In 2011, a study by researchers at the University of California found that most individual investors perform worse than standard investment benchmarks.
Four psychotypes of individual investment
One of the main reasons for this was that people were trading emotionally rather than following a clear strategy. Simply put, if in the past they entered into a transaction that “gave pleasure”, they tried to repeat these actions, avoiding those that “caused pain”.
This has nothing to do with a well-designed investment strategy that will take into account elements such as investment results or factors that may affect the return on investment.
It is also impossible to choose a suitable investment strategy without analyzing the risk tolerance of crypto investors, i.e. the level or amount of capital they are willing to lose. These are just some of the many things to consider before entering the cryptocurrency market.
According to the CFA Institute, there are four main types of investor personality: cautious, methodical, spontaneous, and individualistic. These categories reflect the investor’s willingness to take risks.
- Cautious crypto investors are very sensitive to losses in the value of their portfolio. Their actions and decision-making are often driven by fear. In addition, it is difficult for them to develop a long-term strategy and use investment advice.
- Another type of crypto investor is methodical. These guys follow discipline, make decisions based on detailed facts, and don’t let emotions get the better of their strategy.
- Spontaneous people usually trade following their feelings, which can lead to risky investments (which they don’t always understand).
- Individualists tend to trust facts and their own market research, and they are also risk averse in general.
The strategy of crypto-investments
Let’s look at the main types of strategies for investing in cryptocurrency. And you need to start with this:
Calm down if you want to earn money
The first step to making money is to stop trying to earn it thoughtlessly. It hurts to miss out on profits, but missing out on profits is the only way to avoid losing money. Your goal is to calculate the timing of your asset allocation so that you have the least exposure to risk.
This is really invaluable advice, so make a plan and don’t make hasty investment decisions. Try not to worry so much, especially if you haven’t reached retirement age yet.
Buy gold (if possible)
Gold is immune to recessions, and so far it has been resilient to coronavirus crises as well. Very often, when other major asset classes fall, gold rises. A good hedge is to buy the largest and most popular gold ETF, SPDR Gold Shares (GLD). Buy gold in the form of cryptocurrency PAX Gold (PAXG).
The us dollar also boasts the attributes of a safe haven. Due to its role as the world’s reserve currency, it is liquid and in demand during recessions (at least for now).
Buy & hold (long-term investment)
The main way to minimize investment risks when working with cryptocurrencies is to form a basket of several coins and hold it for a long time. This allows the trader to balance risks and maximize the likelihood that the average portfolio value will increase over time.
Another advantage of this approach is that you do not need to constantly monitor currency rates and spend a lot of time analyzing the market. It is enough to check the prices periodically. The optimal investment period with this approach is 1-2 years.
Diversify your portfolio
Investing in a diversified portfolio is an ideal way to make a profit. However, it takes time and a lot of discipline to reap the harvest. This doesn’t happen so quickly, and applies to anyone who has the discipline to complete these tasks, regardless of your social status, demographics, nationality, etc.
Look for investments and exchanges with lower fees. Make sure you make your money work for you.Remember, always keep your long-term goal in mind
Exchange trading (short-term investments)
This strategy involves daily monitoring of exchange prices and conducting several transactions in the hope of making a profit from fluctuations in the value of coins. This way you can earn a regular income, but it will take a lot of time and knowledge.
The easiest way to reduce risk is to buy an ETF that rises when the underlying index it tracks falls. One of the most liquid short ETFs is the Proshares Ultrashort (QID), which trades on the Nasdaq 100 index. The Russell 2000 small cap index (TWM) is also quite popular in the bear market.
Watch out for divorces of crypto couples
According to Forbes, the number of divorces increases when the economy falls. And when pairs diverge, assets sometimes have to be liquidated quickly. For savvy investors, one person’s grief is another’s treasure.
The most sophisticated investment tool in the world of cryptocurrencies at the moment. According to CoinDesk, initial coin offering campaigns raised more than $ 5 billion in 2017, and in just three months of 2018, this threshold was crossed as startups raised $ 6.3 billion.
ICO investors face a lot of risks because they invest in a project that may be at the stage of an early idea, rather than a finished product. The token sale participant can only analyze publicly available information about the project and study its white paper, materials from the site, text and video reviews.
The risk of unsuccessful investment in such a scheme is quite high, since it is difficult for a layman to assess the prospects of a particular business.
Stablecoins are a repository for crypto investors to avoid volatility. If dollar deposits no longer bring any profit. By investing in stable coins, you can get a big profit from your assets.
How to match a person with cryptocurrency investments
Personality typing is an important investment tool. Financial advisors and Fund managers often use it to offer clients the best strategy that matches their thinking.
To determine this, they use special questionnaires that help study aspects such as the age and size of the current investment portfolio or profession. For example, it is believed that retired primary school teachers tend to fall into the group of cautious investors, architects and engineers are usually placed in the methodological group, while sellers are more spontaneous to invest.
So, before you start investing in cryptocurrencies, you should understand that it is extremely important to analyze your life experience, the factors that determine your decision-making process, career, and any financial experience that you have ever had. Once you have decided on your investment personality, it’s time to choose an individual investment strategy.
If the analysis shows that you can take more risk, then cryptocurrency trading may be for you. If you decide to enter the cryptocurrency market, you will need to choose exchanges to trade on. There are currently more than 200 crypto exchanges, so you will need to do more research to choose the best option. Usually, traders analyze the Commission, overall reliability, jurisdiction, and financial stability of the trading platform.
The latter is very important, since situations when crypto-traders lose their funds due to hacks and security breaches happen quite often. That’s why they try to choose exchanges that can offer insurance or have some kind of reserve Fund to cover expenses if something happens. For example, the Bithumb exchange, which was recently hacked, promised that it will fully compensate users from its Fund of $ 450 million.
If you are more interested in spontaneous investments and would like to support a promising ICO project, do not forget to prepare and conduct a comprehensive review of the project. Experts recommend that you analyze a number of factors, including the profiles of team members, market indicators presented in the official project document, and so on.
In the case of less risky users who prefer long-term investments, it is important to create a diversified portfolio of cryptocurrencies. Fiat money investors typically use benchmark indexes such as the S & P500 and Nasdaq Composite, as they make it easy to trade entire sectors and manage complex portfolios through simple investments, thereby reducing the risks and volatility of the portfolio.
Similar tools exist for the cryptocurrency market, for example, Cryptoindex 100 (CIX100). This is an automatic index calculated using a machine learning algorithm that analyzes cryptocurrencies. This tool allows traders to create complex portfolios of 100 coins with reduced volatility and risk. Thanks to automation, human influence is minimized. After creating a portfolio, a crypto investor can track coins from time to time through the platform’s specialized services.
You should never forget that the crypto market, with all its power and potential, is flooded with scammers. Measure seven times and cut once should be your motto. Start with small investments, because as the ancient wisdom says: “the Big way begins with the first step.”