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Cryptocurrencies are famous for their extreme price volatility, in terms of both upside and downside.
I bought my first cryptocurrency in October, 2017. Since then, I have seen days when my cryptocurrency portfolio increased by 150% on a single day and then decreased by 50% the very next.
It takes a certain mindset, knowledge, and endurance to keep up with the world of digital currency, all of which I’ve experienced first hand.
So, in this article, we’ll discuss:
- If investing in cryptocurrency is right for you.
- Is your personality a good fit for cryptocurrency investing?
- Cryptocurrency investing strategies that will help you to establish your investment goals.
Cryptocurrency investing is like the wild-west of the investing world.
With that being said, cryptocurrency can be an excellent asset class to invest in. However, cryptocurrency investing is not for everyone.
You never want to regret an investment, so it's very important that you understand what you're getting into.
Cryptocurrency is very different from other investments like stocks, bonds, and real estate.
It's about as non-traditional as you can get. And with so many new faces entering the crypto investing space in 2022, you want to try and stay away from hope, and invest according to your goals.
Here's what you need to consider before spending any money on crypto.
1. Short-Term Volatility In Cryptocurrency
Wheninvesting in crypto,investors typically consider market changes that only last around 6-months to be short-term.
As cryptocurrency prices rise and fall very rapidly, any good news may have explosive effects on price to the upside, while any bad news may crash a coin to the ground.
This is because the cryptocurrency market is heavily influenced by pop-culture and certain figures in the community, which makes it a highly speculative asset.
These sudden shifts in market sentiment generally account for the shorter-term price volatility in cryptocurrencies.
For instance, I bought XRP coin (formerly the Ripple coin) last November with a substantial amount of my capital. XRP used to be the 3rd largest cryptocurrency in terms of market capitalization, after Bitcoin and Ethereum.
I invested in XRP at 50 cents per coin.
After about a 60% increase in price from the level I had bought, bad news suddenly hit the market stating that the U.S. Securities and Commissions Exchange (SEC) had filed a lawsuit against the owner company of XRP coin.
The company was charged with raising money through an unregistered digital asset securities offering.
This would officially classify XRP as a security and not as a cryptocurrency, which would abolish the primary use case of XRP and make it worthless.
There was panic and pandemonium among XRP investors. The XRP lawsuit was the talk of the town in the financial media.
XRP users stopped using the coin for payments and investors were exiting. The price of XRP fell from 80 cents to 20 cents in 10 days.
I could not stand against the negative sentiment anymore and I sold my XRP at 50 cents, at the same price that I had bought it.
This was typical Fear, Uncertainty, and Depression (“FUD”), a popular terminology used in the cryptocurrency community for negative sentiment.
The dust settled in the following months and the XRP company came to an agreement with the SEC.
The market eventually recovered and was hopeful again for the coin’s future. Only four months later, on April 15, 2021, the price per XRP reached $2.00 from 20 cents!
Due to the sharp volatility in the short-term, I missed a return of 300% to be realized in only 5 months.
I sold because I was afraid of losing too much money and allowed the cryptocurrency community around me to influence my investment decisions.
Little did I know that these types of price swings and news headlines are nothing new in the cryptocurrency world.
2. Long-Term Volatility in Cryptocurrency
Long-term volatility includes a time period of at least one year. Let’s for example take a look at the longer-term price volatility of the largest cryptocurrency, Bitcoin.
The price of Bitcoin rose from 6 cents, when it first debuted in August 2010, to 30 dollars by June 2011.
During its second uptrend, its price increased from $3 to $1,000 between November 2011 and November 2013.
Its third uptrend also took two years (from December 2015 to December 2017), where the price had skyrocketed from $350 to $20,000 per coin.
As you can see, Bitcoin did not follow a smooth road throughout these 3 uptrends.
It had recorded gains of up to 1000-2000% near the top of uptrends, but FUD followed the end of every trend, during which prices dropped by up to 93%. The average drop has been 85%.
Ethereum, the 2nd largest cryptocurrency in terms of market value, debuted in late 2015. Its price had an eye-watering increase from only about $1 in December 2015 all the way up to $1,400 by January 2018!
Following that peak, it also had its share of difficult days like Bitcoin. The Ethereum price hit as low as $83 in December 2018 and $86 in March 2020.
No matter what coin you invest in, there’s going to be major ups and downs. As an investor, you need to decide three things before you purchase a coin:
- What is my goal in buying the coin? (Do you want to sell it quickly or hold on to it for the long-term?)
- What is my top/bottom price? (If the coin reaches a certain low threshold, you sell, or, if it rises to a certain point, you sell.)
- What is my risk tolerance? (Can I handle the day-to-day maintenance of the cryptocurrency market or am I better off investing in a less volatile asset?)
But, before you can invest in any cryptocurrency, you’ll first need to decide if the crypto market is a good first for your personality.
Not every investment is right for everyone. And you need to understand who you are as an investor before you can have any success in any asset class.
Otherwise, you may end up losing some serious money, which may leave you afraid and discouraged to ever invest again.
Below is a list of scenarios that can help you decide if cryptocurrency investing is a good fit for your personal investing needs.
- If you are an emotional investor, cryptocurrency investing may not be for you. It is possible for any cryptocurrency to have a price volatility up to 30% per day and 70% per week during extreme times, so if you are prone to selling your investments quickly in panic and fear, you will likely miss the price action in larger time frames.
- If you are a perfectionist, cryptocurrency investing may again not be right for you. This is because you may always be on the hunt for the “next best thing.” Thus, you may not be able to hold onto your investment consistently.
In the first half of 2021, I unfortunately missed 10x-20x price hikes in dozens of cryptocurrencies because I had thought they were already expensive at the beginning of this year and I sold my portfolio in an effort to buy back cheaper later.
So, whenever you go to invest in a particular cryptocurrency, make sure you create a plan beforehand.
You can have the goal of selling that coin in a few months, but this is a predetermined strategy. It’s not something that you decide when something bigger and better comes along.
As we’ve seen, even the biggest and best coins can fall.
Not all of them do, but you’ll fall into the perpetual trap of buying and selling cryptos if you don't create a plan first.
Then, make sure you stick to that plan no matter what. You can always make small adjustments as time goes on, but if you find yourself changing strategies regularly, investing in crypto may not be right for you.
- If you have a personality that fears missing out on something, investing in crypto may not be right for you. This means you should never chase other coins that are surging in price.
You need to choose something and then be persistent with it.
If you try to fix one mistake (giving up to FUD or trying to perfectly time the market) by making another mistake (FOMOing into cryptocurrency), then you will not be able to survive easily amidst the volatility.
Such mistakes cost cheaper in more stable money markets, but in cryptocurrency, volatility will quickly evaporate your capital.
Additional Things to Consider Before Investing In Crypto
Whatever type of investor you want to be and whatever your investment plan is, persistence is what counts the most when sticking to your investment goals.
Keep these factors in kind when making a plan for your next cryptocurrency investment:
- If you invest in the most popular and most valuable cryptocurrencies, specifically Bitcoin and Ethereum, it will be relatively easier for you to preserve your persistence because the two have the lowest price volatility to tolerate compared to other coins. In other words, they are better suited for HODLing if you want to become a long-term investor.
- There is considerably more selling pressure on smaller coins on bad days, days when FUD dominates. With that being said, if you are looking to invest in a new, small cryptocurrency that you believe has great fundamentals, be prepared to lose your entire 10x, 100x profits during the falling periods. You are likely to even start making a loss, let alone losing all your profits so prepare your investment goals accordingly.
- If you have strong faith in the fundamentals of a cryptocurrency project, which you think has the potential to replace traditional currencies, then you could motivate yourself on this factor, invest your money, and then forget about it for a few years. You may one day find yourself making way higher returns than Bitcoin and Ethereum. Thus, the greater the risk, the greater the persistence required, and in the end, greater returns may be generated.
What To Consider Before Investing In Crypto – Final Thoughts
The cryptocurrency market rises and falls rapidly. I have experienced this first hand countless times and I can assure you that investing in cryptocurrency is not right for everyone.
However, cryptocurrency is an emerging asset, and can be a great place for both traders and long-term HODLers to make consistent gains.
So, in order to become a successful cryptocurrency investor, you’ll need to consider the following:
- Are you able to handle cryptocurrency volatility?
- Can you set and stick to a plan without chasing other “new-shiny” coins that emerge?
- Is the Fear Of Missing Out something that you can control?
- Can you be persistent in your goals?
Your success will be determined by your persistence and if you fail to satisfy multiple items above, then you may perform better by investing in another more traditional asset class, like stocks, commodities, or real estate.
With every trade and investment I make, I’m becoming a better cryptocurrency investor.
These digital assets are still so new to the investing world, that there’s a lot to figure out and a lot left to experience.
Whether you are a short-term or long-term investor, the world of cryptocurrency has something to offer to you.
And no matter what asset you decide to invest in, we’re all investors with the same goal: We’re trying to build wealth!
So, stay consistent and learn to manage any investing consequences both good and bad, and you may one day become the first cryptocurrency billionaire!