Questions to ask when starting out
There has been an unprecedented number of people investing for the first time in crypto currencies in recent months, drawn by the swell of publicity and lucrative returns. It is likely that very few of these people are asking themselves some simple but important questions which are key to avoiding mistakes later down the line:
What is my objective from investing?
Regardless of asset class, investors should always be clear in what they are looking to achieve. Generally this amounts to return expectation and risk. Whilst crypto is and will likely remain an unique asset class for the foreseeable future, you can define some basic rules for investing.
Risk verges on a binary decision than other markets. You should be prepared to lose everything, see your portfolio drop 70-90% in a week and have no need for your money. You should never invest more than you can afford to lose in any market, but in crypto you absolutely should never invest anything you can't afford to lose. Certain coins are riskier than others, but crypto as a whole remains a risky investment. If nothing else, we are in fairly uncharted waters. No-one knows how much longer this bull run can continue, how much longer capital will keep flowing in, how much longer we can avoid any market altering news.
Defining returns in crypto is also tricky given the market's volatility, relatively immature stage of price discovery and historic nature of these returns. However, one of the key considerations is that the lower the market capitalisation, the easier it is for quick gains in the short term. Bitcoin is not going to double in a day, as is possible with some of the smaller coins. However, Bitcoin is also unlikely to be worth 0 tomorrow - a distinct possibility with some of the smaller coins - and one that should be considered vs your risk tolerance. If you are happy with 5-10x gains then the larger coins are likely going to be capable of delivering that going forward. If you are looking for 100-1000x gains, probably not so much.
What timeframe am I investing over?
This is important because it determines how long you are willing to wait for the returns outlined above. Any crypto currency, even the big ones, is capable of jumping 100% in a matter of days, but the greater returns come from leaving them over a matter of months or years. The people that will have made the most from crypto currencies (and Bitcoin in particular) are those people who left their coins over longer periods, either because they believed so strongly in what they were buying or didn't realise they had them until much later. If you make a 100% profit and then cash out then thats obviously good, but it won't make you the '0000% gains that grab the headlines.
Even in this fast moving world, patience still pays off. Jumping from one coin to the next, always jumping on the next big thing that is currently rising may be able to make momentum traders a lot of money - but you are likely not a good trader.
How much effort am I willing to put in?
Researching and choosing between the smaller projects takes a lot of time and energy, with no guarantee that it will pay off. Everything goes up in a bull market like this. The research I put in is meant to act as a safeguard for when the market - and projects - start to go south. You do not want to be stuck with an overvalued or unpromising coin in a bear market, as these will be the projects which suffer the most. The effort isn't just in choosing the coin initially - it is also in keeping updated with progress and news.
If you are not willing or able to put in much effort then it would likely be a better course of action to buy one of the larger and safer projects, leave it, and come back later.
The crypto market is essentially the largest 24/7 casino in the world. The returns are high, the swings huge, the excitement never ending. But that does not mean that it has to be treated as gambling. Making sure you are alert to some of the questions above is key to avoiding mistakes further down the road.