7 Rules for Investing in Cryptocurrency

Stephen McBride  |

 

Photo: Jeremy Bezanger | Unsplash
 

Crypto has a history of rewarding long-term investors who have conviction in its world-changing potential. On the other hand, it tends to punish investors with “weak hands”—those looking to make a quick buck who can’t or won’t stay invested through volatile periods. That’s why...

Rule No. 1 in crypto is: Embrace the volatility.

Throughout history, early-stage assets have gone through huge booms and busts. The first 120 years of the U.S. stock market are littered with panics and crashes. Railroads, canals, oil, automobiles, and the internet were all extremely volatile when they were young industries. They rewarded early investors with 10X - 100X their money. This won’t be the last crypto bust. You can’t get 20X gains in two years without big sell-offs too. 

Rule No. 2: Accept you’ll be underwater at times.

I’ve been in crypto long enough to witness a few cycles. Those ups and downs have thickened my skin over the years. If you’re used to investing in the stock market where 50% sell-offs are rare and 70% sell-offs almost never happen—crypto is a shock to the system. Know that every crypto veteran has had their hat handed to them multiple times. You can get beat up, you can get knocked down, but to succeed, you have to get up and go again. When prices hit record highs late last year, the world marveled at how much money crypto investors were making. In the past few months, we’ve seen the other side of that.

Rule No. 3: Be optimistic.

Be prepared to read tons of negative crypto headlines. They’re nothing new. Folks have been writing off crypto since the beginning. Hundreds of “Bitcoin is dead” articles have been published since 2011. The history of technology is the history of people saying, “This will never work.” It happened with the horseless carriage (car), airplane, internet, and the iPhone. In short, humans are hardwired to be pessimistic. The skeptic who talks about what could go wrong sounds intelligent. He sounds smarter than the oblivious optimist. That’s why you see so many gloomy Wall Street analysts on CNBC. Being optimistic isn’t the same as being naïve. As Nat Friedman, CEO of software firm GitHub, said, “Pessimists sound smart. Optimists make money.”

Rule No. 4: Remember that you make most of your money in bear markets.

Famed value investor Shelby Davis once said, “You make most of your money in a bear market; you just don’t realize it at the time.” Thousands of millionaires were made during the last crypto bear market. These are the folks who bought bitcoin, Ethereum, and other cryptos at depressed levels when all the tourists had left. I’m extremely confident this will happen again. Remember, all previous crypto bear markets had one thing in common: They ended with crypto going on to make new record highs.

Rule No. 5: Correct position sizing is key.

Investors should only allocate a small portion of their portfolios to crypto. One to two percent is a good target. Five percent is pushing the limit. Generally, you should invest less in crypto than you think you should. That sounds strange coming from “the crypto guy,” someone who’s bet their career on this technology. But correct position sizing is key to surviving and staying invested through crypto booms and busts. 

The biggest risk to most investors is they buy too much crypto, freak out when prices fall, and panic-sell near the bottom. I know folks who bought bitcoin as early as 2013 but own almost no crypto today because they were overexposed and pressured to sell. All they had to do was sit tight and they’d be multi-millionaires. But they couldn’t do it… because they owned too much crypto. If you believe crypto and blockchain tech will transform the world (like I do), you only need to own a little bit to make a big difference in your financial life.

Rule No. 6: You must stick around during the tough times.

The other day, someone asked me, “Isn’t it better to ignore crypto when prices are falling and jump back in during the next bull run?” You never know when prices have bottomed or when the next bull run is starting. More important, only investors who stick around during the tough times have the conviction to buy quality tokens when they’re 90%+ off their highs. 

Crypto innovation happens at a lightning-quick pace. Hundreds of new crypto businesses are being created every day. If you step away for even a month, you’ll be several steps behind. It’s like a pro NFL player saying he’ll stop training for a month and play a full game on his first day back. It won’t end well. Most investors I know who made incredible gains in the last bull run stayed and kept learning during the 2018 bear market. The folks who left and came back missed a year’s worth of “earned secrets”… and failed to catch the big winners.

Rule No. 7: Think like a venture capitalist.

Venture capital has been the envy of the investing world. According to Cambridge Associates and Invesco, top VC funds have beaten the S&P 500 by 1,100% per year for two decades running. VCs cut checks to startups with the goal of profiting in a decade when or if the company IPOs. They’re willing to wait 10 years for transformational gains. It’s no coincidence investors with the most patience are also the best performers.

Most crypto businesses are the equivalent of early-stage startups. The big difference is crypto “startups” have tokens that trade 24/7. Whereas traditional startups are private, and you can’t buy or sell them. To be a successful crypto investor, you must drown out the day-to-day price moves and think like a VC. Crypto is a long-term investment. Be patient and have a long-term view. When you zoom out five years from now, these day-to-day price fluctuations won’t matter.

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Stock price data is provided by IEX Cloud on a 15-minute delayed basis. Chart price data is provided by TradingView on a 15-minute delayed basis.

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