Investing in crypto can be a scary thing at first, and this is perfectly normal. For this reason, we will look at how crypto is perceived and how it compares to other technologies in the past. Second, we will focus on why people, companies, and institutions invest in crypto. And finally, we will cover HOW you can approach investing in crypto.
Before we get started, know that you should always do your own research when investing any amount of money in crypto. Additionally, you should only invest what you can afford to lose.
Early crypto investing
In the last decade, we have seen the narrative around investing in crypto, and specifically, Bitcoin, shift dramatically. Between 2013 and 2014, economists, banks, governments, and institutions were unanimous in their perspective that crypto was dangerous, volatile, and mainly used for money laundering, terrorism, and all sorts of criminal activities. To this day, some are still highly skeptical of crypto and advise staying away from it at all costs.
You probably remember the amount of fear surrounding the internet revolution. The internet was feared for its cybercriminals, porn, and piracy.
It is sometimes difficult to imagine that that was around 25 years ago. Look how much the internet has changed everything around us, including our personal relationships and social norms. In the 90s, it was considered strange and even rude to call someone on a cell phone in the street. Maybe you remember that episode from Seinfeld where Jerry scolds Elaine for ‘cell phone walk and talk’?
Technology changes social norms – the internet and mobile technology have, and so will, crypto.
Crypto is going through similar growing pains, and that’s completely normal. As an industry observer and someone interested in what the future might hold, it is important to look beyond just that and see where this could go.
Investing in crypto nowadays
In the last 3 to 5 years, the narrative has been slowly shifting from ‘’stay away from crypto’’ to ‘’every investment portfolio should have some amount of crypto.’’ Stakeholders with a long-term outlook, like banks, investment funds, companies, and even entire countries, are rethinking their perspective on crypto. It sure has been fascinating to witness this shift so far.
The past assumption around investing in crypto was that it was riskier to invest than not to invest. Maybe you’ve heard the term: ‘’only invest what you can afford to lose!’’ This was because stakeholders did not understand blockchain technology and its potential applications.
Cryptocurrencies in modern investment portfolios
In the last few years, we’ve seen this narrative turn 180 degrees: now, many believe that it is riskier not to invest than to invest, even if this means just investing a little bit. This assumes that the crypto market will continue to appreciate over the next few years and that it’s never too late to invest.
But what exactly is causing this shift? We already discussed in previous articles that Bitcoin is a sort of digital gold whilst Ether is the world’s computer. We also covered the fact that there are many other serious blockchain protocols that try to emulate these concepts.
5-6 Years ago, the only people who thought these ideas had any value were people who were really deep into crypto. Crypto nerds were passionate about the technology and wanted to see it become mainstream. Yes, they took risks, not only by investing, but also by putting their reputations on the line by telling people they thought crypto was the future.
Bitcoin outperforming the S&P 500
In addition to understanding the potential for crypto to become an important part of our lives in the following decades, investors are convinced that crypto is an excellent long-term investment. Although cryptocurrencies are volatile, their long-term profitability has outpaced every other asset class, including the S&P 500. So although there can be great price swings in short-term periods, the long-term trends show crypto as a good investment.
A traditional investment portfolio consisting of 60% bonds and 40% stocks saw a one-year return of 7% in 2017 when Bitcoin’s value skyrocketed by 1,500%, a portfolio with just 1% in Bitcoin would have grown by 22%.
Today, many professional investors and fund managers, typically quite conservative when choosing assets to invest in, think that allocating just 1% of a client’s portfolio to Bitcoin carries massive potential for returns with minimal downside risk.
We want to highlight that most folks investing in crypto are looking for investment returns in years, if not decades. If you look at the volatility or price movements of some digital assets on a daily basis, it can be enough to make your head spin. However, if you can zoom out and see the big picture, looking towards 2025, 2030, and beyond, the short-term price fluctuations, although volatile, start to matter less.
Cryptocurrency investment strategies
Time and time again, when it comes to investing, studies have shown that we can be our own worst enemies. Even if our investment thesis or strategy is correct, our natural human emotions can take over. We get scared when we see our investments go down and excited and greedy when our investments go up.
There’s no question that is the case for investing in traditional stocks like Google, Amazon, or Tesla, but it’s all the more so for crypto, where in the short-term, you can see a cryptocurrency plunge down or shoot up in a matter of hours. Therefore, we want to discuss three main approaches to ‘’getting off zero’’ that acknowledge our human behaviors and set us up for investing success.
The first cryptocurrency investment strategy is called Dollar-Cost Averaging or DCA. With this strategy, an investor commits to investing the same amount of money spread out over regular intervals, regardless of the asset’s price.
Example: you decide to invest $100 in crypto every other Tuesday at 10:00 AM, no matter what’s going on in the market. You might already implement this strategy by putting money monthly into your 401k or another sort of investment or retirement fund. The goal is to reduce the overall impact of volatility and prevent our emotions from getting in the way of our investment decisions.
The second cryptocurrency investment strategy, which can be riskier, is to invest a lump sum of money at a particular point in time and HODL. In crypto, we don’t hold, but HODL. This is an important cultural meme in the crypto community, and you can look up its origins, but basically, HODLING means not letting your emotions get the best of you when prices are very volatile.
Investing a lump sum all at once potentially carries more risk because you’re putting more money at stake and could lose everything should the price drop, but it has potentially higher returns long-term if the value appreciates.
Differences between Dollar-cost averaging and HODLING
Let’s compare both strategies with an example. Alice and Bob both have $1,200 to invest in the year 2020.
Alice is comfortable taking higher risks and chooses to buy $1,200 in Bitcoin on January 1st, 2020. The price of Bitcoin on that day was about $7200, so she walks away with about 0,1666 BTC.
Bob is more risk-averse and prefers to spread out his investment over the year. He invests $100 monthly on the first of each month. Because the price of Bitcoin fluctuates, he will buy different amounts of Bitcoin monthly.
On December 31st, 2020, Alice’s investment would be worth $4,825, whilst Bob’s $3,537. Alice made about 4x her total investment, while Bob made about 3x. Both made decent money, but Alice took on a lot more risk because she didn’t know where the price of Bitcoin would be at the end of the year.
For comparison, let’s replicate this exercise for the year 2018. That year, Bitcoin started at about $13k on January 1st and closed the year at just under $4k. If they had implemented the same strategy over the year 2018, at the end of the year, Alice would have lost over 70% of her investment of $1,200, while Bob would have only lost about 50%.
Alice took on more risk, and she’s feeling it. Bob still lost money, but the loss was more controlled. This is the difference between DCA and HODLING – the risk/reward ratio is much higher in lump sum buys.
Now, consider if they both HODLED that investment until today. Bob, who went the way of DCA and took less risk, would have about $4,000 whilst Alice would have had about $2,5k. In the long term, both seem to be doing just fine!
Buying and selling
The third strategy we want to discuss is buying and selling, also called trading. Here, the goal is to buy low and sell high as the price fluctuates. Traders try to predict where the price is heading based on all sorts of data like market sentiment, news, historical pricing data, and many other resources.
Trading is definitely not something we would recommend to beginners with no experience. Something new traders often need to pay more attention to is the tax implications of buying and selling crypto in the short term.
In many countries, investors who buy and hold over an extended timeframe will be taxed much lower than those who trade. Whatever your strategy, talk to your tax advisor about the financial implications of buying and selling crypto in your country.
Getting started in crypto – conclusion
In the end, the strategy which works best for you is the one you’re comfortable with. It’s also important to consider that it’s possible to further reduce risk by spreading investments across different crypto assets.
For example: if you have $100 per month to invest in a DCA scheme, it’s possible to break that up into $50 in Bitcoin, $25 in Ether, and $25 in Solana. This further helps reduce volatility and the risk of investing in newer blockchains with fewer users and adoption.
Getting started with crypto is like learning a new language, in this case, the language of money: it’s both uncomfortable and exciting.
Learning a new language is hard for most people. But one thing is sure, it’s something that you can do only with practice. You learn a new language by doing, first by learning simple conversations like ‘hello,’ ‘what’s your name, ‘where are you from?’
The same goes with crypto – the best way to learn is to get off of zero.
The first step is getting a wallet; Zengo is a great wallet to start with and takes just 5 min to set up. The next step is to buy a small amount of crypto. Next, you can pair yourself with someone you trust and send transactions back and forth. When it comes to learning, it is almost always better when you are doing it together with someone else.
Start at the beginning, and with resources like the Zen Crypto Blog, you’ll start learning crypto ABCs, a little bit of crypto grammar, and simple concepts like DCA and HODLING. The only thing left is to start USING that language – which means getting a fraction of a Bitcoin or Ether.
In no time, you will learn more and more and will feel more comfortable with crucial crypto concepts.