Crypto Investing Is Easy

No, it isn’t. If it was, everyone would do it — and would be cruisin’ around in red Ferrars with “HODL” license plates. The crypto space is considered to have much higher upside potential than the traditional finance (TradFi) investing space of stocks, bonds, and exchange-traded funds (ETFs). However, it also has far more volatility — and downside risk. If you’re financially conservative by nature, crypto investing may not be right for you. 

Or, you may want to only place a very small percentage of your investments into crypto (1–2% of your overall portfolio for example). Others may feel comfortable placing much higher allocations into crypto. Let’s cover some additional errors that often happen with new investors within both the crypto and the wider investing space.

Avoid the Art of Panic Selling

In our previous piece, we covered how the fear of missing out (FOMO) on gains causes rushed investments into cryptos that are parabolically rising in price. In some ways, you could think of this FOMOing as “panic buying” in that you are simply buying without doing much – if any — planning, risk management, or research.

On the flip side of the crypto coin, we have panic selling. Panic selling is the practice of selling a crypto investment after a very modest price decrease. Oftentimes, this selling is also done after only holding the investment for a short period of time (think a week, a few days, a couple hours, or even a few minutes). Like FOMOing into a new investment, panic selling out of an investment is often done impulsively, emotionally, and without much thought.

For example, let’s revisit our previous FOMO example of bitcoin (BTC) hitting an all-time high (ATH) in 2017 of $20,000. As the price continued to move downwards towards $3,000 (before ultimately recovering and flying past $20,000 later on), many decided to cut their losses. While there are certainly legitimate reasons for selling (you think the project will never recover, you don’t understand BTC, you want to diversify, you want to sell and then rebuy again at a lower price point), panic selling is a whole different investing story.

If you bought at $20,000 and sold before $19,900 (or even $19,000), most would consider you a pro panic seller. Why? It’s because you obviously “panicked” after only a relatively small price decrease. Oftentimes, panic sellers are very risk averse. While they want the high-upside returns of alternative asset investments such as crypto, they can’t handle the volatility of the space (especially the downside volatility during price drops). When a new investor combines FOMO investing into crypto with panic selling out of it, they often compound their mistakes in a way that can be truly pecuniarily painful.

For this reason, having a plan in advance for how long you will hold an investment, at what price point you will sell for a loss (and why), and other key questions is wise. Otherwise, it’s easy for your mind to imagine a worse-case scenario that makes panic selling seem reasonable.

HODL Until the End of Time?

“(Insert name of trending coin/token) to the moon!” is a clichéd phrase on crypto twitter. This is often enthusiastically typed by memecoin investors that think their sub-$0.01 crypto is going to soar past $1 and head all the way to the moon — meaning a sky-high or actually, moon-high price explosion. While memecoins can appreciate in value substantially, many never take off — and actually end up dropping precipitously in value. This is because some are driven more off hype and marketing than having actual and sustained real-world utility.

HODLing — a memeworthy misspelling of “hold” from a viral post — is the art of holding over the long term despite massive price swings (such as BTC HODLers). While panic selling isn’t good, holding onto losing investments too long is also not ideal; you sometimes need to cut your losses when your investments aren’t panning out.

If you bought a bag of memecoins for $0.0078 each and the price drops to $0.00000423, you may have to consider if price recovery (to break even, profit, or even recoup some unrealized losses) is likely. If not, though painful, you should simply sell your investment to recover whatever you can — even if it is only a small fraction of your initial investment.

On the other hand, many new investors may continue to buy as the price decreases with the hope that it will eventually recover. As they continue to buy during the price freefall, they do get a better — or lower — average purchase price. If the price does eventually rebound, this isn't a bad idea. However, if the price never recovers, you’re simply throwing “good money after bad crypto.”

You may have heard of this as the sunken costs fallacy, where the costs (or losses) have already been incurred. You can’t simply recover these losses by buying more. If you fall for this fallacy, your $100 mistake could turn into a $1,000 mistake quite easily.

A good example is when TerraUSD (now TerraClassicUSD) lost its $1 peg and dropped to the floor. In this case, it wasn’t panic selling to sell for a loss — the panic was rightly justified. HODLing would have seen your $1 stablecoins drop to less than $0.01. As it currently stands, the price is still near the floor — with no signs of recovery in sight. In this case, selling for whatever you could get immediately ($0.70, $0.50, even $0.20) made a lot of sense.

While having a HODL mindset can prevent you from panic selling, you sometimes need to sell crypto investments for a loss to recover what you can. Being too resistant to selling losing investments can lead to steeper losses.

Should I Be a Crypto Maximalist?

A crypto maximalist is someone who only invests in one crypto project, with common iterations including BTC-only and ETH-only maximalists. This would be the TradFi equivalent of only buying one stock. Spoiler alert: a financial advisor would not recommend this strategy. That is why most investors in the legacy space get wide exposure into a number of companies and sectors by buying indexes like the S&P 500 or NASDAQ 100.

While the one stock or crypto you end up picking could explode in value, there is also a very good chance you could be wrong. Obviously, the disparate crypto maximalists can’t all be right. For this reason, you may want to hedge your risk by diversifying into a number of crypto projects.

While I (the author) admit that I have a few projects that I strongly believe in, I have to reckon with the possibility that some — or all — of my personal picks could end up being wrong. For that reason, I have diversified my crypto exposure into other assets that I’m less sure about — but that seem promising, have good future use cases, and are popular amongst other investors (based on market cap, trading volume, and other metrics).

While this means that I would end up with lower returns if all my favorite investments are spot on, I have also ostensibly reduced my risk by spreading my crypto investment portfolio into different protocols, use cases, and crypto niches. If you do choose to invest in just one project, be aware that your solitary pick needs to be right to make gains — and even then you could possibly get better returns by investing and diversifying into emergent projects. To do this simply, there are index tokens like DeFi Pulse Index (DPI) that allow you to get a portfolio of crypto projects focused on decentralized finance (DeFi) that is rebalanced on a monthly basis.

Understand Opportunity Costs

Evaluating opportunity costs is critical and most of us do this instinctually everyday. Opportunity costs refer to what you are missing out on when making a decision. This relates to how you invest — as well as how you spend your time. For example, if you are watching TV, you can’t use that time to exercise, hang out with friends, or learn a language or musical instrument. Essentially, opportunity costs refer to tradeoffs.

When it comes to crypto investing, it means that investing in one project means you can’t invest — or have less to invest — in other crypto projects. If you have $2,000 to invest in crypto and you put all of it into ether (ETH), the opportunity cost is that you can’t purchase other cryptos. This means that you could miss out on projects that may potentially rise faster than ETH. Even experienced crypto investors struggle with this. Here’s an example:

Let’s say that I see a new project that I think could explode by a factor of ten (or more) within two years. However, I don’t have more fiat currency to invest at the moment. In this case, I would have to sell an existing crypto from my current portfolio in order to fund the purchase. In this case, I’d need to weigh the opportunity costs of selling an existing position to make a new purchase. While I think this project is promising in the short term, I may decide against investing as I’d have to sell a percentage of an allocation I believe in over the long term. 

Is this future investment more risky than other existing assets that may only double in price (but seem to have less volatility)? Is this riskier asset worth the higher risk profile of seeing returns that outperform my existing portfolio? Is it better to avoid this risky asset and keep my existing portfolio? Maybe I even want to change my existing portfolio to be less risky by buying more large-cap cryptos, stablecoins, and perhaps even Pax gold (PAXG) in order to ride out what I think will be a bear market (before rebalancing to take on more risk during a bull market where this may align with my investing worldview).

Betting More Than You Can Afford To Lose

You may want to be cautious when entering the crypto investing world. When novice investors see appreciating prices, they often think about best case scenarios without considering some of the risks: “If I could potentially triple my $1,000 investment, wouldn’t it be better to invest $10,000 instead?”

While being too fearful leads to panic selling, being too greedy can lead to FOMO investing during price spikes and/or investing far more than you reasonably should. If you are counting on this money for critical needs (mortgage payment, retirement, emergency fund, and so on), you really shouldn’t be investing it in speculative assets like crypto. While they both entail risk, there is a clear distinction between gambling and investing. We’ll be covering how much to invest in crypto and how to manage this risk in more depth in a future article.

DYOR vs. Just Listen to Crypto Influencers

An acronym of do your own research, “DYOR” is a common response given to new investors who listened to the advice of other crypto investors and blamed them when their picks didn’t profitably pan out. Oftentimes, these tweets and videos may come from social media influencers who are financially invested in — or paid to promote — a specific crypto. With this in mind, you can’t be surprised that they are trying to convince others to purchase the same crypto in order to potentially sell their crypto holdings for more.

Even the most well-intentioned crypto investors who give advice don’t have a price-prediction-enabled crypto ball. For these reasons, it is recommended to at least do some cursory research on cryptos prior to purchasing them. This may include: learning about the crypto project (or blockchain in general), understanding its use case(s), understanding its tokenomics, and perhaps even trying to use fundamental and technical analysis to better predict future price movements.

In the future articles in the series, we’re going to leave the “don’t” arena and cover some of the “dos” that can help even crypto beginners make more informed — and perhaps better — investing decisions.

Disclaimer: This investing series is strictly for informational and entertainment purposes. It should not be construed as financial or investment advice. Do not invest based on price prediction tools or forecasts laid out in this series. Please consult an investing professional or financial planner if you feel you need investment guidance.

Cheat Sheet:

Investing in crypto (and other markets) isn’t typically simple or a risk-free endeavor.

To be avoided, panic selling often entails selling shortly after buying after a modest price decrease relative to your purchase price.

Holding losing investments too long is another common emotional investing mistake. Known as the sunken costs fallacy, it sometimes causes investors to double or triple down on a losing investment — creating bigger financial losses.

Like one-stock portfolios, crypto maximalists’ portfolios are considered more risky than a balanced crypto portfolio with a variety of coins and tokens.

Don’t invest more than you can afford to lose. That isn’t investing. That’s betting — and is akin to gambling at a casino.

DYOR can help you be a more knowledgeable and informed investor. The time invested in research can often pay financial dividends.