Crypto Investing for Beginners #2 – The basics

Good evening Cheapskates! In our last post, we talked about what a crypto currency is, where they came from and a little about what we think the future holds for crypto. Presumably you’ve read that and have decided crypto is right for you, fantastic!

In this post were going to cover some of the basics of crypto investing that you should consider before parting with your regular, old hat, fiat currency. It’s a long read, but totally worth it.

As always, the following is not financial advice, read our disclaimer

“Bitcoin will do to banks what email did to the postal industry”

– Rick Falkvinge

1. Don’t try and time the market

We start with a rule that may seem obvious to some and may not make any sense to others. Regular readers of cheapskate will know that we are pretty big supporters of the DCA method (dollar cost averaging). Essentially this means that regardless of price you will always invest at regular intervals (usually monthly). This way, regardless of what the market does, because you’re regularly investing, you’re likely to be paying the ‘average’ price.

“But hang on” I hear you say, “we don’t want to pay average, we want to buy low and sell high!”. Absolutely, it’s the old adage that anyone who knows about investing has heard. That’s called timing the market. HOWEVER, what they don’t tell you is – timing the market is notoriously hard to pull off. It’s well documented that the majority of professional wall street traders cant even beat the average gain of the S&P500 which is the benchmark for the average stock market yield year on year. We say treat your crypto investing like investing in stocks or commodities. Average gains of say 10% don’t seem huge in the short term, but a 10% gain on £1M is £100K. Nice.

So why can’t people time the market? Well, it’s all to do with human emotion and confirmation bias. We published an article HERE that goes some way to explaining this, but essentially humans are hard wired to think that the future is going to continue in the same way that recent events have played out. Market gone up for a whole month? Well then it’s likely to go up again tomorrow right? Wrong.

Not only that, people think they’re smarter than they are. For example – Elon Musk recently made a now infamous appearance on SNL. The entire Dogecoin community waited with bated breath for him to mention DOGE and send their coins to the moon and hit that elusive $1 mark (so each dogecoin would be worth equivalent to 1 US dollar). The problem is, clever people realise that most people would probably sell if it hit $1. So to beat the market, they thought they would sell at $0.9. But hang on, if those people are selling at $0.9 and potentially crash the price, then we should sell at $0.8 and beat the market right? You can see where this is going. From there on, the price is like dominoes. As soon as some people sell, it triggers more people to sell and that crash continues until it reaches a price where everyone is either comfortable to leave their investments or start buying more. In case you were wondering, DOGE didn’t hit $1, it topped out at $0.69 before crashing 30%. Would you have guessed $0.69 was the price to sell at?

2. Don’t dedicate your entire portfolio to Crypto

This should be a fairly obvious one, but we’re always surprised by how many people are putting pretty sizeable sums into crypto wallets without even understanding the basics of investing. If you haven’t already built a portfolio or hold no investments what so ever, we have published an investing for beginners’ series that we highly recommend you read before starting on your crypto journey. We think it’s absolutely essential to have a good understanding of yields, diversification, dividends, ISA’s, compounding and more so that you start investing the right way. Investing correctly requires discipline and the right mindset. We believe it is a life skill and a long term endeavour that will set you up for the remainder of your life if done correctly. Remember, we advocate INVESTING, not TRADING. What’s the difference? Investing is making money work for you. Trading is trying to make a quick buck.

How much of your portfolio you dedicate to crypto is an entirely personal thing. It really does depend on your risk tolerance, your age, your confidence and a whole host of other factors. However if you’re just starting out we would recommend no more than 5%, especially until you learn the ropes and find the right coins for you. This is a typical number you’ll hear and we feel it’s about right. Of course, as you become more familiar with the industry and get more confident in the future of your investments and choices, you may want to adjust that percentage (we know people that have 100% of their future investments in crypto!) but when you do, we like to use 1 rule:

How much of your portfolio could you afford to lose completely?

Make no bones about it, crypto is a risky investment. There’s no doubt it is becoming more mainstream and accepted and we think it’s pretty unlikely all coins will run to zero, but there’s no doubt that it holds much more risk than traditional equities. With great risk comes great rewards…….but also great risk. Would you bet your entire pension on crypto? Personally, we’re not there quite yet.

3. Pick the right trading platform

We’re going to make this nice and easy – we recommend choosing Binance as your platform for buying and investing crypto.

We get absolutely nothing out of promoting Binance but as cheapskates but we feel it’s our duty to recommend the platform we think is the best one. The reason we chose Binance as our trading platform of choice is three fold:

  • It is the worlds largest platform. While this doesn’t seem like an important one, it’s important to remember that crypto and specifically blockchain technology is a new thing. Being the largest platform means Binance have the most cash to invest into cutting edge security which we think its super important. Being the largest, they also have the largest range of coins to chose from.
  • Cheap Fees. Binance is one of the cheapest places around for trading fees, charging just 0.1% on trades. For comparison, Coinbase, which is the second largest platform charges up to 4% on trades (which is absolutely ridiculous)! There’s also no limit on amount and value of trades you can make and there are ways around the withdrawal fees. Binance wins hands down on value
  • Tons of features and services. you might think that because Binance charge a small fee, the app may be pretty basic. Well you’d be wrong. In fact, in our experience, we found that Binance offer – by a long way – the most features and services of any app. Some of the services we love are; Saving – where you can put your crypto coins into savings accounts and earn interest, and Staking; where you can use your coins to help other traders make transactions, earning you a tidy commission in the process. The problem here is that with so many features on offer, a beginner may feel overwhelmed with the app. There’s no doubt the Binance pro App has been designed for, well, Pro’s. However they do offer a ‘lite’ version which is great for getting familiar with their services. They also provide hours upon hours of training videos to help you through. We will be creating a Binance app review and how to article soon so stay tuned.

4. Understand your wallet

Your crypto assets will be kept in a wallet, just like a regular coin. Except this is a digital wallet for holding crypto currency. You might think that a crypto wallet stores money just like a USB stick – but that’s not exactly how it works. Your crypto wallet merely contains your unique address and the public and private keys that are used to record transactions you make on the network. When you acquire Bitcoin for example, your wallet is used to make a record on the public ledger that you own that particular bitcoin. This ledger is visible and counter checked by everyone on the network and can’t be duplicated or stolen. The bitcoin doesn’t actually live in your wallet.

So as you can imagine, ensuring the details of your wallet are secure is incredibly important – and you’d be right! When considering security, there’s 2 types of wallet you need to familiarise yourself with – Hot wallets and cold wallets.

In broad terms, a hot wallet is a wallet that is constantly connected to the internet, usually via some kind of online platform accessed through an app. Some examples of these types of wallets are trust wallet, or even the wallet you’re given as part of your Binance trading account. It’s widely accepted that hot wallets aren’t as secure as cold wallets because they’re constantly connected to the internet and with connectivity comes the risk for hacking. However, the big benefit of using a hot wallet is their ease of use. Your wallet is ready and available to trade at a moments notice.

A cold wallet on the other hand is as you’d expect – not connected to the internet and is usually some sort of device similar to a USB or a hard drive that you connect to your pc / internet only when you need to trade and transfer cryptocurrency. Because they aren’t constantly connected, it’s much more difficult for hackers to gain access to the information held on them, though they are much less convenient to use.

We are actually big fans of hot wallets for a couple reasons – one is that whilst your online wallet COULD be vulnerable to attack, crypto exchanges like Binance have industry leading security and hold the lions share of customers funds offline in cold wallets anyway. The other reason we like hot wallets is that they are one more step in making crypto mainstream. Because they are so convenient to set up and use, we think they will help drive widespread adoption eventually. We don’t envisage a future where everyone accesses their money through carrying a USB stick that needs connecting to a PC.

5. Pick your coins – the different types

OK now for the interesting bit. We talk more about specific crypto currencies, which ones we like and why we invest in them in the next article but here we talk about the different type of coins, some of the big ones and some of the things to be aware of before picking.

The types were going to cover are:

  • Bitcoin
  • Altcoins
  • Stable coins
  • Tokens

Bitcoin

The original, the only – bitcoin. The reason that bitcoin sits outside in it’s own category here is because it was the first and paved the way for every other crypto currency now in existence. We covered a lot of bitcoin origins in the last article and it’s still used today as the benchmark by how all other crypto currencies and the entire market is judged.

Altcoins

Altcoins get their name from being ‘alternative to bitcoin’, which basically means all other crypto currencies. Note though, that just because altcoins are considered to be alternatives to bitcoin, it doesn’t mean they are the same as bitcoin, or even that they have the same use or use the same technology. Many altcoins have been created to fulfil a specific purpose (like XRP – which is the native currency of a network designed specifically to serve the needs of financial services) or to try and improve on the bitcoin model (like BNB, that uses a ‘proof of stake’ method of verifying transaction, greatly reducing the energy required by the network).

Stable coins

One of the things holding back crypto currencies is that their price can be so volatile, its difficult to envisage them being used as a day to day currency to pay for goods. This is where stable coins come in. The idea behind stable coins is that they try to mirror the price of an existing currency or commodity, or are backed by them. For example, USDT, otherwise known as tether tried to maintain a price of 1 US dollar and every tether coin is backed by 1 real dollar (or equivalent of) which stabilises the price.

Tokens

Tokens are slightly different to coins in the fact that they do not have their own inherent block chain network, but instead are a derivative based on another block chain. For example, DAI is a popular token that uses the Ethereum block chain. Tokens, like some altcoins, have usually been designed with a specific purpose in mind. DAI for example is designed to be stable and allow is users to carry out borrowing and lending.

6. Remember that the price is likely going to be volatile

If you are getting into crypto, you’re probably already aware that the price of these digital currencies can fluctuate wildly (especially compared to more traditional investments like commodities or even stocks). If you had invested £1000 in bitcoin in Jun of 2016, you would have had over £100,000 at its peak in Apr of 2021. Not bad in 5 years. Not a day goes by where there isn’t a news story of someone making big money through investing in some unheard of cryptocurrency. HOWEVER, a word of warning. While the price can go up, it can also come down. The stories of crypto coins running to zero aren’t as publicised as the success stories. But trust us, it happens way more often than the news would have you believe. In fact, as of January 2021 over 1900 crypto currencies had failed and run to zero, which at the time was over a fifth. Yikes.

The takeaway here is – you need to know what you’re getting into. Don’t panic when things fluctuate and don’t invest more money than you can afford to lose. We wrote an article about FOMO here, which talks about how emotions lead to people losing money in the stock market and the same applies with crypto. More than likely, whatever coins you buy, they WILL crash in price pretty sharply at some point or another. Knowing that this can happen and keeping calm throughout will go a long way to ensuring you make the right decisions.

What we do

We like to treat crypto investing exactly like investing in the stock market. To learn how we invest in stocks, check out our GUIDE here, but the main tactics we employ are:

  • Diversify – don’t put all your eggs in one coin
  • Research – ensure you understand the coin and it’s potential future. Is the technology promising? How many coins are there in circulation?
  • DCA – dollar cost average, invest consistently and don’t try to time the market
  • Buy the dip – likewise, if the entire market crashes (like it did last week because Elon did a tweet), consider investing
  • De-risk – make crypto a small part of your portfolio, not the lions share.
  • HODL – don’t be tempted to sell when things look bad. Remember, losses are only realised when you sell.
  • Only invest what you can afford to lose.

Next Up…

Thanks for reading! Head on over to our investing section HERE to see what else we’re investing in.

Let us know your thoughts by leaving a comment below!

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