Cryptocurrency Investing on eToro – a League of Its Own
Cryptocurrencies represent a distinct asset class in a league of their own. While they have often been associated with extreme volatility since their inception a decade ago, volatility is a double-edged sword. While you can earn a significant amount of money quickly, you can also lose it just as fast. The average annual return of the US stock market since the 1950s is estimated at 7%[1], however, in the cryptocurrency market, prices can move by many percent in a single day (for example, Bitcoin circa 2017).
The fast-paced nature of the cryptocurrency market also manifests itself in a far shorter market cycle than in traditional financial markets. Here are some tips to help you survive a market downturn.
#1 Reflect on your true Intentions (Long-term vs Short-term Horizon)
Knowing your investment objectives and your time horizon are two important elements that will dictate your investment decisions. Individuals can be characterised as either short-term traders or long-term investors. Short-term traders thrive in a volatile environment where they tend to make frequent investment decisions — in the form of buying and selling — in very short time intervals. They can hold on to their investments for days, hours, minutes and even seconds! Short-term trading is highly risky, and is usually reserved for sophisticated and experienced individuals. For normal retail investors, a long-term investing approach is a safer strategy, where investments are held for the long haul. Given the potential and gradual adoption of blockchain technology, cryptocurrencies may skyrocket in value over the long term. With a longer-term horizon, you do not need to be exposed to short-term price variations that can take their toll mentally and emotionally.
You should only acquire cryptocurrencies through reputable and licensed cryptocurrency exchange such as eToro, which offers many popular cryptocurrency and tokens to choose from, and several features to help you get started on your crypto journey, for example, eToro’s extensive articles that cover basic trading strategies as well as guides to help you navigate the complexities of the market.
#2 Limit Your Exposure to Obscure Tokens
Obscure tokens are tokens with low market capitalisation or even coins which have gone through an Initial Coin Offering (ICO), but are not yet listed on any exchange. Usually, these tokens are thinly traded across a small pool of exchanges, probably due to little trading demand or because they are relatively new coins. Obscure tokens are highly risky, because they do not have an established track record and prices could be extremely volatile due to their paltry liquidity. Prices can swing rigorously if a large order is executed on an exchange. Although these tokens could be significantly profitable if prices go on an upward trajectory, you could also stand to lose a big chunk of value if prices move adversely. A market downturn, as witnessed at the start of 2018, could obliterate the value of obscure tokens significantly, and they could possibly lose as much as 70% to 90% of their value. Only when you have considerable experience and knowledge dealing with obscure tokens should you seek to include them in your portfolio. You should always store your coins in a secure digital wallet. eToro offers a secure digital assets Wallet solution that supports over 120 coins and lets you safely store your cryptocurrencies.
#3 Invest only After Extensive Research
In this complex and fast-moving space, research is your best friend. Engage in thorough due diligence before carrying out any investment decisions. If you are thinking about investing in a new coin or token, first evaluate the website, team and most importantly, the project’s white paper. Ensure that the project has clearly defined the problems which it is addressing and that the solution has been thoroughly explained. Only when you are clear about the project’s direction, its potential and the absence of red flags, should you commit to executing the investment. One easy way to understand sentiments related to any coin is to utilise a crypto social feed, such as eToro, which allows interaction with a vibrant community of like-minded crypto enthusiasts.
#4 Do Not Over-Leverage Yourself
When new to the cryptocurrency market and trading in general, it is best to avoid highly leveraged products and strategies in the fast-evolving cryptocurrency space. Products such as cryptocurrency derivatives, options and CFDs should be avoided if you do not fully understand their mechanics. Strategies such as margin trading are also highly risky and should be avoided to reduce your risks. Investing in cryptocurrencies is already risky; trading using leverage could significantly increase your risk exposure, especially in a market downturn where the possibility of margin calls increase exponentially. Acquiring real coins from regulated cryptocurrency platforms such as eToro is a good first step.
#5 Putting all your eggs in one Basket?
Financial wisdom dictates that diversifying is key to managing your investment portfolio. Put simply, a basket of crypto is wiser than investing solely in one coin. Without diversification, your losses will be directly tied to one investment. In a diversified pool of coins, your losses can be mitigated across all coins and could reflect a lower overall loss in a market downturn. The availability of different coins and trading pairs in many cryptocurrency platforms — with eToro being one of the most prominent — allows you to effectively diversify your portfolio safely and conveniently.
#6 Earn free Cryptocurrency on the Side
In a market downturn, the focus should be more on accumulating cryptocurrencies due to lower market prices, especially if you are a long-term believer in digital currencies. There are numerous ways to earn free cryptocurrency on the side, including utilizing your computing resources to collectively mine cryptocurrency transactions and earn mining rewards, subscribing to services that provide free coins in exchange for work being done (such as BAT browsers) and exploiting cashback rewards services that provide you cryptocurrency rewards if you shop online.
#7 FOMO Makes you Lose
Fear of missing out (FOMO) is a widely used term in the cryptocurrency space to describe a situation that entails extreme hype which generates investment decisions on a particular coin. Investing in a cryptocurrency purely based on hype and speculation is an irrational move and could result in significant losses for investors. You must do thorough due diligence for every investment decision to ensure that you truly understand the coin’s proposition and utility, using leading resources such as eToro’s free market research on prominent coins.
#8 Ignore Volatility of the Market
Volatility in the cryptocurrency market can be extreme. It is always a good idea to try not to be overly zealous when looking at price movement, since market volatility can induce a heightened degree of anxiousness and FOMO, both of which could be detrimental to your investment decisions.
Downturns come and Go
Market cycles are a natural part of the free market. The volatile nature of the cryptocurrency market could shorten the market cycles of booms and busts relative to more traditional and mature markets, such as the stock markets. It is important to enter the market with a focused and long-term investment horizon.
[1] Data derived from Investopedia
Cryptocurrencies represent a distinct asset class in a league of their own. While they have often been associated with extreme volatility since their inception a decade ago, volatility is a double-edged sword. While you can earn a significant amount of money quickly, you can also lose it just as fast. The average annual return of the US stock market since the 1950s is estimated at 7%[1], however, in the cryptocurrency market, prices can move by many percent in a single day (for example, Bitcoin circa 2017).
The fast-paced nature of the cryptocurrency market also manifests itself in a far shorter market cycle than in traditional financial markets. Here are some tips to help you survive a market downturn.
#1 Reflect on your true Intentions (Long-term vs Short-term Horizon)
Knowing your investment objectives and your time horizon are two important elements that will dictate your investment decisions. Individuals can be characterised as either short-term traders or long-term investors. Short-term traders thrive in a volatile environment where they tend to make frequent investment decisions — in the form of buying and selling — in very short time intervals. They can hold on to their investments for days, hours, minutes and even seconds! Short-term trading is highly risky, and is usually reserved for sophisticated and experienced individuals. For normal retail investors, a long-term investing approach is a safer strategy, where investments are held for the long haul. Given the potential and gradual adoption of blockchain technology, cryptocurrencies may skyrocket in value over the long term. With a longer-term horizon, you do not need to be exposed to short-term price variations that can take their toll mentally and emotionally.
You should only acquire cryptocurrencies through reputable and licensed cryptocurrency exchange such as eToro, which offers many popular cryptocurrency and tokens to choose from, and several features to help you get started on your crypto journey, for example, eToro’s extensive articles that cover basic trading strategies as well as guides to help you navigate the complexities of the market.
#2 Limit Your Exposure to Obscure Tokens
Obscure tokens are tokens with low market capitalisation or even coins which have gone through an Initial Coin Offering (ICO), but are not yet listed on any exchange. Usually, these tokens are thinly traded across a small pool of exchanges, probably due to little trading demand or because they are relatively new coins. Obscure tokens are highly risky, because they do not have an established track record and prices could be extremely volatile due to their paltry liquidity. Prices can swing rigorously if a large order is executed on an exchange. Although these tokens could be significantly profitable if prices go on an upward trajectory, you could also stand to lose a big chunk of value if prices move adversely. A market downturn, as witnessed at the start of 2018, could obliterate the value of obscure tokens significantly, and they could possibly lose as much as 70% to 90% of their value. Only when you have considerable experience and knowledge dealing with obscure tokens should you seek to include them in your portfolio. You should always store your coins in a secure digital wallet. eToro offers a secure digital assets Wallet solution that supports over 120 coins and lets you safely store your cryptocurrencies.
#3 Invest only After Extensive Research
In this complex and fast-moving space, research is your best friend. Engage in thorough due diligence before carrying out any investment decisions. If you are thinking about investing in a new coin or token, first evaluate the website, team and most importantly, the project’s white paper. Ensure that the project has clearly defined the problems which it is addressing and that the solution has been thoroughly explained. Only when you are clear about the project’s direction, its potential and the absence of red flags, should you commit to executing the investment. One easy way to understand sentiments related to any coin is to utilise a crypto social feed, such as eToro, which allows interaction with a vibrant community of like-minded crypto enthusiasts.
#4 Do Not Over-Leverage Yourself
When new to the cryptocurrency market and trading in general, it is best to avoid highly leveraged products and strategies in the fast-evolving cryptocurrency space. Products such as cryptocurrency derivatives, options and CFDs should be avoided if you do not fully understand their mechanics. Strategies such as margin trading are also highly risky and should be avoided to reduce your risks. Investing in cryptocurrencies is already risky; trading using leverage could significantly increase your risk exposure, especially in a market downturn where the possibility of margin calls increase exponentially. Acquiring real coins from regulated cryptocurrency platforms such as eToro is a good first step.
#5 Putting all your eggs in one Basket?
Financial wisdom dictates that diversifying is key to managing your investment portfolio. Put simply, a basket of crypto is wiser than investing solely in one coin. Without diversification, your losses will be directly tied to one investment. In a diversified pool of coins, your losses can be mitigated across all coins and could reflect a lower overall loss in a market downturn. The availability of different coins and trading pairs in many cryptocurrency platforms — with eToro being one of the most prominent — allows you to effectively diversify your portfolio safely and conveniently.
#6 Earn free Cryptocurrency on the Side
In a market downturn, the focus should be more on accumulating cryptocurrencies due to lower market prices, especially if you are a long-term believer in digital currencies. There are numerous ways to earn free cryptocurrency on the side, including utilizing your computing resources to collectively mine cryptocurrency transactions and earn mining rewards, subscribing to services that provide free coins in exchange for work being done (such as BAT browsers) and exploiting cashback rewards services that provide you cryptocurrency rewards if you shop online.
#7 FOMO Makes you Lose
Fear of missing out (FOMO) is a widely used term in the cryptocurrency space to describe a situation that entails extreme hype which generates investment decisions on a particular coin. Investing in a cryptocurrency purely based on hype and speculation is an irrational move and could result in significant losses for investors. You must do thorough due diligence for every investment decision to ensure that you truly understand the coin’s proposition and utility, using leading resources such as eToro’s free market research on prominent coins.
#8 Ignore Volatility of the Market
Volatility in the cryptocurrency market can be extreme. It is always a good idea to try not to be overly zealous when looking at price movement, since market volatility can induce a heightened degree of anxiousness and FOMO, both of which could be detrimental to your investment decisions.
Downturns come and Go
Market cycles are a natural part of the free market. The volatile nature of the cryptocurrency market could shorten the market cycles of booms and busts relative to more traditional and mature markets, such as the stock markets. It is important to enter the market with a focused and long-term investment horizon.
[1] Data derived from Investopedia