8 Essential Questions You Need to Answer Before Investing in Cryptocurrencies
Answering these questions will allow you to define the best strategy for your profile.
You see more and more people around you talking about cryptocurrencies. You read many articles explaining that Bitcoin has been the most successful asset in the decade 2010.
The fact that Bitcoin turned $1 invested in 2010 into $90,000 by the end of 2019 clearly does not leave you indifferent.
As the year 2020 begins, you are starting to see articles about Bitcoin’s upcoming Halving which could mark the beginning of a very strong bull market for Bitcoin.
All this makes you want to get into the Bitcoin adventure but also into the cryptocurrency world. Before you start, I think it is important that you answer 8 essential questions in order to define the best strategy for your investor profile.
1. Do You See the Bitcoin and the Cryptocurrency Industry as a Revolution?
The first thing I invite you to ask yourself is what you really think about Bitcoin and cryptocurrency. For some people, Bitcoin is nothing more than a new investment tool that offers the hope of huge returns on investment.
Bitcoin is a multi-faceted revolution whose impact goes far beyond the world of finance alone.
Nevertheless, some people do not perceive it or do not try to give themselves the means to perceive it.
Personally, I see Bitcoin as a great opportunity to build a fairer world for all in the future.
Of course, this is only my opinion and you have the right to have a different opinion about Bitcoin.
The way you perceive Bitcoin and cryptocurrency in general will have a strong impact on how you will invest.
If you see Bitcoin as a revolution, you will probably be more inclined to support it in the long run by accumulating new Bitcoins regularly and keeping them warm without touching them.
How you position yourself in relation to Altcoins will also determine whether your strategy will be short, medium or long term oriented.
If for you, cryptocurrency and Bitcoin are just new financial assets, you will clearly not be in a long term strategy I guess.
You absolutely must answer this question before going any further.
2. How Will You Choose the Next Cryptocurrency You Invest In?
You may have noticed that the CoinMarketCap site references over 5,000 cryptocurrencies. At first glance, you may feel that it will be difficult to find your way around a large number of cryptocurrencies you could invest in.
In fact, 99 percent of all cryptocurrencies will tend towards zero in the future.
Only 1% of the cryptocurrencies currently listed on CoinMarketCap have a real future ahead of them.
Overall, only cryptocurrencies that address real-world user issues will have the ability to survive in the future.
You should therefore only invest in cryptocurrencies that respond to real problems.
This is an essential prerequisite.
After a quick mathematical calculation, you must have deduced that only 50 of the 5,000 existing cryptocurrencies have a real potential for the future.
The big question you have to answer for your investments is therefore how you will choose your investments among these 50 cryptocurrencies.
If Bitcoin is an obvious choice, some will then choose to bet on already established Altcoins while others will prefer to take more risks by betting on promising Altcoins but with fewer users for the moment.
Just as when you invest in the world of traditional finance, everything will depend on your risk aversion.
Only you can answer this question, but I wanted to make sure that you ask and answer it before going any further.
3. Do You Intend to Sell Your Cryptocurrencies As Soon as Their Price Has Reached a Peak?
First of all, I’ve asked you to ask yourself what you think about Bitcoin and the cryptocurrency industry. Your answer to this first question has already helped you determine whether you want to join in the long term or rather in the short/medium term.
Now, before buying a cryptocurrency, you need to define if you are ready to sell it when its price has reached a peak.
By answering this question in advance, you will have no hesitation if the time comes.
You will be able to make a quicker decision and maximize your profits.
4. What Sales Strategy Will You Adopt for Your Cryptocurrencies?
If you have answered yes to question 3, you have set out to sell your cryptocurrencies when their price reaches a peak. So you know that you are rather short-sighted.
You then need to define how you will sell your cryptocurrencies.
Some will opt for a full sale.
Others will opt for a gradual sale in order to eventually benefit from reaching a new peak in the future.
Those opting for a gradual sale will be more in line with the medium term.
You can also choose to sell everything and then bet on a dump of the price of this cryptocurrency before eventually buying it again.
The latter strategy is reserved for investors who are willing to take more risks and who can therefore potentially make higher profits.
Be careful to try this type of strategy only on cryptocurrencies with solid fundamentals, otherwise, they may never rise again.
5. What Are the Factors That Could Cause You to Immediately Sell All the Tokens of a Cryptocurrency You Own?
Making winning investments requires excellent control of the risk inherent in any investment. In order to better control the risk, you will have to anticipate different scenarios in order to prepare for them as well as possible.
You need to ask yourself what factors might cause you to immediately sell all the cryptocurrency tokens you own.
The factors can be multiple and you will determine them by studying the fundamentals of the project behind each cryptocurrency.
You can also identify factors that are external to the cryptocurrency industry but are specific to your personal situation.
For each of the factors you will identify, I advise you to prepare a plan of action you will implement.
This will allow you to react as quickly as possible by eliminating the loss of time inherent in any decision-making process.
When it comes to investing, acting quickly when you learn crucial information about a cryptocurrency can save you a lot of money.
So you need to be prepared.
6. What Is the Maximum Amount as a Percentage of Your Initial Investment That You Are Willing to Lose?
When it comes to financial investment, Warren Buffett knows a lot about it. His phenomenal success, which has lasted for more than 60 years, commands respect.
When Warren Buffett details these two golden rules of investing, all you have to do is listen.
Here are Warren Buffett’s two basic investment rules:
“Rule N°1: Never lose money. Rule N°2: Never forget rule N°1.”
— Warren Buffett
These two rules are really only one.
What Warren Buffett says is self-evident. Nevertheless, in some cases, you will lose money.
Losing money by investing happens to everyone.
In order to limit your losses, the best solution is to set in advance a threshold limit beyond which you will decide to say stop.
This threshold should be set before you even buy a cryptocurrency.
You will determine it by studying the fundamentals of a cryptocurrency as well as by doing a thorough technical analysis of its price evolution.
This will allow you to know when you have to exit the game.
In the heat of the moment, it will not always be possible for you to have enough distance to make this type of decision.
7. What Is Your Level of Confidence in Making Profits?
This question is essential and will help you avoid losing money. Before you invest in a cryptocurrency, you will need to determine your level of confidence in making a profit from the investment.
If you don’t feel that you can make big profits by investing in a cryptocurrency, you should avoid investing in this cryptocurrency.
It may sound radical, but it is the number one rule you must follow.
The market for Bitcoin and cryptocurrency is a young market. Such youthfulness implies great volatility.
You can make big profits but also incur heavy losses.
You shouldn’t take your investments lightly.
When investing in a cryptocurrency, you need to be convinced of its potential and that it will allow you to make big profits in the future.
8. Do You Follow Market News and Prices on a Daily Basis?
To conclude with these essential questions that you will need to ask yourself before investing in the cryptocurrency world, you need to decide whether you want to follow market news and cryptocurrency prices on a daily basis or not.
If you do not wish to follow the news of cryptocurrencies on a daily basis, you should favor medium and long term investments.
In fact, that’s what I do personally.
I prefer to adopt a medium/long term strategy in order to avoid having to look at cryptocurrency prices on a daily basis.
Some people prefer to do day trading with cryptocurrencies but it is something very time consuming and much riskier.
If you come into the cryptocurrency world for the first time, it is not something I would advise you to do.
Once you have gained experience with cryptocurrencies, you might want to consider it if you have a lot of time to devote to it.
Investments in Bitcoin and cryptocurrencies are very similar to investments in the traditional financial world. Before you make your first purchases of cryptocurrencies, you need to ask yourself the right questions.
These questions will help you to better understand your expectations.
You will know whether you want to support certain projects in which you particularly believe for the future or whether you see cryptocurrencies only as a financial investment.
By also determining the maximum percentage of capital loss you allow yourself or when you plan to sell a cryptocurrency, you will know whether you should favor a medium, short or long-term strategy.
In any case, don’t forget that investing in cryptocurrencies involves risks and that buying cryptocurrencies is a personal decision that only you can make.