Eleanor Roosevelt once said: “Learn from the mistakes of others. You can’t live long enough to make them all yourself.”
I know it’s a bit cliché to say this, but these really are the tips we wish we learned before starting to invest in the explosive asset class of cryptocurrency. These tips can help you thrive in this promising (but tricky) emerging market.
We’re going to try to keep this short and sweet, but there’s a ton of lessons packed in here that we’ve learned in the trenches. Don’t hesitate to reach out and let us know what you think. By the way, not many people are talking about #4, #11, #22 and especially not #23…
1. No one has a magical “script” that can make you a millionaire.
Crypto can be lucrative, but it takes serious work and research. Tune out this type of noise. There are too many charlatans that simply got lucky by investing in Bitcoin early, and then they want to go on to sell their “expertise.”
At the end of the day, it’s all about whether you can get a sustainable information advantage, and that requires a systematic way to find, evaluate, and select coins. It requires a comprehensive research process that takes luck out of the equation as much as possible.
We strongly recommend turning and running from anyone who can promise you insane returns. No one can promise profits in any investment class, because there’s always risk involved.
2. Do your own due diligence.
Related to point #1. It’s a bit like the Wild West right now, and you’ll get picks from everyone under the sun. Fact check and take your time before investing.
Yes, we even recommend this tip when we give our own family and friends our own best picks. That’s because while we do our best to make our research as thorough and comprehensive as possible, every investor has their own strengths, weaknesses, and risk profiles.
Don’t fall into the hype and FOMO. Take your time and invest in your education first.
3. If it sounds too good to be true, then it probably is.
No one can guarantee returns. Any seasoned investor will tell you that reward and risk come hand-in-hand.
4. Preferential Economics:
Beginners should avoid ICOs. Most projects pre-sell tokens at a massive discount to close friends, advisors, and VCs. Then, many of those insiders then dump their positions into the ICO, causing the price to tank. The result? Insiders profit & average retail investors eat the losses.
5. Cryptocurrency =/= blockchain.
Blockchain is technology for decentralized ledger systems. Cryptocurrencies are tokens issued on a blockchain. Blockchain is a groundbreaking technology, but many tokens are utterly pointless.
Many respected investors disagree on whether cryptocurrencies really have a place in this economy, but it’s almost universally accepted the blockchain technology will have a huge impact on society. Therefore, when presented with an opportunity to invest in a coin, always ask the question:
Is a new coin (token) really necessary to solve this problem?
9 times out of 10, the answer will be “no.” However, it’s in those last 10% of the cases where the biggest profits often lie.
6. Five long-term fundamentals to value a crypto project:
This is a young market, and as a result, you’ll he a high amount of short-term volatility in the market. But trying to trade the short-term volatility is stressful, difficult, and time-consuming. Instead, we feel that it’s better to find projects that have the potential to grow 10X, 100X, or even 500X over several years.
There are 5 core fundamentals that drive the long-term value of a cryptocurrency.
- (1) The problem it’s trying to solve.
- (2) The leadership and developer team behind the project.
- (3) Its core technology.
- (4) The token rights conveyed to investors
- (5) The potential for “Super Dominance”
7. Problem
Always ask at least these 3 questions to weed out the hype:
- (a) Is this solving a real pain point?
- (b) Does blockchain offer a better solution than the current one?
- (c) Can I explain its purpose in plain English?
There are too many blockchain projects that are simply a “solution looking for a problem.” In other words, their technology looks cool and they have lofty promises, but they’re not solving any real problems.
8. Team
Evaluating the team thoroughly can be a time-consuming process, but here are 3 simple yet powerful heuristics to start with:
- (a) Look for bottom-heavy teams with more developers and fewer executives. If you look up the project on LinkedIn, you shouldn’t see that most of their employees are “directors” or “consultants.” Instead, most of them should be developers with software engineering / C.S. backgrounds.
- (b) Leadership should be 100% committed, with tokens vesting over many years. Avoid “serial entrepreneurs” who hop from fad to fad.
- (a) At least one person on the leadership team should have extensive experience and deep domain knowledge in the industry they are trying to tackle. For many blockchain projects, that domain would be financial services, but it could also be media, adTech, education, real estate, or anything else depending on the project.
9. Technology
Technology =/= whitepaper. Technology = working code.
Ask yourself: Is there a working prototype? Beta users? Functional test-net? Regularly updated Github?
Even if you don’t dig into the code base, there are still simple ways to see if there’s working technology. The easiest way is to simply become the end-user, and see if you can use the technology yourself.
If that’s not possible yet, then you at least know that the project hasn’t gone “live,” a signal you should either dig deeper or pass on it as an investment, at least when you’re just starting out.
10. Token Rights
Not all tokens are created equal. Some have utility, provide network access, or offer voting rights. But a surprisingly many have absolutely no purpose. Know what you’re buying.
Here’s a detailed explanation of token rights for blockchain projects.
11. Super Dominance
Network effects (i.e. more users => more value) mean there will only be 1-2 long-term winners in each problem space. Look for projects that have first-mover advantage, exclusive partnerships, or special technological moats.
This all comes back to something known as Metcalfe’s Law. Proposed by Robert Metcalfe, a successful venture capitalist from MIT, this law states that a network’s value grows exponentially relative to its user base.
The basic idea behind is simple: as more users join a network, that network becomes more enticing for additional users to join. For example, as more users join Facebook, Instagram, or any other social media platform, it becomes more enticing for their friends to join.
This relationship plays out in cryptocurrency as well, because the more people who accept and transact with a certain cryptocurrency, the more valuable it becomes.
12. Not all “crypto millionaires” are good investors.
I know I mentioned this above, but this is so important that I just want to reiterate it.
Many “crypto millionaires” just got lucky on a whim. Sure, some of them are genuinely smart and visionary investors, but having past success in cryptocurrencies is not by itself a good reason to trust someone blindly.
Always do your own due diligence, and when in doubt, return to the fundamentals!
13. Adoption is the biggest DIRECT long-term driver of price appreciation.
More users = more value. However, those 5 fundamentals (Problem, Team, Technology, Token Rights, and Super Dominance) drive adoption.
14. Don’t day trade.
In the short term, markets are swayed by FOMO (fear of missing out) and FUD (fear, uncertainty, doubt). You’ll sleep better and make much more profit by focusing on projects that have strong fundamentals for the long term.
Throughout all of our research, we’ve found repeatedly that the most successful investors are those who plan for multi-year holding horizons instead of trying to day-trade.
For example, many people know the story of the guy who bought two pizzas for 10,000 bitcoins back in 2010. Today, those bitcoins would be worth over $100 million. In the short term, volatility sways all boats. In the long term, bad projects sink and good projects survive.
15. Use small position sizes.
Crypto is a classic “asymmetric bet” (defined in Tip #22)… and you don’t need to invest more than you’re willing to lose.
That’s because the market is so volatile, yet the potential upside is so huge, that even small position sizes can produce generational wealth.
For example, here’s an asymmetric bet of $5000 on Ethereum from January, 2016. Less than 2 years later, that $5000 would’ve turned into $1.5 million.
Now, $5000 may or may not be a large amount for you. The point is not the actual number invested, but rather the huge multiple returned.
16. Staying Power > Short-Term Profits
We’re still very early in blockchain tech… The biggest gains will be in buying and holding for multi-year horizons. There will be boom and bust cycles, but the reality is that we are in the infancy of a globally disruptive technology.
Every year for the last 5 or 6 years, major media outlets have proclaimed Bitcoin to be “dead.” By now, it’s pretty clear that the average “tech journalist” with a bachelor’s degree and a couple years of writing experience has no idea what they’re talking about when it comes to investment advice… especially when it pertains to disruptive technologies. That’s not a sleight against any of them, but keep in mind that it’s their job to drive eyeballs and clicks… not to educate you on smart investing.
Our advice? Wait and see.
Look: no one can predict the future with 100% certainty, but there’s simply too much momentum in the space for it to go away. Leading VC’s in Silicon Valley have all gotten in, and Wall Street is short on their heels. So while there WILL definitely be dips and “crashes,” we truly believe the long-term potential growth of blockchain technology is too impressive to ignore.
17. “Free” is never truly free.
Be wary of social media influencers or newsletters that give “free picks.” You don’t know who’s really paying them to pump those coins…
The best example was the BitConnect craze. BitConnect is a crypto project that shut down in early 2018 after being outed as a Ponzi scheme… after it had already stolen millions of dollars from investors.
But here’s the thing. During the months preceding the exposure, popular YouTubers, newsletters, and blogs were all pumping it like crazy because BitConnect was paying them affiliate commissions behind the scenes.
The lesson is that you should never accept information from anyone who gets paid to promote a coin (or any other investment asset)!
18. Never store digital assets on an exchange.
They can be shut down, frozen, or hacked. Offline paper or hardware wallets are much safer.
19. Before making a large coin transfer (e.g. from exchange to wallet), send a tiny bit first.
This ensures the transaction is smooth, and that the addresses are all correct.
20. Install anti-virus and anti-malware.
Treat your computer as a castle and protect it at all costs. Some people have even bought a separate computer just for cryptocurrency that they don’t install anything else on. We’ve found the best balance between security and convenience is to install a premium anti-virus and use a hardware wallet to store coins.
21. Education > “Hot Picks”
Don’t just take “picks” from others, but seek to understand a coin at a core fundamental level. That’s why we never just present a coin + a buy-up-to price and leave it at that. We never bombard you with “URGENT BUY BUY BUY.”
That’s just a recipe for pump & dumps.
Instead, we walk through our exact thought process as we think about the team, the solution, and the technology. We are committed to making our content educational above all else. Even so… we still recommend investors to do their own due diligence, which is the same advice we give to our friends and family members.
Make the commitment to really learn this space, and don’t worry about “missing out.” Opportunities come and go, but this educational investment in yourself will pay dividends for the rest of your life.
22. Look for ASYMMETRIC bets.
That means investments with capped downsides and massive potential upside. You can often find asymmetric bets in emerging markets, breakthrough technologies, and niche markets that have not yet gained mainstream attention.
Many consider cryptocurrencies to be asymmetric bets because of how young the market it, and the potential for massive upside. However, that also means that crypto investments tend to be riskier, so we always use smaller position sizes relative to our overall portfolio.
23. (Most important!) Seek sustainable information advantages… not one-hit wonders.
Investing is an information game, and those who have better info will make better decisions… plain and simple.
Successful investors (especially those who can thrive in any type of market condition) will seek sustainable information advantages over the other traders participating in that market. Before investing a single dime in any asset, they first invest in their own education, in data, and in comprehensive research.
That’s also why we don’t believe it’s wise to be married to any one “style” of investing. You’ve gotta be adaptable, observant, and opportunistic.
Alright, that was a quick run-down of some very important nuggets of wisdom for crypto newbies. This was a short article, but it’s the product of years of experience and thousands of dollars made in past mistakes.
To get a much more in-depth guide to getting started in crypto investing, check our Ultimate Beginner’s Guide to Crypto Investing.