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6 Commandments for Crypto Investing

Juan M. Villaverde
Last updated: | 5 min read

Juan Villaverde is an econometrician and mathematician devoted to the analysis of cryptocurrencies since 2012. He leads the Weiss Ratings team of analysts and computer programmers who created Weiss cryptocurrency ratings.

Source: iStock/ImageGap

The takeaway from my previous article, “5 Myths of Crypto Market Manipulation,” is that the game is not rigged.

Beyond a few obvious pump-and-dump schemes that can be spotted from a mile away, the best defense for small investors is to trade smart and, above all, prudently.

And, in the long run, the reason why large institutional investors are successful is that they stick to sound investing principles. They have a plan.

This is what helps maximize the chances of success over the longer term, whether they’re a whale or a small fry.

If you want to do the same, here are six crypto investing commandments to adhere to:

1. Recognize the risk.

Never lose sight of the fact that crypto is still an immature, high-risk asset class.

Several coins that we rate merit high technology marks. Also, a handful have enjoyed broad adoption.

But currently, not a single coin merits good scores for investment risk. Nearly all are weak or very weak in that category.

This is one of the key reasons Bitcoin currently gets a Weiss Rating of “C+.” It’s also why no coins get an “A.”

2. Don’t get sucked into a buying frenzy.

The worst time to buy is when big crowds are trying to do the same. This is why we strongly advised our friends not to buy Bitcoin near its peak in December 2017.

And it’s another reason we gave it a “C+” rating, when nearly everyone in cryptoland was screaming, “Buy, buy, buy!”

Wait for the frenzy to calm down. Or better yet, wait for the inevitable bear to follow the bull.

3. Don’t commit more funds than you can afford to lose.

This may sound obvious, but many novice investors choose to ignore it.

Their decision seems to be predicated on the belief that they know ahead of time what the market will do next. But if that were the case, why not just mortgage the house, sell the family silver and put all available money into that asset?

Dedicate no more than 5% of your liquid assets to crypto. We have just half of that 5% deployed in our Weiss Cryptocurrency Portfolio service right now as we await the next buying opportunity.

The reality is that no one can know with certainty what the future will bring. The best you can hope for is a well-educated guess. So, it stands to reason that you shouldn’t overcommit to any single asset class, let alone a risky one.

As a general rule of thumb, we have continually recommended dedicating no more than 5% of liquid assets to crypto. And, in our Weiss Cryptocurrency Portfolio service, we have invested only half of that money so far.

With the other half, we’re waiting patiently for two factors: (1) big bargains and (2) a signal from the market that a new bull phase has begun. We’ve got the first, but haven’t yet received confirmation on the second.

4. Never borrow money to trade crypto!

Some high-rollers seem to have no problem day-trading their entire portfolio while using up to 20x leverage. That’s the equivalent of about 5 cents on the dollar of your own capital, and 95 cents of someone else’s.

Personally, I have always been more risk-averse. I would rather make fewer profits for the sake of avoiding bigger losses.

How do you know what’s too risky for you? If you’re losing sleep over your trades, you’re overinvesting. Another telltale sign: If you can’t take your eyes off the screen.

Solution: Cut your exposure.

5. Ignore the headlines!

Reporters go with the flow. If the market is exuberant, you see mostly good-news headlines. When the market is in dog days, all the pessimists come out of the woodwork and bad-news headlines prevail.

So, following the headlines winds up being pretty much the same as following the crowd — buying high and selling low.

Some prime examples:

Right now, you hear a lot about Bitcoin “not solving any real issues.” The news is also dominated by scary stories about the government’s “power to make crypto disappear.”

The opposite was true when the market was flying high. All the talk was about how Bitcoin and other cryptos (aka, altcoins) were destined to replace fiat money as the world’s reserve currency. And insane predictions of stratospheric Bitcoin prices prevailed.

The fact: News cycles are driven by price, not vice versa.

My advice: Ignore them.

6. Buy the best technology and adoption.

These are the two factors that will prevail over the long haul.

Right now, for example, two of the coins that score high in terms of our adoption index are Bitcoin and Ethereum.

Plus, two that are among the highest rated in terms of technology are EOS and Cardano.

What’s the bottom line? It’s true that wealthy investors are likely to emerge from this consolidation period reaping the greatest benefits.

But, it’s not because they tricked the small fry into relinquishing their positions. Quite the contrary, small investors have jumped — almost salmon-like — straight into the tendered nets of their own impatience.

What about the notion that the ocean is only big enough for the whales? Let me remind you that most cryptocurrencies are now trading at levels unseen since the beginning of 2017!

Are small investors buying? Nope. They are swimming for the exits.

Bottomline: Don’t fall for vainglorious promises of “ez gainz” — only to find that they have been sold a pup. There is no entry in the Trader’s Dictionary under “easy.”

However, it’s not difficult to stick to sound investing principles. All that it requires is a bit of discipline.