The hype of the cryptocurrency investment markets, in particular Bitcoin, has been luring investors seeking high percentage returns. Within these digital currency asset class, certain cryptocurrencies have gone on to make as much as 3000% returns in a matter of weeks
Naturally, this degree of price inflation has transformed a handful of early investors into somewhat overnight millionaires. With any financial market investment, it is imperative to firstly understand the product itself and, most importantly, the underlying risks associated to it. At the turn of 2017, having seen a prodigious run of appreciation, headlines sprouted with many scrambling to get involved and take advantage of what looked to be easy money. However, early this year we saw a sharp depreciation in Bitcoin resulting in many of the early investors seeing profits deplete while late investors saw their initial investments decimate. Now, more than ever, investors are starting to deliberate as to whether it is a good time to invest.
At London Academy of Trading (LAT), we believe that education and information on cryptocurrency and blockchain technology have now become essential. This enables investors to be better equipped before committing to this relatively unknown asset class. As once quoted by the most recognised investor, Warren Buffet, “Never invest in something you don’t understand”. Get to know what you are getting involved in.
With that of cryptocurrencies and digital assets still being a relatively new world, there are some useful skills and basic information one should aim to master as quickly as possible.
When approaching this sector, there are some helpful learning outcomes to look for:
- Learn about the features of different cryptocurrencies
- Learn to read each project’s business plan (known as white papers)
- Understand the fundamentals and economics driving the underlying product
- Establish and quantify the risks involved and create an effective risk management system
To date, within the cryptomarket we have observed the text book herd mentality. Market participants are driven by euphoria, optimism and fear of missing out. The impulsiveness of the asset class is a result of low market liquidity. It is imperative not to let news or other people’s views influence your decisions. It is not uncommon to spot fake news and manipulated information on the internet and social media, therefore it is important to keep an eye on this and avoid irrational decisions which could lead to poor market timing.
As with all new developing markets in their early adoption stages, it’s easy to see significant volatility. The market is only beginning to understand the correct intrinsic value on the basis of supply and demand. The average daily volume of cryptocurrencies is $30bn, a fraction compared to the $5.6tn of global currencies, possibly leading to periods of illiquidity and sharp volatile moves, as we are seeing 20% gains or losses on a daily basis.
It also must be considered that the crypto market is still unregulated, so security of investment is an issue, with the security of the Prudential Regulation Authority (PRA) still inaccessible, should there be any issue with the broker.
Above all, the golden rule to investing is to invest only what you can afford to lose. Yes, we have seen large rewards, but with large rewards come large risks, and capital preservation is key. This means draw a line in the sand whereby if the market reaches that defined level you must concede the investment was wrong. Even the esteemed Mr Buffet loses money, as is reflected in his quote “We don’t have to be smarter than the rest of us, we have to be more disciplined than the rest of us”.
MSTA, CFTe is Market Analyst and Trading Mentor
London Academy of Trading (LAT)