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Five considerations before investing in crypto-currencies


Johannesburg, 07 Sep 2019
Read time 6min 40sec

Investing in crypto-currencies has become a controversial and much talked about topic. One of the biggest arguments for investing is the volatility of the asset class and the unmatched return potential. This is not a guaranteed property of crypto-currencies, though, and there are a few considerations to be made before making your first investment.

Never invest above your means

The nature of the volatile crypto markets provide the opportunity for large gains and also large losses. Investing in this asset class, therefore, is not recommended to anyone wanting to make an investment with money that they are likely to need in the short term.

While there have been small windows where crypto-currencies produce eye-popping returns over a short period of time, the largest and most reliable growth that we see is over the long term. This means that if you don’t have money available that you are able to go without for a longer period of time, you should hold off on investing in crypto-currencies until you are able to comfortably do so.

Make sure you know what you are buying

As the Russian proverb says: “Trust, but verify."

We shouldn’t blindly trust anyone. When you buy a car, you make sure that it’s in a roadworthy condition and mechanically sound before handing over your money, and the same principles should be applied to investing in crypto-currencies.

There are well over 2 000 crypto-currencies that are actively being traded daily, and a significant amount of them are ERC-20 tokens that are minted on top of the Ethereum blockchain (there are other blockchains that also provide this functionality), often, the teams behind these crypto-currencies are selling vaporware, which means their product or software has not yet been released or completed.

This makes understanding and research a critical element of the investment process. An appropriate minimum amount of time spent researching a crypto-currency is around 20 hours: five hours to familiarise yourself with the product, its team and what they want to accomplish; 10 hours on non-blockchain solutions to the same problem that the crypto-currency aims to solve; and another five hours trying to find holes in said crypto-currencies' execution plan.

You don’t need to be an expert in cryptography, a programmer or an economist to make this evaluation (although it certainly doesn’t hurt), you just need to be able to put in the time to help yourself understand what you are investing in and how comfortable you are making that investment after you have digested the information at hand.

As a simple rule of thumb, if there isn’t enough information out there for you to spend 20 hours researching a specific crypto-currency, you should avoid the crypto-currency altogether.

Diversify

There are two main ways to look at diversification:

  • Diversification into crypto-currency.
  • Diversification of crypto-currency.

Diversification into crypto-currency is the further diversification of your investment portfolio to include crypto-currencies.

Ideally, crypto-currencies should be part of your larger portfolio of investments, such as property, stocks, bonds, etc. This first concept takes a traditional investor from exposure to traditional markets that are usually correlated (for example, the relationship between a stock of an airline to the price of a commodity like oil) into an asset class that doesn’t have any correlation or relationship to traditional assets (except in some cases where a crypto-currency is specifically pegged to another asset, such as a crypto-currency that is pegged to gold).

In some cases, it might even be argued that crypto-currencies such as bitcoin have a negative correlation to traditional assets and currencies as it slowly becomes a safe-haven asset like gold, which is expected to retain or increase in value over time in times of market turbulence or recession.

Since there are many barriers to entry into the traditional markets, there is also an increasing trend where newcomers to investing are converting a portion of savings into crypto-currency investments.

From there, they diversify their crypto-currency portfolio by buying multiple crypto-currencies to mitigate losses as well as compound gains when a single asset appreciated or appreciates. This is the next logical step after purchasing your first crypto-currency, which means yes, you should go back and spend another 20 hours on each crypto-currency you are considering.

Make notes

It’s incredibly important to keep track of your portfolio and factor in all the costs involved such as:

  • Purchase price
  • Trading / purchase fees
  • Blockchain fees
  • Withdrawal fees
  • Bank transfer fees

While not all of these fees always apply to every platform you might use, you will need to properly plan the flow of your money into and out of crypto-currencies to accurately measure performance.

Secure your crypto-currency

If you’re looking at investing in crypto-currencies, you will have heard about the many hacks that have occurred. Needless to say, securing your crypto-currencies should be a top priority for a long-term investor.

There are many ways that you can secure your crypto-currency:

  • A mobile wallet on your phone;
  • On an exchange;
  • A hardware wallet; and
  • Cold storage.

Mobile wallets are quite common, however, there can be serious implications if your phone is lost or stolen, so unless you are planning on spending the crypto-currency that you keep in your mobile wallet, you should not hold very much crypto on your phone.

Exchanges are also vulnerable to attack, but generally, have policies and practices that are in place to mitigate the risks of hacks and vulnerabilities. A good exchange will put stopgaps in place to minimise the risk of losses should they be hacked.

Hardware Wallets are wallets where the private keys to your crypto-currency wallets are stored on the device itself. These wallet types have three main security features:

  • They are not connected to any networks unless they are plugged into a device.
  • They require a pin or password to be accessed.
  • You need the physical device in order to transact.

In some cases, custody providers make use of hardware wallets to protect your crypto, however, this method is better suited for personal storage.

Cold storage is the practice of generating crypto-currency wallets with an airwall — in other words, generating crypto-currency wallets and storing those private keys on a computer or device that has no Internet access. This creates a scenario where it is impossible for funds in a cold storage wallet to be sent because there is no way for it to connect to a network.

Cold storage is one of the most common ways that exchanges and trading platforms protect their users’ accounts and funds.

Conclusion

Your first introduction into investing into crypto-currencies need not be as intimidating as it might seem. While there is a lot to learn, there are many resources and platforms that will guide you through the learning curve that is the best performing asset class of the past decade.

Revix provides customers with the tools to help newcomers with investing in crypto-currencies for the first time:

  • We provide customers with a factsheet for each of our bundles to assist with research.
  • We provide safe and secure custody.
  • All of our bundles are diversified.
  • Our fees are simple and open to everyone to see.
  • We connect customers to multiple global exchanges so we can get the best available prices for our customers.
  • Our platform helps you easily keep track of your portfolio and each bundle's performance.
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