its effects. This may include seeking out education and training to increase their knowledge and understanding of the market, and seeking out diverse sources of information to help them make well-informed decisions.
The framing bias
The framing bias is a cognitive bias that occurs when the way in which information is presented influences how it is perceived and understood. This can lead people to make different decisions depending on how the information is framed, even if the underlying facts are the same.
In the context of cryptocurrency investment, the framing bias can have a significant impact on decision-making.
For example, consider a scenario in which an investor is deciding whether to buy a particular cryptocurrency. If the information about the cryptocurrency is presented in a positive light, emphasizing its potential for growth and highlighting its strong track record, the investor may be more likely to make a positive decision. On the other hand, if the information is presented in a negative light, emphasizing the risks and uncertainties associated with the cryptocurrency, the investor may be more likely to make a negative decision.
To avoid the framing bias in cryptocurrency investment, it is important to carefully consider the information that is being presented and to try to look at it from multiple angles. This may involve seeking out multiple sources of information and being open to different viewpoints. It may also be helpful to consult with trusted advisors or to seek out the guidance of experts in the field. By taking a balanced and nuanced approach to decision-making, investors can avoid the pitfalls of the framing bias and make more informed investment decisions.
In a few words :
- Make sure to have different point of views on a specific topic
- If you follow someone’s choices, make sure to double check his history
What is his experience in the matter ? Does he have a personnal interest in promoting a project ? Is he objective on the topic ?
The naive realism
The naive realism bias is a cognitive bias that occurs when people believe that their own perception of reality is accurate and objective, and that others who see things differently are simply mistaken. This can lead people to underestimate the influence of their own biases and assumptions on their perception of reality, and to overestimate the accuracy of their own beliefs and judgments.
In crypto investment, the naive realism bias can have significant consequences. For example, an investor who is affected by the bias may believe that their own analysis and interpretation of the market is accurate and objective, and may be less likely to consider alternative viewpoints or to seek out additional information. This can lead to overconfidence in their own investment decisions and a lack of appreciation for the complexity and uncertainty of the market.
To avoid the effects of the naive realism bias in cryptocurrency investment, it is important to recognize that our perceptions of reality are shaped by our own experiences, beliefs, and assumptions, and that others may see things differently.
It can be helpful to seek out diverse sources of information and to consider multiple viewpoints when making investment decisions. By adopting a more open and flexible mindset, investors can better navigate the complexities of the cryptocurrency market and make more informed decisions.
My best advice would be, if you are a big fan of a project and really want to invest in it, try to find people who are the most negative about it. Try to understand why, and if after researches you consider their arguments are not concrete, unfounded, this might be the moment to invest.
Phenomenon of Baader-Meinhof
The Baader-Meinhof phenomenon, also known as the frequency illusion or the recency illusion, is a cognitive bias that occurs when people notice something that they have recently learned or encountered more frequently than they did previously. This can lead them to believe that the thing in question is more common or more significant than it really is.
In the context of cryptocurrency investment, the Baader-Meinhof phenomenon can have significant consequences. For example, an investor who has recently learned about a particular cryptocurrency may start to notice it being mentioned more frequently in the media or in conversations with friends and colleagues.
This may lead the investor to believe that the cryptocurrency is more popular or more promising than it really is, leading them to make an investment decision based on this flawed perception.
To avoid the effects of the Baader-Meinhof phenomenon in cryptocurrency investment, it is important to recognize that our perception of the frequency or importance of something can be influenced by our own recent experiences and attention.
The same advices as before applies here : it can be helpful to seek out diverse sources of information and to consider multiple viewpoints when making investment decisions, rather than relying solely on our own recent experiences. By adopting a more balanced and objective approach to decision-making, investors can avoid the pitfalls of the Baader-Meinhof phenomenon and make more informed investment decisions.
The self-indulgence bias
The self-indulgence bias, also known as the “what-I-want-to-believe” bias, is a cognitive bias that occurs when people prefer to believe information or ideas that align with their own beliefs, values, or desires. This can lead them to selectively seek out information that supports their preexisting views and to discount or ignore information that challenges them.
In the context of cryptocurrency investment, the self-indulgence bias is really important.
For example, an investor who is affected by the bias may be more likely to seek out information that supports their own beliefs about a particular cryptocurrency, rather than considering a range of viewpoints.
Let’s imagine you discover a new token and you are a big fan. You are more likely to focus on good news on this project and ignore red flags, because it is against your initial position. We humans, like to be conforted in our point of views, and hate when we are proved to be wrong.
This is a dangerous path can lead them to make investment decisions based on flawed or incomplete information, and may result in poor outcomes.
The bandwagon effect
The bandwagon effect is a cognitive bias that occurs when people are more likely to adopt a belief or behavior because they perceive it to be popular or widely accepted. This can lead people to follow the crowd and make decisions based on the perceived beliefs or actions of others, rather than considering their own independent judgment.
It is closely related to the “FOMO” effect, as people tend to panic when they see an asset going up, thinking “everyone is earning money, i don’t wan’t to be the fool who missed an opportunity”.
In the context of cryptocurrency investment, the bandwagon effect can have significant consequences. For example, an investor who is affected by the bias may be more likely to invest in a particular cryptocurrency simply because they perceive it to be popular or widely accepted, rather than considering its underlying value or potential risks. This can lead to poor investment decisions and may result in significant losses.
This cognitive bias is more likely to happen in Bull market, as you see all cryptos exploding, and everyone talking about it all over TV & internet.
The “sheep” effect
To avoid the effects of the bandwagon effect in cryptocurrency investment, it is important to recognize the influence of social pressure and the perceived beliefs or actions of others on our own decision-making.
Be careful when everyone is talking about a project. It’s probably already too late. You should have bought it when no one talked about it. Because the technical fundamentals of it are exactly the same, do not buy it when everyone is buying it.
It can be helpful to seek out diverse sources of information and to consider multiple viewpoints when making investment decisions, rather than simply following the crowd. By adopting a more independent and objective approach to decision-making, investors can avoid the pitfalls of the bandwagon effect and make more informed investment decisions.
Loss aversion effect
The loss aversion effect is a cognitive bias that occurs when people are more motivated to avoid losses than to seek gains. This can lead them to make decisions that prioritize the avoidance of losses over the potential for gains, even when the expected value of the decision is positive.
For example, an investor who is affected by the bias may be more likely to sell a particular cryptocurrency when it is experiencing a downturn, even if the long-term prospects for the cryptocurrency are positive.
In other words, people are not patient enough when investing in cryptocurrencies, because they mostly focus on the actual loss, rather than the potential gain on the long run.
Be patient !! If you bought a specific assest after carefully investigating in its potential, do not panic when prices vary. If your investigation work is good, you will be a winner on the long run.
How to implement a good DCA strategy
A DCA strategy is an important part of your global investment strategy. It helps reducing the risks related to the high volatility. Make sure to fully understand how it works and how to use it properly.
I have written a full guide on DCA strategies to make it easier for you to master it :
DCA strategy in crypto investment
In this article, i talk about :
- What is a DCA strategy
- The benefits / disadvantages of this strategy
- Creating your own strategy that fits your personnal situation & needs
- When to use it and how to use it
Make sure to read this guide before continuing.
How to build a balanced portfolio
One of the best way to invest in cryptocurrencies is building a balanced portfolio. You may have heard this multiple times, but you are unsure on what is exactly means, and how to do it.
Building a balanced portfolio is something easy to understand on its surface, but much harder to put it in application.
I discuss this matter in details in my guide related to risk management, that you can find here :
Here is a summary of the key points discussed in this article :
Advantages of diversified/balanced portfolio
- You spread risk among various assets
By the end of 2022, the FTX platform collapsed, even though it was one of the biggest actor of the crypto market. There is no doubt that some people lost a lot of money in it. Some of them who had 100% of their token in FTX. They lost everything they had.
- You diversify your potential gain / risk
As i said earlier, your potential gain is variable, according to the risk. Most of your tokens should be on cryptos close to top 20, but you can take higher risks on a smaller portion of your portfolio, by going under top 50 / 80.
- You avoid too much self competition on your assets
If you invest only in Layer 1 Blockchains for example, such as Ethereum, Solana, Elrond, Algorand, or Cardano, there is a risk that competition will kill most of this projects, thus killing your portofolio with it.
On the long run, only a few in each domain will survive. Compare it to search engines tools such as Google and Bing. In the early 2000’s, there was so much more competitors. In 2022, more than 82% of the market share is owned by Google only. Most of the competition didn’t survive.
The same thing will happens in crypto. Competition will make survive the strongest projects and make the others disapear.
In addition to this information, i also wrote a full guide on how to create a balanced and diversified portfolio :
In this guide, i provide some information on how to build your portfolio, and i also provide some concrete example based on my personnal experience from more than 6 years of crypto investment. I also show you what my personnal portfolio looks like, so you can have an example of structured and justified portfolio.
How to secure your assets
Asset security is probably the most important factor to master when investing into crypto. Whatever you earn through years of investing, you could loose everything in a fraction of a second with no turning back.
Because most of crypto projects and wallets are decentralized, with no central authority controlling it, it means that there is no customer service when you have a problem, or loose access to your wallet.
Consequently, it is very important for you to understand how this work, and how to effectively protect your assets. For this matter, i have wrote a full detailed guide on wallets and security, that you can read here :
By reading this guide, you will understand these key concepts :
- What are the different forms of wallets, with advantages and limitations
- What wallet is the most secured form of security
The most secured wallet is cold wallets such as ledger, which you can find here :
When to take profits
This section is also very important because this is the final point of your overall strategy. This is the ending of an exciting journey, taking profits to a positive position on the markets.
So the question is, when to sell when the markets are up ?
To answer this question, it is capital that you are prepared to it. The last thing you want to happen is not expect a major market turnaround and make bad emotionnal decision.
The more you are prepared to an event, the less likely you will take an emotionnal decision, most of the time bad. If you carefully read this guide, you also learned what kind of emotions could lead you to bad choices.
Having a strategy from the beginning helps you anticipate events, and just apply methods and choices you already planned.
This being said, what is a good “take profit” strategy ?
A good “take profit” strategy
First of all, you need to differentiate all kind of assets you possess. They are all different, and have different potentiel return on investment.
Analyze your assets and their potential return on investment
If you have read my full guide on how to create a balanced and diversified crypto portfolio, you saw that in my personnal situation, i have different assets with different overall average potential. To sum up, this is what to remember.
What is their position on Coinmarketcap
- Bitcoin & Ethereum : They are the 2 most dominant projects of all. Their market cap is huge, and their all time high is not more than x5 of actual price.
In this situation, you can’t expect these project to make a x100. Be realistic about this. As an example, Gold have an actual market value around x30 compared to Bitcoin. If you have some Bitcoin & Ethereum, considering making x3 to x5 seems to be realistic, on a 3 to 5 years strategy.
- Top 25 projects such as Chainlink : Chainlink is the Blockchain leader in Oracles systems. Its position in the ranking system (coinmarketcap) is around 21.
The all time high is around 50$. The price in 2023 bear market is around 5$. For this project, a x10 from the bottom of the market is something realistic.
- Top 150 projects such as Kadena : Kadena is my example project for a high risk/high investment for the future.
The position on coinmarketcap in 2023 is around #120, and its all time high is 28$ in November 2021. During the 2023 bear market, you could buy it to less than a dollar (0.9$). If you bought at this price, and sell at all time high, you could expect a x30 return.
This is obviously very theoretical, but can help you better understand the potential earning scale you need to apply to your strategy.
You could go lower and lower in coinmarketcap coins, but the further you dig, the closest you approach to 0% win chance as they are very early projects, or just scams. Remember that 9 out of 10 projects won’t last for more than a year, so picking up very early project is a big gamble.
When to sell and what strategy should i pick
Now that you have a better understanding of the different scale of projects, you can estimate potential returns, if the market goes up.
In addition to this first strategy, my advice would be to set up different exit prices, that you sell for if the price is reached.
For example, let’s say you bought Bitcoin at 17 000$ during the 2023 Bear market. The all time high is around 69 000$.
Your strategy regarding this position could be :
- Every time Bitcoin reaches 5% more than the old “all time high”, you sell 10% of your assets
- You will keep 20% of your initial position no matter what the price is
So that would be :
- 72 450 $ you sell 10% of your Bitcoin assets.
- 76 072,5$ you sell 10% more
- You repeat this every time the price condition is reached
This strategy has various advantages :
- It is a form of DCA strategy : If the price keep going up, you still have some coins to sell, averaging your selling price
- You already know what you have to do, and are prepared to it. With this strategy, you are less likey to be affected by short term emotions
Important : When investing in crypto assets, focus on what you have earned, and not what you “could theoretically could have earned”. This specifically applies when you sell your asset and make profit. Don’t look what you could have earnd by keeping your coins.
Nobody on earth ever buys on the lowest point, and nobody sells on the highest either.
Conclusion on what is the best way to invest into cryptocurrencies
Investing in cryptocurrencies is an adventure full of emotions that you will need to control in order to achieve your goals. If you carefully follow the rules listed in this guide, and you are patient enough, you will be much more likely to earn money from your investment.
Here is a small summary to the major points developped in this guide :
- Why Bitcoin / Altcoins / Blockchain are a big deal for the future
- Determine your risk aversion
- The emotions that affect your jugement and decision making
- How bull & bear market works
- The best way to implement a good DCA strategy
- Build a diversified & balanced portfolio
- Learn about security and secure your assets
- When to sell and take profits
If you have reached this lecture point, thank you for your time and attention. It took me a long time and effort to gather all of these information to produce this guide.
I work as a solo writer so it’s very time consuming. If you consider that this guide anyhow helped you and you want to support my work, feel free to buy me a coffee by sending a few Bitcoin tokens on this adress 🙂 :
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