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The long-term investor would consider the cryptocurrency market to be in its infancy. Unregulated and with very little institutional appeal, the demand for low-cost, cross-border, immutable and programmable money is only just beginning. This technology has not even begun to crawl yet; we are all still very early.

This article assumes that you have already been convinced by the value of this technology – whether in the form of Ethereum, Bitcoin or the blockchain ecosystem more broadly. Now that you have decided to invest – or invest further – this article should hopefully come as a useful guide to the cryptocurrency landscape and some key principles that can be applied for investing for new and experience investors alike. Needless to say, this market is highly volatile, and your capital is at risk.

Note; this article talks about cryptocurrencies and cryptoassets. In this context, they mean the same thing.

Principles of Cryptocurrency Investing

There are a number of things I’ve learned about cryptoccurrency investing over the years but there are three which are really worth noting in order to enter this market with as little misinformation as possible.

  1. The cult of crypto
  2. The possibility of a 10,000%+ return has some (unsurprisingly) strange effects on the human psyche. Be aware of the lengths to which some people will go to “pump” superficial coins with very little fundamental value. A new investor may end up following the first leader who promises riches, often being persuaded by pseudo-scientific language that sounds somewhat impressive. Be wary of marketing strategies and discussions that shy away from technology and instead use vague and emotionally-charged language.

  3. Complex technology
  4. The mainstream media will have you believe that an investment in Ethereum et al is equivalent to an investment in an internet company. This is not particularly accurate. When you invest in a blockchain token like ETH or BTC, you are investing at the protocol level. The approach to valuing the investment opportunity of a protocol is very different from that of a technology stock. At a protocol layer the technology is extremely complex, with – in reality – very few people fully grasping how it works. It is not realistic for investors (myself included) to critique – for example – a low level consensus algorithm. Find developers and technologists that you trust and learn what you can from them.

  5. Binary investing
  6. From speaking to others and following various communities there is an unhealthy level of “binary investing” in this space. For example, a new investor asks the question (and this type of question is asked frequently) “should I invest in Ethereum or Ethereum Classic?”. Other than the desperation to scream “do your own research!”, the implication that the choice is binary confuses me. Investing in cryptocurrency is rarely an “either/or” scenario. If this investor believed in the fundamentals of both ETH and ETC then the answer is simply: both. The real question is how these two assets should be balanced in a portfolio.

Balancing a Portfolio

Before speaking about cryptoassets directly, let’s first take a look at some fundamental considerations that can be used to help determine which cryptoassets to include.

Balancing a portfolio is subjective and largely tied to an investor’s risk tolerance. While the cryptocurrency market as a whole is considered very high risk, the risk spectrum within the market is broad and a balanced asset selection is important. Cryptocurrencies with a higher market capitalization (= coin value multiplied by coin supply) will typically have lower volatility than assets with a low market capitalization. Lower volatility often correlates with lower returns and – as a result – many new investors chase high risk/high return cryptoassets with a low market cap. Across all of these varying coins and market caps are varying risks; one asset may be far more likely to feel the full force of the SEC while another may be launching with radically new technology that could be fraught with bugs.

Cryptoasset risks
The term “risk” is thrown around a lot with cryptocurrencies. Everyone knows that investing in crypto is “high risk” but what does that actually mean? Yes, the price will be volatile, but that doesn’t explain the fundamental risk factors that belie these wild price movements.

Despite the risks; the previously Bitcoin-sceptic JP Morgan published the “Bitcoin bible” in February 2018 in which it asserted that cryptocurrencies are here to stay. The question now comes down to not “should I invest?” but “what should I invest in?”.

Which cryptocurrencies to buy

When evaluating the investment potential of a cryptocurrency there has to be a strong understanding of what will drive the price upwards. This sounds painfully obvious, but so many new investors purchase utility tokens which fail to meet this simple criteria. The value of a cryptocurrency will increase if it is bought and held for long periods of time with low-inflating or fixed supply (demand and supply economics). If the asset’s usefulness comes in the buying and selling of it instantly, or the supply inflation rate is high and indefinite, then the economics are simply not conducive to price growth. What is it about the technology that would incentivize buying and holding beyond simple price speculation?

Utility vs Blockchain tokens
A blockchain token like Ether or Bitcoin is used as an incentive mechanism to secure the network. Miners are rewarded with tokens on the successful discovery of the next block of transactions. This native token is also used to pay transaction fees. Utility tokens on the other hand are application specific and are required to interface with the app’s platform. The vast majority of utility tokens are built on top of Ethereum of which there are now hundreds. Some of the higher market cap assets include cloud storage tokens like Golem and Storj as well as prediction market tokens Gnosis and Augur. While a number of utility tokens have increased in value dramatically (and many will no doubt continue to do so), their potential demand is much lower than that of a blockchain token like Ethereum whose token is general-purpose and faces large-scale global demand.

Purchasing by sector
The first “killer app” for cryptoassets is payments. Here are a number of others (and their coins) which are – in my opinion – most likely to be heavily disrupted or innovated in the years ahead:

The coins above may or may not be a scam. Do your own research!

What does our portfolio look like?
Armed with all of the above information, particularly those around growing sectors and the potential risks, it becomes much easier to decide on which cryptocurrencies to buy. The balance of one’s portfolio should be tied to perceived risk as well as perceived growth. For example, privacy coins have enormous potential growth, but they could well be halted by strict regulation.

High risk portfolio
This portfolio is made up of penny stocks with very little focus on the relatively stable prices of Bitcoin and Ethereum. An investor in agreement about the sectors above (in terms of potential for growth) may choose to find ICOs in these sectors or coins with very low market caps. Returns for a portfolio could be enormous, but equally these tokens may disappear into obscurity.

Lower risk cryptocurrencies
The lower risk portfolio has an emphasis on Bitcoin and Ethereum – as much as 90% – with the remainder distributed to high risk assets that have the potential to increase 10 to 100 times over a short period of time. Those looking for even lower risk portfolios may also want to include equities (not cryptos) that are closely linked to the cryptocurrency markets such as Nvidia and AMD (and more recently – Samsung).

When to invest?

If there is one aspect of cryptocurrency investing that is over-thought and over-discussed, it is the timing of an investment. This guide is focused on the fundamentals of cryptocurrency investing, and as such, considering the short term price movements would be irrelevant. If you believe that the long-term outlook of the tokens you have selected is positive, then there is no better time to invest than the moment you have made that decision.

There is a caveat in that statement, and that is that an unlucky investor’s portfolio could fall by 50% or more overnight. Those who do not want to risk that gut wrenching feeling may wish to “dollar cost average” (buying fixed % chunks over a set time-period). This averages the overall purchasing price and softens any volatile movements (good and bad). Dollar cost averaging does provide some peace of mind, however over the long run its effects are likely to be negligible.

Where to invest?

Deciding on where to purchase cryptocurrency varies depending on the portfolio selected. Once you have decided on the make-up of your portfolio, visit CoinMarketCap.com and navigate to each cryptocurrency individually. From the cryptocurrency page you can select “markets” and this will provide information on the exchanges that trade this cryptocurrency with the most volume for your given currency pair (for Ethereum, that would be ETH/EUR, ETH/USD and so on). It’s possible for someone dealing with Euros to invest in an ETH/USD currency pair as the exchange will do the necessary conversions, however the fees for this will likely make it less appealing. Investing on an exchange with the highest volume in your local currency pair will mean that your order is likely to be settled the quickest and at a price which is closest to the “real” market price of the asset.

Keeping your investment safe

With a cryptocurrency purchase now made, it’s essential that the portfolio is stored securely. Millions of dollars worth of cryptoassets are stolen each year – predominantly from vulnerable exchanges. There are many tools available to investors which will help them store their investment in an ultra-secure manner. Our guide on how to buy Ethereum features a number of principles which cover wallet security for all cryptocurrencies in general.

This article should not be considered investment advice; do your own research and make an informed decision that you are comfortable with.

Nick was introduced to Bitcoin in 2011 while studying for a degree in economics and quickly spotted an opportunity for the cryptocurrency's use in online poker. Since then, the space has expanded beyond his expectations and in January 2016 he dedicated more time towards studying Ethereum and other blockchains. Nick is currently the sole author of this blog and writes on a range of topics from the technical to the financial. He also developed the Ethereum price tracker.