5 Steps To Finding The Crypto Investment Style That Suits You. Beginners Guide

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Investing in the Cryptocurrency market can be as simple as buying and holding a favorite coin or as complex as you want it to be. In this beginners guide, we will be breaking down the 5 Steps To Finding The Crypto Investment Style That Suits You and the various pitfalls you might encounter in this journey.

We will be breaking down what the term “investment” really means, the various ways you can invest in the crypto market, and all you need to know about risk.

What is an Investment?

Investing is “calculated risk taking” whereby asset(s) are purchased with the hope of it appreciating in value after a particular period of time. Once these assets have appreciated, you can make gains and earn a good return by selling them at a much higher price.

However, it is important to note that while these might sound very easy to accomplish, investing in any particular asset is a risky endeavor. This makes it very important for you to clearly understand the type of asset to buy as well as the whole investment process and the steps involved so as to make gain from investment decision.

But before we dive into the various processes available for investing in the cryptocurrency market, you need to first answer a few questions;

Why do you really want to invest in the cryptocurrency market?
How much do you want to invest in the cryptocurrency market?
How long can you buy and hold this assets before needing to sell them? and
What is your risk tolerance?

By being able to confidently answer each of this question, you begin to paint some kind of mental picture of how you really want to approach crypto investing and the types of assets or investments that will suit your needs.

Conservative/ Balanced/ Aggressive? Which Approach Suits You?

Deciding on what type of investor you are is very important in understanding and crafting out a investment process that would work for you.

Different types of people have different attitudes towards risks and this would have a major influence on the kind of crypto investments you make.

How to gauge one’s risk tolerance?

Your risk tolerance level is usually corelated to your investment horizon. The longer your investment horizon (i.e a young man that just started his career vs a man planning retirement) the more aggressive you can become in your investments.

Not only that, your risk tolerance is also dependent on your life goals. Are you looking for wealth creation or just to have a positive cashflow and maintain your standard of living? All these factors come into play when deciding what kind of investor your are.

Types of Crypto Investments Based on The Crypto Sector

In order to decide the best strategy to use in your crypto investment process, it is important to understand the various types of cryptocurrencies available and how they work. Here is a quick list of the various types of crypto sectors available and how to classify crypto coins into these sectors.

By understanding what sector each coin falls under, why they are created and how they were meant to be used, you can better make informed decisions in your crypto investment journey.

1) Utility Coins:

Utility coins are specifically created to serve as a gate pass to access access various services or blockchain protocols. These services could include trading fee discounts, eligibility for bonuses, staking or even airdrops, access to private groups and VIP server rooms and so much more.

Examples of utility coins include the Binance coin (BNB). Holders of BNB get a lot of additional perks on the Binance Crypto Exchange Platform.

2) Stable Coins:

Stable coins are pegged to real world assets or fiat currencies. This makes it possible to store value in this coins without experiencing the massive volatility or change in prices common to other cryptocurrencies.

A popular example of a stable coin is the USDT. This coin is pegged to the U.S dollars with a 1:1 value ratio.

3) Payment Coins:

These coins are primarily focused on offering a straightforward way to transfer money. The transaction fees are lower and they offer transaction a path that is very fast and easy to use with no hassle.

Bitcoin is an example of a payment coin. It has no other use than to store value and allow it to be easily transferred from one crypto user to the next.

4) Governance Tokens:

These Governance tokens give power to the holders. This power could be the right to vote on particular things like the future of a crypto project, the application of a protocol and so much more.

Governance Tokens are very important for making decisions. In most cases, Blockchain protocols are decentralized (i.e they do not have any central authority to make decisions). Governance Token holders cast votes and make crucial decisions that will be beneficial to the community.

Compound (COMP) is an example of a Governance Token. The more tokens a user gets, the more voting right they receive, allowing them have a say on the future of the project.

5) Non-Fungible Tokens (NFTs)

Investing in NFTs have become a very popular strategy for a crypto enthusiasts. These types of token are primarily made to represent ownership of one-of-a-kind digital asset.

These NFTs can be considered as a certificate of authenticity for digital creations on the internet. It can also sometimes serve as an Utility token, giving you access to VIP groups and additional perks in the crypto community.

Note: There are still a lot more types of crypto coins available but we will be stopping at these 5 popular ones in this article.

For a full break down of all the crypto sectors available, how they work and all you should know about investing in them, check out this article: The 5 Types Of Cryptocurrencies We Have and How To Understand Their Utilities.

Understanding Your Investment Process: 5 Steps To Finding The Crypto Investment Style That Suits You

Though investment may appear as a simple process of securing future gain from an asset, investing is a form of gamble. Therefore, it is important for an investor to be educated on what to invest in and how to invest in it if they want to ever become successful in this industry.

For every successful investment process, there are many factors to consider; like the goal of the investment, risk tolerance and other factors. In one way or the other, regardless of the strategy used in the investment process, the ultimate goal of investing is to gain good returns over a long term period.

Here are the 5 Steps To Finding The Crypto Investment Style That Suits You:

Defining investment goal
Careful examination of the asset to buy
Evaluation of associated risk and current investing skill level.
Risk to reward ratio you are aiming for/ Exit requirements
Diversification of portfolio

STEPS FOR MAKING APPROPRIATE INVESTMENT DECISION

Understanding the various steps in your investment process helps an investor to clearly understand and have a clear picture of what he wishes to achieve from an investment before he commits to it. By having these plan set, you can avoid panic during volatile market conditions, stem off greed during massive bullish rallies, and know when to exit from your positions. Below are the strategic steps to make appropriate decision in your investment process.

1) Clearly Define The Investment Goals:

The purpose of investment varies among individuals. For some it may be wealth creation while for others it may be income generation or financial safety. These goals may also vary according to age and income. In every investment decision-making process, the first step is to state the goal of the investment.

Young individuals usually invest to gather wealth, but income generation and retirement planning are the goals of investment for people in mid and later midlife. For instance, an individual may decide to save a particular amount of money from salary earned monthly over a period of 20 years in order to DCA into a few crypto pairs and Hodle for a long period of time.

These a clearly defined goal with a Dollar cost averaging strategy (DCA).

2) Examination of Current Financial Standing:

After an investor have clearly identified and defined the investment goals in the short and long term, the next step is to evaluate the present financial situation. This will help to know how much to invest based on investment plan.

Assessing the monthly income, monthly expenses, asset, liability, and risk tolerance level will greatly help to determine which asset to buy while having a clear picture of the financial standing of the investor.

3) Evaluation of Associated Risk and Current Investing Skill Level:

Wanting to become the next investment protégée is one thing. However, having the appropriate skill set and experience to achieve this goal is a totally different topic.

In this stage of your investment process, you want to have a reality check by asking yourself a few question;

Do I have the skill level or capital to go after this investment goal you decided on?
Do I have the time horizon to hold on to my investments for as long as required to achieve my goals?
Can I take on the risk involved with implementing this investment strategy?

By having these reality check conversations, you can easily spot the weakness in your decision making process and rectify it before even risking a dime.

4) Risk to Reward Ratio/ Exit Requirements:

Now you have a clear picture of “what you want to invest in and how you want to invest in it”, the next step in your decision making process is preparing the rules that will trigger you to exit your investment positions.

These rules could be

a time limit,
maximum drawdown or loss,
economic events,
a percentage (%) surge in the value of coin you are holding
or even government policies.

These rules could be anything you want. All it does is it gives you a clear understanding of why to exit a position and how to do so without panicking or allowing your greed to take over.

If you have a perfect exit strategy, you can easily prevent situations where profitable trades turn into loss or situations where a small loss ruins your whole investment portfolio.

5) Diversification of Assets:

Diversification entails allocation of funds to different types of investments, this is ultimately to help manage risk. Having a mix investment helps to guide against total loss.

An investor can maintain a balance portfolio after experiencing a loss from one investment in the mix due to consistent returns from other investment that helps to cushion the effects of the hit.

Selection of The Appropriate Crypto Investment Strategy

Investment strategy is basically the way or process of growing investment. It entails the system of managing the assets to yield gain over the investment period.

Making a decision on the appropriate mechanism for growing money is an important part of the investment process.

Crypto Investment: Active vs Passive Asset management

Assets can be managing to yield gain in a passive or active form.

Passive Asset Management:

Passive gains are generated from less risky investments. An investor may buy an asset and sit back to watch the investment yield return over time, there is no active involvement of the investor.

The costs are generally low, but it takes a longer period of time to realize gains when compared to more risky investment

Active asset management:

On the other hand, active gain are realized from a more risky investment. Active investment strategy requires full involvement of the investor in managing the investment funds. With this strategy, investor’s focus on beating the market within a short time.

Much attention is needed from the investor to carefully understand the past performance of an assets thereby making a projection of increase in value of the investment over a period of time to make a gain.

Asset Management Based On timeframe

Based on the goal of an investor, an asset can be managed on a short or long term period. This will enable the investor to identify the strategy to use in managing the investment funds. Let’s quickly examine the major strategies of investment based on time frame.

Short Term:

This approach offers a return over a short period of time and are generally more risky in nature. Crypto funds could be invested into learning Technical analysis for Crypto Leverage trading, researching and investing in new crypto projects for Airdrops, investing in meme coins and so much more.

Long Term:

This investment approach is less risky due to the ample time available to wait for the market to work in your favor. In this case, an investor can lock capital or assets over a long period of them. Funds are allocated on less risky venture which yield more return over many years.

Other strategies that can be used to manage your crypto investment include:

Buy and hold Blue Chip Cryptos: An example of a Blue chip cryptocurrency is Bitcoin and Ethereum. These are established cryptocurrencies with institutional status, a sizable market cap, higher liquidity displaying strong demand, lower volatility and a strong reputation. This investment process involves holding these kind of crypto assets for a period of time with the hope of it increasing in value.

Growth investment: This involves looking for and investing in the next 100x coins. It involves making a prediction that an investment will move on a positive trajectory. This is a risky strategy of managing investment.

Value investing: This involves investing only in Cryptocurrencies with a strong community base and real world application. By investing in these types of undervalued projects, the investor hopes that price will increase when the market realize its authentic worth. It can be tricky to identify the hidden potential of an asset but value investing so DYOR

How Do You Use a Blend Of Crypto Investment Strategies?

There are multiple ways to invest in the Crypto market! Some popular ones are;

Crypto Staking: Earn passive income with little to no effort by simply locking up your crypto for a particular period of time. It is available for most cryptocurrencies and is the same thing as receiving interest in a deposit account in a bank.

Yield-Farming: This is for Decentralized Finance (DeFi). Here you directly participate in a lending process by simply connecting your cryptocurrency wallet to a token pool with other users. The crypto fund pool is then used for loans in return for interest and fees.

Buy and Hold Strategies: This strategy could involve Dollar Cost Averaging into a few chosen crypto coins over a period of time. These way you are buying the deep and waiting for the price to push higher.

Liquidity mining: Another popular passive way to earn income from cryptocurrency is Liquidity mining. Here you connect your wallet to a Decentralized Exchange (DEX) liquidity pool. This crypto fund pool is used to provide liquidity to facilitate transactions while you earn passive income.

Play-to-Earn Games: There are a lot of popular play-to-earn games available for you to invest your time and money in. You can earn passive income by playing these online games. Some popular ones are Axie Infinity and Decentraland.

Note: There are still so much more ways to earn both passive and active income from investing in the cryptocurrency market.

Ideas For Portfolio Diversification

Dividing the funds into the above sections will enable the investor to mitigate the risk that might come from the likely downfall of any single investment within the whole cryptocurrency portfolio.

A young investor may decide to allocate 60% of his crypto portfolio to highly volatile investments like cryptocurrency trading and the remaining 40% is allocated to less volatile ventures like staking and Yield-farming. Whereas, an investor nearing retirement may choose to engage in a conservative approach by investing more in less risky ventures in order to mitigate the risk of massive drawdowns in the portfolio.

With this point of view, it is important for an investor to choose asset allocation that will suit the investment goal while considering the risk bearing capacity.

Other Popular Ways To Invest In The Cryptocurrency Market

While crypto traders might choose to mainly focus on investing directly into the cryptocurrency market, it is important to note that there are other ways to accomplish this.

Crypto futures: Crypto Futures trading is a very popular way traders are taking advantage of the high volatility in the Crypto market. With Crypto Futures, traders can wager on the price swings of a particular crypto pair with leverage for massive returns (or losses)

Crypto funds: This type of investment is now becoming popular as big names like Grayscale Bitcoin Trust emerge from the crowd, drawing in massive support from institutional investors who are buying crypto through a fund-like product.

Trading Crypto exchange stocks: Buying the company stocks of popular crypto exchange platform is another way of having exposure to the cryptocurrency market. These company stocks usually outperform other sectors when the cryptocurrency market is doing well.

Blockchain ETFs: A blockchain ETF allows you to invest in a basket of companies that may profit from the growth of the blockchain technology. However, it is important to note that most of these companies in the Blockchain ETF basket often do much more than crypto-related business. This makes your exposure to the cryptocurrency market diluted, reducing your potential upside and downside.

Performance Evaluation of Your Crypto Assets/Portfolio

Assets’ performance review is an essential task in the investment process. This stage involves the careful examination and monitoring of the investment. This is to ensure the investment is on track with your set financial goals.

It is important to monitor this performance at regular intervals to identify loop holes or areas that needs adjustment. This can be monthly, quarterly, or annual, asset performance review.

This exercise will help to make changes on fund allocation based on the performance of each assets in the mix of investment, reduce your exposure in certain industry in order to stick to your risk tolerance level, and better take advantage of the market during a volatile period.

By indicating when to buy or sell specific assets to gain more returns and mitigate losses, an investor will be able to track and manage portfolio efficiently.

How To Keep Your Crypto Investment Safe

5 Steps To Finding The Crypto Investment Style That Suits You. Beginners Guide

Investing in the cryptocurrency market also requires you to stay security cautious and take precautions to keep your crypto investment safe from hack, loss, and scams. Here are some tips to keep in mind:

Never share your crypto wallet private keys or password with anyone.
Use only strong passwords, two-factor authentication, and a secure internet connection at all times.
Only carryout transactions with reputable exchanges and digital wallet providers.
Do your own research before investing in any crypto project
Be vigilant about phishing scams that target crypto users.

Investing Solely To Become a Millionaire. Is This Good or Greedy?

Every individual is charged with a financial obligation at a point in life, this eventually translate to goals which needs a concrete plan to be achieved.

Investment has been a mechanism used by many individuals to meet short term and long term financial goals which range from retirement plans, wealth creation, buying a dream house or car and so on.

It is important you have a clear mental image of why you are stepping into this Crypto investment landscape and own it. There is no shame in going aggressively after money, there is no shame in going after a million dollar house.

By understanding what you plan to get out of this market, you can better make decisions on what you can accept, the type of investments you can, and the type of investment strategy that you might be willing to learn and implement.

Having a strong psychology is key and will help you weather tough times and losses that you might incur in your crypto investment journey.

Crypto Investment: Conclusion

Investing in the cryptocurrency market is a risky enterprise. An investor tries to beat the market by making an informed choice on which assets will bring gains within a projected period of time depending on the age of the investor, goal of the investment, income and risk tolerance level of the investor.

It is important to clearly state;

the investment goal,
examine your current financial status,
identify various venture to allocate funds,
select appropriate strategy to grow the investment and
regularly evaluate how well the investment is doing in achieving the goal.

These steps serve as guidelines to follow in your investment process. It is important for an investor to know when to buy or sell an asset to take advantage of market opportunities.