How to Survive when Investing in Cryptocurrencies
Before we begin you may wonder why I write this article. I believe that blockchain technology, Cryptocurrencies and decentralization will lead to a fairer more inclusive world and, as a strong believer, I feel obligated to share what I have learnt through my experience hoping that it will help newcomers have a smoother and safer ride when it comes to investing in cryptocurrencies.
I have no doubt that most of the people who enter this universe as investors will at some point make a terrible investment decision or get scammed in some way. I’ve been there, friends and family have been there, and it is highly likely you will too.
Reading this article won’t make you immune to making bad calls but I hope it will at least make you think twice before making a move or trusting some random person on the Internet.
Crypto Information Funnel
So why does almost everyone that gets into Crypto make the same mistakes? Mainly because we all follow the same path when learning about this technology and fall into the same pitfalls. We all start at the top of the funnel where information is more abundant, less technical, less valuable and sometimes ill-intentioned and work our way towards the bottom where information is more scarce, technical and usually more valuable.
The issue here is that scammers and false prophets love the top of the funnel. Why? It’s simple, everyone will go through it (not everyone will reach the bottom though), they only have to share entry level information and you are easier to manipulate since you are just starting out.
This is where you will find all this crafty YouTube videos about why some project or coin is the next big thing and you should invest in it or some shady technical analysis with some crazy +1000% price prediction without any fundamentals. Here is probably the place where you will make your first manipulated bad decision. Don’t get me wrong, there is a lot of useful information on Youtube (or other places on the web) that you will need to understand before moving on but the abundance and engagement of this type of material is high and they are designed to manipulate you.
As you go deeper into the funnel you will find different types of prophets and so-called experts. My favourite ones are the those that live on “Crypto Twitter”. Twitter is a great place to get to know the community, learn from the best and have some classic meme fun but it comes with its own risks. The problem with twitter is that it gets harder to distinguish between bad actors who just want to pump their useless coins and people who want to build and share knowledge. Many of these scammers have a decent following and knowledge on the tech and will be better at manipulating you if that’s what they want. In the end both players want their coins to pump (Even those who swear to be in it for the tech) but in the first scenario you will be a victim as they sell on you and leave you with a worthless bag of coins.
Your job on these platforms (or any other you end up on) will be to be able to filter out the noise. It will take some time and maybe a few bad decisions, but you will begin to differentiate between players who bring value to the table and those who only take at your expense.
Signal to Noise
So how can we get rid of all the noise that tries to cloud our judgment? Everyone ends coming up with their own unique process, but I will share with you my basic approach when it comes down to filtering information.
Value to Cost Ratio
One question to ask yourself when making decisions based on information you are receiving is “what is this information costing me and what is its percieved value?”. If the value to cost ratio is too high you should be cautious. In the world of finance and investments no one is going to give you valuable information for a low price; most of the time the value of the information you are receiving is the same as what you are paying for, be it money or attention.
So next time someone on a Youtube video predicts that some coin will gain +1000% in the next month ask yourself, “If they are certain about this prediction that will give me incredible profits, why are they sharing it with me for such a low price?”. They are not your friend and they are not trying to help you get rich, they are simply trying to get people to engage in their videos by promising great returns (everyone loves that right?) and get you to pump their coins so they can sell on you. You might get lucky and end up buying something useful at a fair price but in most scenarios you will lose.
Insiders & Outsiders
Another rule of thumb I have since I read it somewhere on the web is “If you read it on twitter, it’s probably too late”. Most of us in crypto will suffer from FOMO a lot. Seeing everyone brag in their tweets about their gains on some coin they bought while you are sitting there doing nothing doesn’t feel good and will make you want to jump on that train as soon as possible.
This is where this golden rule comes in to save you. If you are new to this world chances are you are an outsider; you are not in closed Telegram groups, you are not a developer or a professional investor and your access to information is somewhat limited by what others share. So, when everyone on twitter is talking about how some coin is already up by a lot and it could blow up or about this new project that has just launched and it’s going to the moon you should stay away and fight the FOMO at all costs.
The most likely outcome if you give in and enter, based on pure greed and without doing proper research, is that you will buy the top and have people sell on you. Remember that you are an outsider (at least for now) and that valuable information will come to you last.
Speaker Background
Always take in consideration who you are receiving information from; What is their background? Are they involved in the project they are promoting? What is their role in the project/community? Are they only shameless coin promoters or do they actually bring some value to the table? Do they show solid knowledge? These are all questions I like to ask myself when deciding who to listen to and who to follow.
You need to be able to filter out from your decision-making process users who bring no value to the ecosystem, those who only dedicate their time to promoting random coins without any fundamentals, trying to win big instead of building, those who want to make you act based on the fear of missing out rather than on understanding.
Do your own research
You’ve probably heard or read this phrase a thousand times but that doesn’t make it less true. The ugly truth is that you need to do your job as an investor and take the time to understand what you are planning to invest on. This does not mean that you need to read every single whitepaper you find and every technical aspect of every protocol but, as Warren Buffet said, “never invest in a business you cannot understand.” It may sound obvious as you read it now, but the fact is that most people will spend more time reading reviews for a PlayStation game they want to buy than actually understanding what they are putting their money into. You might get lucky once or twice as you jump on the hype train for some coin but luck will run out and it won’t be pretty.
What are some basic questions you need to ask yourself when looking to invest on a project?
1. What does this project solve or do? What is their use case?
2. What advantages does it has over similar projects?
3. What cons or potential pitfalls does this project have? (Yes, listen to critics too)
4. Is it already being used?
5. What are their activity levels or Integrations?
6. What is their roadmap?
7. Do they have an established team and clear communication channels?
If you are wondering why price is not on the list, that is because price is the last thing I look at when investing on a project. To me project valuation is about answering the questions above and finding potential value rather than speculating on the current price and a profit target.
Even if you don’t have all the answers to these questions (or any you come up with) the goal of working with a framework is to make rational investments based on your research and reasoning. Be it a good or a bad investment call, the decision should always be your own.
Disclaimer: I am not a financial advisor, opinions are my own and nothing said here is investment advice
