Prudent way to invest in Cryptocurrencies.
By Mr. Bhushan B Sonawane
Very important rule needs to be understood before doing any investment and which is definitely not applied to speculators is, invest in what you understand.
In that sense to understand the Cryptocurrency world you need to understand two basic domains integrated with it. One is finance and other is technology. When I talk about importance of finance domain knowledge as a pillar to understand cryptocurrencies in my conferences. Majority of investors get scared would I talk about “Return on investment” and other technical ratios, but what I basically would like them to understand is the macro finance principles and how fiat currency system works.
Once you understood some of the basic principles of what are the limitations of present Fiat System adopted in new world order. Next logical crust will be looking for better solution to present Fiat System but remember there is no holy grail here. The new asset class of cryptocurrencies tries to overcome limitations of present fiat system but it does also put good amount of responsibilities on users, for prudent and safe use.
Analogy of good cryptocurrencies goes with the spirit of Benjamin Franklin story. When Benjamin Franklin was asked by a lady after a session of the Constitutional Convention, “”What kind of a government have you given us?”” he replied, “”A democracy, if you can keep it.”” You can have good cryptocurrencies and use them to overrule the perils of present fiat system if you can use them prudently and safely.
Once you get a fair comparative understanding of Fiat and Cryptocurrencies financial principles. The second area to be explored is technological ingredient of cryptocurrencies also known as Blockchain. it’s a novel integration of cryptography, distributed ledger technology and open source code along with proof of work or proof of stake. As like Crypto finance tries to overcome the limitations of fiat system, here the Blockchain technology tries to overcome some of the limitations of traditional technological solutions. It brings immutability and distributed truth at the core of new solution.
Once you research out above two areas, you can get fair understanding of fundamental ingredients of cryptocurrencies. Now let’s cut to the chase and try to cover few of the core areas of Cryptocurrency investments i.e. How much to invest, where to invest in, kind of risk and returns to be expected and responsible way of handling cryptocurrencies, lets address them in chronological order.
How much to invest:
A suggested in “Kautilya Arthashastra” thousands of year ago, “If you want to do the financial Speculation, do it with at most 10% of your savings, more than that can bring wealth destroyer” is still highly reverent. Remember any new investment need to be taken with pinch of salt.
Pointers to Investigate Right Cryptocurrencies:
So, as an initial step do look for Cryptocurrencies with high market cab, which are highly distributed with maximum minting limit hardcoded. You can avoid pre minted cryptocurrencies as they didn’t provide prudent logic to be invest in. No doubt there are ringmaster, who can manipulate the resulted set but the liquidity required to do so would be very high. Also do research their business case and if it looks appealing, ask the question whether that business case produced any substantial results so far or is it just a glorified idea. As many of them may have good business case but poor implementation so far, though they are around for substantial period of time with mammoth amount of many raised during ICO boom. These questions and their researched answers will give you prudence about selection of cryptocurrencies.
Risk and returns to be expected:
Do understand that, cryptocurrency market is highly unregulated in most part of the world, and at the places where it is operating, don’t get mistaken that it is as tightly regulated as traditional stock exchanges or banking system, there is lot of grey area still persists across the continents on who will regulate the cryptocurrency market and how. And market manipulation is very high in crypto market. Inherently Cryptocurrencies belong to international asset class which often need not to flow through the traditional banking system, it’s an unregulated territory. The market manipulation, circular trading and pump and dumb can easily possible with cryptocurrencies with less market cap as well as with those where substantial number of Cryptocurrency distribution concentrated with limited investors also known as whales.
Returns
Another crucial aspect to be discussed in is the kind of returns to be expected in while investing in Cryptocurrencies.
The worth of your asset can go to zero whether its cryptocurrencies or traditional asset class like equities. E.g. the big giant like Enron, Lehman brothers, RCom, Kingfisher declared bankruptcy due to various reasons and there equity value gone to zero overnight. On the same line due to Techno Financial nature of the cryptocurrencies due to technical (major bug, one of which avoided last year) or regulatory impact (like carpet ban all over the world, unlikely but possible scenario) they can drop down to Zero value. It’s always prudent to know extreme end.
On the other hand, there are many good traditional stocks which had provided astonishing return over a period of time to investor like Microsoft, Apple, Amazon equities. If you think on those logical lines don’t expect extragenetic result from this class too as it’s in a nascent stage. Please do remember high risk need not be always resulted in high returns, and cryptocurrency investment is definitely a high-risk avenue.
It’s always just better to understand the different asset class around you and if you wish you can diversify your portfolio a bit (Like few of the institutional investor are investing 1% of their portfolio value into selected cryptocurrencies). And If you understand the market very well you can do strategic investment by judging the value whether it’s too hot or right way to enter or exit (timing out the market can be left over to sessional investors, many at a times they are failed too) or you can invest small amounts periodically in cryptocurrency or currencies you like and studied well.
There is word of caution to you please only invest what you afford to lose and don’t ever ever trade on borrowed money as it’s a highly volatile market due to reason stated above like market manipulation and unregulated nature of cryptocurrency market, also there is no safety of your asset if you save them on cryptocurrency exchanges or in hot wallets and they got busted.
Responsible way of handling cryptocurrencies:
Don’t save them on exchanges or hot wallets, using cold wallets is prudent practice. Investors lost Billions of dollar worth of cryptocurrencies due to hack or internal fraud by management or due to the technical glitch in cryptocurrency exchanges and hot wallets. There are dozens of crypto exchanges compromised globally. Remember most of the exchange are unregulated and don’t guarantee safety of your assets.
One of the crucial aspect of cryptocurrencies is that the transaction is irreversible in nature. Means you can’t reverse the transaction by knocking the door of any authority as technologically they are built in that fashion. You may lose them if your password is compromised, or simply due to some ransomware you need to give them. As in regular Fiat world there is scope to reverse the transaction with the help of authorities but in cryptocurrency world it’s nearly impossible.
Cryptocurrencies are designed to avoid the interference of any central party to limit your financial freedom but they put good amount of responsibility on user to use them prudently too.
Summary
In summary Invest in cryptocurrencies which you studied and understood well, as there is limited source of information available in open source. YouTube and other media sources are full of paid promotions. Spend some time on research before investing.
Invest on afford to lose basis. Avoid use of leverage and margin trading as they can be become weapon of your wealth destruction. You can invest small amounts periodically instead of lump sums. And have some physiological target limit on your expected returns.
Don’t save cryptocurrencies on exchanges or hot wallets, use the Cold wallet instead.
As rightly said by Clara Barton Economy, prudence, and a simple life are the sure masters of need, and will often accomplish that which, their opposites, with a fortune at hand, will fail to do
Disclaimer: This is not financial advice and I’m not your financial advisor. I do carry exposure to few Cryptocurrencies, Views are personal. Invest on your own risk. Past performance is no guaranty of future returns. Image is for illustrative purpose only without any indicative message of investment.
Twitter ID: @always_bhushan
LinkedIn: www.linkedin.com/in/bhushan-sonawane-blockchain
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