With falling returns on ICO investments and a decline in ICO fundraising from the start of the year, I believe that understanding the fundamental value of crypto assets enables us to make better mid to long-term investment decisions. A number of investors in the crypto asset space fail to pick a clear strategy, instead making impulsive and short-term moves in pursuit of profit. While this may be profitable in the short term, I'm confident that this approach will impede mid to long-term gains.
The majority of day traders lose money, but if you get the fundamentals right you can at least invest in crypto asset markets with confidence in place of hope.
When setting up your investment strategy, consider the following three steps in building your core portfolio. These steps should underpin your overall investment approach but not define it. Make sure to do your own research on every crypto asset that you choose to put in your portfolio. Let’s get started.
1. Outline your risk appetite and profit targets
Define your goals and understand how much risk you are willing to take on, how long you are willing to invest your money and how much profit do you hope to make. Once you’ve set these parameters it’s all about discipline. Remove at least part of your initial investment once profit targets have been met. This will protect your portfolio in case of a sudden and unforeseen drop in the markets (we have all seen it happen!). If you hold this capital in fiat currency or in a stablecoin then you have cash to invest when the market is down by 30 percent. Not only did you protect your initial investment but you actually increased your overall profits by offsetting a loss of in the rest of your portfolio.
2. Structure an investment portfolio
Decide the type of portfolio that you want to create. What sort of returns are you looking to get? How much risk are you willing to take on? Have you considered that a high-risk investment could swallow up every dollar that you put into it?
I suggest that you split your portfolio into three categories; long-term hold (low risk), medium-term hold (unstable), short-term hold (high risk). Whilst it’s tempting to go for the high-risk, high-reward approach, it is also the most likely to get you burned. For my portfolio I put 85 percent low-risk, 10 percent medium-risk and the remaining 5 percent in high-risk investments. Remember, the concept of risk here is relative. In reality, the whole crypto asset market is high in risk since it is largely unregulated and still in its nascent stages. If you are investing in crypto assets, consider also investing in other more stable fixed-income instruments.
3. Choose which types of crypto assets you want to invest in
As a rule of thumb look for some use cases of cryptocurrency that are close to your personal interests or business experiences. Whilst you may not fully understand the technology, staying close to home will allow you to evaluate the outcomes that a particular project is aiming for. Understand the difference between protocols and tokens. Protocols are their own native blockchains and support their own infrastructure; tokens are like applications that sit on top of protocols, they are limited by the infrastructure of the protocol they choose to run on.
Whilst crypto assets serve a number of different purposes, some of their main applications are as digital currencies; to track provenance in a supply chain; as platforms for centralized or decentralized exchanges; operating systems for decentralized applications; a location for storing digital contracts; and for tokenizing a micro-economy such as peer-to-peer energy trading.
Once you have chosen the categories, you can pick low-risk, medium-risk and high-risk coins within these categories. This is to say that you believe in the future of that sector and want to build a balanced investment approach within it. Make sure that you understand the product that you are investing in. If you don’t know what it is, why it has value or what is does, then don’t buy it.
During market volatility you can rely on a strong portfolio to earn solid returns over the medium to long term. ICO investing was extremely profitable in 2017 and may well present opportunities this year also. However, I firmly believe that the investment landscape is evolving. With ICO funding down 70 percent from its January 2018 peak and a significant amount of price appreciation already being factored into the latest ICOs, the best returns for second half of the year and beyond lie in a well-researched investment portfolio.