How The Values of Traditional Investing Apply to Cryptocurrency – And How They Don’t

News, Opinion | April 17, 2019 By:

Cryptocurrency has opened up the world of investment to a fresh demographic. While stock trading is only available to the tailored suit, digital currencies are accessible to the common man.

Because of this, buying and mining cryptocurrency has created a brave new world for investment opportunities—as one blockchain innovator put it, “we’re already on the moon.”

Digital currencies are fundamentally different from other assets, but the values of traditional investing still apply in many ways. Let’s explore some ways that traditional and digital investing values align—and a few ways they don’t.

You Have to Believe

If you are going to invest (and potentially lose) your money, you need to believe in the company you are investing in. For traditional investors, this is what justifies the risk.

With any investment, it is important that you do your research, understand the investment space and trust the company. The same is true for cryptocurrency. Wise digital currency investors will research every coin option first. They will make sure that they understand the process and will be able to recognize the stark differences from traditional investing, (specifically in timeline and volatility).

Institutional investors believe in the values of the companies they invest in and trust the industry leaders. Traditional investors who have not done their research, make the mistake of gambling their money based on hype or misunderstanding. The same can be true of crypto investors. If you don’t understand the crypto market, or you don’t genuinely believe in the product, then don’t invest. Plain and simple.

Investors in digital currency need to invest not because of momentum or FOMO (fear of missing out), but because of real belief in value or utility.

Start Small and Diversify

The first rule of investment: only invest what you can afford to lose. So, once you’ve found a digital currency or ICO you believe in, start small.

Investing in cryptocurrency can be impulsive, so it’s important to remember traditional investing values. Inherently, investment involves some risk-taking, but it’s essential to be risk-averse where you can. Never greedy, always smart. And if you don’t have the money available, never go into debt for a chance investment. Just start with an amount you can afford.

Then, like any other asset, examine your digital holdings every quarter and re-allocate. Because of the huge volatility of cryptocurrency, rebalancing your portfolio is critical. The best investors are disciplined in order to maximize their risk-adjusted returns. Even crypto investors need self-control and to systematically rebalance in order to build a reasonable portfolio.

Investing in cryptocurrency can be a great way to diversify your assets. Remember though, that these digital assets will not behave the way your other assets behave—cryptocurrency technically doesn’t even behave like a currency—and you may need to re-evaluate and re-allocate on a more frequent basis.

As the saying goes, don’t put all (or too many) of your eggs in one basket.

Follow up on your Investments

Institutional investors are committed to buying and holding. Successful cryptocurrency investors have made this mantra their own. In fact, investors in cryptocurrency have gone as far as to create their own acronym for the practice—”HODL” or Hold On for Dear Life.

Investing depends on a commitment to long-term thinking and a long-term timeline. However, crypto markets are drastically different than traditional markets when it comes to timeline.

If you wanted to buy one Bitcoin in December 2016, it would have cost you about $781. One year later, it would have cost you $17,395 (or more). Give it another year and at the end of 2018, Bitcoin’s value dropped to $3,296.

The extreme volatility of crypto markets means that the value of your investment can change drastically—within a matter of minutes! Knowing this going in can help you have a better stomach for it, but doesn’t align with traditional investing.

In fact, traditional investing values tell you that the best investments don’t need to be monitored daily because they are solid companies with competitive advantages and strong leadership. Cryptocurrency doesn’t act like this at all.

Thus, we return to belief. If you are committed to the values of cryptocurrency, then such drastic changes in price won’t cause you to panic. If however, you aren’t sleeping at night, ask yourself why did you invest in the first place? Take the time to review your investment philosophy as it applies to cryptocurrency and check to see if anything has fundamentally changed.

And with any investment, follow up regularly—about once a month—and look out for any potential red flags.

Leave your Emotions Behind

A patient temperament is the secret to investment success. Some cryptocurrency investors share this value and are willing to optimistically look to a brighter future.

However, many digital currency investors have not been patient in the initial—which is why we’ve seen coin values dramatically decrease over the last year. Some crypto investors bought on a whim or because of FOMO and have not stuck around for the long haul. The impulsiveness that drove them to buy, also drives them to sell (and often lose thousands of dollars).

Smart investors will remember that the secret to great investing isn’t IQ or timing or wealth, it’s self control.

While traditional markets have investors, unfortunately, crypto markets have had many speculators. Emotional triggers lead to bad investment decisions and traditional investors know that they must keep their emotions in check and cling fast to their financial goals.

Some crypto fanatics have said that buying in is a kind of addiction, like playing your cards at a table. While this may satiate some investors appetite for risk, it is a dangerous investment strategy. The crypto investors who may see success are those who have self-control, belief in value and diversified assets.

Speculation never delivers on its promises—and the crypto bubble has burst. Markets are on the lookout for the greater fool, and traditional investors are not buying in.

Trust Traditional Values

If you are excited about investing in cryptocurrency, cling tight to that optimism—it’s something that is severely lacking in our day and age. However, consider instead repurposing that optimism into a productive investment strategy, rather than an impulsive investment strategy.

Research every digital currency or ICO option and find something that you truly believe in. Then, do the same with traditional stocks and securities, and again, invest in a company you understand and trust. Settle in for the long haul and monitor your investments regularly (but not too regularly). Compare the experience and find out for yourself how the rules of investing apply to digital and traditional assets.

Then, you can make the decision for yourself—is crypto investment worth it to you?