Blockchain Investing Guide
Welcome! In this guide I will show you some tricks and strategies in order to become a successful blockchain investor.
My name is Bitcoinx (@bitcoinx2 on Twitter), also known as Gandalf86 on Bitcointalk. I'm a computer scientist living in Germany, and started with blockchain investing in 2015. In this guide I will show you how to make lots of profit by investing in cryptocurrencies.
For a more basic introduction to the world of cryptocurrencies, check out the Crypto Intro Guide.
In this guide I will assume that you have some basic understanding of blockchain technologies. If you are completely new to all of this, you might want to educate yourself on the topic, first. Use Google, Youtube, whatever you like. If you come across a term you don't understand, write it down and look it up later. Here are some basic terms you should be familiar with: Bitcointalk (the forum), Coinmarketcap (the website), blockchain, Bitcoin, Ethereum, proof-of-work (PoW), proof-of-stake (PoS), mining, forging, market capitalization, exchanges (a type of website where you can trade coins), buy-low-sell-high, wallet (a piece of software), sat (satoshi) as a price unit, ANN (= announcement thread), OP (opening post of the ANN, sometimes also referred to simply as ANN), whale (someone who has a lot of money), troll, FUD (fear, uncertainty and doubt), price manipulation, pump and dump (PnD), scam / scammer, ICO (Initial coin offering).
This guide is about investing. The difference between trading and investing is that with trading, your approach is to buy and sell based on the price fluctuation of a coin. With investing, our approach is to buy and sell based on the value of a project. When trading, you make profit when the price rises. When investing, of course we also profit from a price increase, but we're aware that this price increase is based on the increase in value of the underlying project! So instead of just looking at the price, our decisions will be mostly based on the fundamentals of the project, and its potential to rise in value.
I found that value dictates the price on the long term, and evaluating the value of a project is a relatively accurate method, while trading based on price swings is completely speculative. Trading is more like sports betting, you might be right or wrong, depending on your luck. Investing is a rather long-term approach, the decisions we make will be well-thought and will depend on a lot of variables. In that regard, investing is more like Poker than sports betting, as our success will depend on probability, not on luck.
I'm aware that there are many people who still make continuous profit with trading, but this will not be the topic of this guide.
Generally, the higher the risk, the higher the reward. You need to be aware that investing in blockchain projects is rather risky way to invest your money. From the viewpoint of traditional banks, even investing is Bitcoin is considered as "highly speculative". The smaller a coin is, i.e. the lower the market cap, the more potential it has to rise. On the other hand, projects that have a low price are usually evaluated this low by the market for a reason, which means that the value of the project is low as well. So the smaller coins you invest in, the higher your risk is. But if one of these coins suddenly fixes its problems and becomes successful, you could become a millionaire within a few months. (We will therefore see later that the key to choose projects on is not that it has great solutions, but that it has great problems!, i.e. problems that have a high impact now, but have a high probability of being resolved in the future.)
When investing your money in blockchain projects, you need to be aware that it could result in complete loss. Never risk your life, health, or the well-being of your family on these things! Taking high risk out of desperation is a good way to get broke completely. You should have a certain base for security, like a daily job, someone who supports you etc., and only spend the money you can also afford to lose.
Another thing to take into account is diversification. That means to spread the risk across multiple projects. Now if you have found a project you are absolutely sure about, you can also put everything on one card. But unless you have visionary powers, you should (hopefully) not ever be 100% sure about anything. Generally, you should spread your money across multiple projects in some way, to cover the case that your intuition about one of them was wrong. Of course you can weight the money you spend on them depending of your impression of the risk/reward ratio, i.e. spend more money on projects which you think have the biggest potential to rise. I would recommend you to diversify across 2-5 different projects.
"Cap" in this context does not mean a hat, but is short for "capitalization". The market capitalization, which is a term that also exists in traditional stock investing, is generally defined as the number shares (or the current coin supply) multiplied with the price per share (or the price of one coin in our case).
In order to compare projects, we usually use the market cap and not the price, because the price depends on the coin supply:
So the higher the supply, the lower the price will be. This doesn't say anything about the total value of a project, so we always use the market cap to compare projects because it combines the information available about price and supply.
We can make a distinction between big projects, middle sized projects and small projects. For this guide, we will use the following definitions:
- Giant caps: Between Bitcoin and 1/100 of Bitcoin (above $628,000,000 USD).
- Large caps: Between 1/100 and 1/1000 of Bitcoin ($62,800,000 - $628,000,000 USD).
- Mid caps: Between 1/1,000 of Bitcoin and 1/10,000 of Bitcoin ($6,280,000 - $62,800,000)
- Small caps: Below 1/10,000 of Bitcoin (below $6 Million USD).
From an investment perspective, giant cap projects are completely uninteresting, because these kind of projects deal with enormous amounts of money that are impossible to predict. They don't have any serious problems that would still need to be solved, and their growth depends on variables that are outside of our control. The website CoinMarketCap is a great resource in order to compare projects based on their market cap.
Small cap projects usually have the best risk/reward ratio, if you find one that is promising enough for you to invest in.
Before we start thinking about which criteria identify good projects, we need a method to find them to begin with.
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One good source for finding new coins is CoinMarketCap. The problem here is that the list is quite extensive, so we need a method to further narrow down the possible choices. One way to do so is to go to the second or third page (or even further of course), where small cap projects are found, and look for interesting names. Having a good name is a good indicator for serious projects that have a true vision. You don't need to click on coins that are called "BigMac token" or nonsense like that. There is also a section called Recently added that is good for finding new projects. You should put it into your bookmarks.
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Another good source is the Bitcointalk forum. Join discussions that seem to be interesting or relevant to you. People will mention their favorite coins, which you can learn more about then. Don't go with the majority, also check out projects that are only mentioned once in the thread, it may be an unknown pearl!
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You can also enable notifications for new topics in the Announcement section of Bitcointalk. Through this, you will have kind of a high-frequency newsletter, with about 30-40 mails per day. You will probably want to create an email filter to have them delivered into a dedicated directory in your email client, or just use a dedicated email address for it.
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Another source is Reddit, where you have subreddits like r/CryptoCurrency, /r/CryptoCurrencies, /r/Altcoin etc. that you can subscribe to and read interesting discussions about various projects.
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Of course there are also a ton of other news pages, social media channels, Youtube channels etc. that can all serve as good information sources. You should try to find some sites that also cover small and new projects and not just the established ones. Personally I don't read any site on a regular basis right now.
Taking it together, finding the right project is also a matter of luck. Just keep your eyes and ears open and wake up when you read something that catches your interest. You shouldn't wake up too often though, most of it is nonsense or already too big.
Now comes the interesting part! ;) How do you identify a promising project when you're looking at it?
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Clear vision. If you are seeing dozens of terms you don't understand, that's not because you are too dumb and the project is too smart. Most likely, it is rather because the project is too complicated and doesn't have a clear vision. If someone has a really good idea of what he's talking, he will also be able to express it in simple terms. You can make this judgment after only 30 seconds of reading. If you don't understand anything on the first read, it's probably not worth your time. Note that this also depends on your knowledge and technical understanding, so by learning more about the tech, you will find more projects that you can understand. Understanding a project is critical in order for you to invest in it. That's one reason why I've never invested in Ethereum and everything that is based on it, because it was (and still is) too complex and too big for me.
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Something about it is unique. A project should have a unique selling point (USP). This can be a unique vision, a unique developer that nobody could replace, a unique technology, and so on. Just cloning other people's work and advertising itself as being a "fast, decentralized currency that does not depend on banks" etc. is not enough.
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It is relevant. Now this is a more complex point, because it depends on your personal opinion and intuition. A project that is about saving ant populations in Madagascar from being eaten by some other animal is probably not too interesting, even if its unique and easy to understand. You need to ask, will people actually need this? Who benefits from it? If there is a clear answer, that's a good sign.
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It is realistic. Thinking big is good, but don't leave planet earth please. If someone wants to revolutionize healthcare, empower truck drivers or launch a space shuttle that will fly to Venus, that's cool but probably won't happen. Until it becomes realistic, many other projects may have launched that want to do the same. Will your project be able to compete with future competitors? A project you choose should be realistic and doable right now. It should have a detailed roadmap that explains exactly what the next steps are.
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Good dev. In my experience, this is really important. The developer should be competent, experienced, publicly available, he should be open for suggestions, give competent answers and love what he is doing. If he is angry, doesn't communicate, makes spelling mistakes, talks nonsense etc. that's not something you should invest in. The dev is the most important person of the project, you are also investing in him!
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Good name. Sometimes, a name makes all the difference. For example, Bytecoin is a cool name because it is has a strong relationship with Bitcoin. It would have quite some value even if it would just be a clone of Bitcoin, simply for the name. The name makes the uniqueness.
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It should be undervalued. Small-cap projects are more easily undervalued than big projects, obviously. Compare the projects current state and its potential with other projects that do something similar. Does it provide any serious advantages compared to the "big players"? Which target group would be attracted by this new project? What would be its value when the roadmap gets fulfilled? If the current market cap is significantly lower than what you think it will be in the not-too-distant future, you may invest.
Nowadays, there are a lot of scam projects, which means that someone is trying to steal your money by making a fake project. To identify scams, it is best to try to think like a scammer. If you wanted to trick people to give you a lot of money, you would probably want to:
- have technology that sounds cool and complicated
- don't let people ask too many questions, or when they do give pseudo-answers that don't explain anything
- let everybody know about it, i.e. put a huge amount of effort on marketing and "looking good". Maybe have a fake company registered in London and some celebrity who backs you
- don't give too many technical details, make secrets, excuses why there can't be any details yet etc.
- ask for a lot of trust, e.g. by having an ICO without escrow
- use a newbie account on Bitcointalk so that your reputation doesn't suffer from it
- keep a large portion of the coin supply for yourself, e.g. by saving it for "future use" or refusing to burn remaining coins after the ICO, so you can sell them at some point and make big profit.
If most of these are a check, you should hold your money tight and run away as fast as you can.
Many projects these days start with a so-called ICO, which means initial coin offering: Before the project really starts, they make a blockchain, pre-mine coins on it and sell it to you. So that later when the projects becomes successful, you will profit (and if not, your money is gone). The rules for investing in ICOs are the same as when investing in other projects:
- A serious project will probably use an escrow and not collect money just for themselves. The release of funds should be tied to certain promises fulfilled by the project, and you personally should trust the escrow.
- If you invest in it, it should be undervalued, so if they already raised millions of dollars there is probably not too much to get for you any more. The value raised during ICO is the same as the "market cap" at the start of the project.
- You need to be aware what you are paying for. Don't spend money on promises, but on their plan, on the people who are doing it etc.
Now I want to go into further detail about what "undervalued" means. The price usually reflects a combination of the current value of a project, and its potential value (depending on how likely the market expects this potential value to become reality). So in order to decide that something is "undervalued", you need to be better at estimating the true value than the market does. The good news is that "the market" is a short-sighted, hysteric kid, so your chances of being better than it are not too bad if you use your brain for a second.
I want to discuss this step by step. The first market characteristic is "short-sighted". That means that the market weights the current value of a project too much, and the potential value too little. More specifically, if there are problems that have a big impact right now, but will not have a big long-term effect, that's good for us because it means that the project is probably undervalued. I call such problems "good problems", whereas problems that will have a big impact in the future are called "bad problems".
Good problems
Good problems are problems that are good for us, in the sense that they contribute to a project being undervalued because they are easily resolved or have a low effect on the long term. Typical such problems are:
- Interface bugs in the wallet. Note that the value you are purchasing is stored on the blockchain, not in the graphical wallet. If the wallet is unstable or has glitches, that's not a big deal as long as your funds are safe otherwise. Make sure to have backups of your private keys ready.
- No graphical wallet at all. This is a big entry barrier for most people. If you can work with a command-line interface wallet, you can expect the price to rise after the developers have added a GUI to it.
- Dead coin (No developer). If the project is promising otherwise and is already known to many people, and just doesn't have a dev at the moment, someone may pick it up in the future (or you could pick it up yourself in the future when you have enough money to pay a developer).
- No marketing efforts. This often leads to projects being undervalued, although it doesn't affect the inherent value of the project itself at all! As soon as there is some marketing (which you could maybe even organize yourself after investing in the coin), the price will probably increase if the project is great otherwise.
- Bad name. If the projects name is suboptimal, you can buy the coin and then suggest a name change. You should figure out beforehand if the devs are open for a name change in principle. Changing a name and ticker is relatively simple.
- Small exchanges. If the coin is not listed on Bittrex or Poloniex yet, that's a good thing because if the project itself is good, it will certainly get listed there in the future.
- Scam accusations. This is interesting because even if many people claim a project to be scam, that doesn't have to be the case. You have to build your own opinion, talk with the developer and then decide on your own.
Bad problems
Bad problems are problems that indicate serious issues with the project that won't be easily resolved.
- Bad dev. If the dev is really not that great, doesn't know what he is doing, is insulting other people, heavily censoring the ANN thread etc., that means that he probably has a bad character and will ruin the project on the long term.
- A lack of vision. If the project doesn't have a clear goal, is unrealistic or even a fun coin, it won't last long. Think long term. Something like "Trump Coin" or nonsense like that is nothing for serious investors.
This famous quote by Baron Rothschild also applies to blockchain investing. Let's say one of the "good problems" just kicked in, for example the dev announced that he will no longer continue the project. Then probably the market will panic and the price will crash hard. That's what I meant earlier when saying that the market is hysteric. In this case, when the fundamentals are still good, you might choose to invest. Think long term. Will the project recover from this? What would be possible solutions? How much does it actually affect the underlying value? If you come to the conclusion that the market is over-reacting, the coin may be temporarily undervalued until it recovers some day in the future.
This style of investing is extra risky and it may take a long time until the price recovers, if at all. So it is better if you don't need the profit right now and have a lot of time. So it is better suited for more experienced investors who have a lot of money. If you like this style of investing, you can watch the Gainers and Losers page on Coinmarketcap and research the reason for the price drop.
Now we're getting into the details of buying and selling.
Exchanges
Generally, you will want to have an account at all of the major exchanges, so you can react quickly if necessary, and get the best prices. It doesn't cost you anything. Just make a dedicated email address for it if you need to. Go to the coin page on Coinmarketcap, and select the exchange which has the biggest volume for your coin. If you don't have an account there yet, create one.
When to buy
You shouldn't buy after the price has just "pumped", which means that it had an increase of >100% in just a few days or a week. As I said before, the market is hysteric, but also in positive direction: When there is a steep price increase, many people will freak out and try to jump on the train, which means that short-term price increases always lead to (temporary) over-valuation. Wait until the price dropped by 25-50% of the top, then you can buy. For example, if the price went up from 2,000 to 10,000 in a few days, buy at a range of 5,000-7,500, but definitely not at the current price of 10,000. Research about why the price pumped, and how much that reason actually changes the value of the project. If you don't see any reason at all, don't buy at all. Wait until it has come down again.
Generally, in order to make big profit, you have to act earlier than the market. Buy before it starts pumping. The trick to know what will happen is to base your decisions on the fundamentals, instead of on market movements that already happened. If you find that the project is undervalued right now, buy before the market corrects it. You may have to wait a few hours or a few months, what matters is that your decision was right when you made it. Again, think long term. This is called value investing.
When to sell
Selling is a different topic. We have some possible intersection with trading here. There are two strategies, one is to buy and hold until you find that the max potential of the project has (mostly) been reached. That may take years. The other option is to trade using a certain percentage of your holdings, like 10%, and hold the rest. For example, after a short-term pump by magnitudes, you may feel like the market is over-reacting and sell some of your coins. You can then buy back after the price has calmed down a bit again, and increase your bag.
In Germany, income from blockchain trading has to be taxed, but only if the holding period is less than a year. So I'm going the middle way and buy and hold for one year, and then start paying out when the price peaks, and buy back if I feel that the max potential has not been reached yet. You may find a way that is appropriate for your personality and your personal situation.
By the way, this is also how we are contributing value to the world as investors. We are correcting the inefficiencies of the market, and by doing so, we become part of the (now more efficient) market ourselves.
There are two kinds of orders one can make, market orders and limit orders. Market order means that you are fulfilling existing orders, limit order means that you create a new (book) order yourself. None of them is better or worse, it depends on the urgency, and on the order book.
How to buy
Generally, you should have a goal about how many coins you want to own. My goal is usually 5% of the current coin supply, but if you have less money you could go for 1% or even 0.1% etc. This also serves as a motivation to look for coins that have a very low value yet, so we can reach our goal with the money that we have. Now if your goal is easily fulfilled by buying a few sell orders without driving up the price much, then you're lucky. On the other hand, if the market is really flat and there are almost no sell orders, buying a lot of coins can be more tricky.
You shouldn't be buying at higher than 150% of the current base price, otherwise your effect on the market will be too high. If you want to accumulate a coin that has a very low trading volume, your most important trading tool is time! Create a mid-sized limit order and wait. Check the market periodically for sell walls within reach, and take them when they appear. If you accumulate slowly like this, you shouldn't talk about the coin with other people much, in order to avoid other investors jumping in. Accumulating a low-volume coin can be a tedious task, but the reward is that if your intuition is right, you are accumulating a coin that is extremely undervalued right now.
Buying against a hysteric market is the most fun, because your orders will be filled quickly. If a coin is dumping hard, you can essentially buy as much as you like. In that case, you should split up your market buy orders and benefit from the panic by getting lower and lower prices. For example, split up the amount you want to invest into 10 parts, and then place buy orders at different prices, for example 10000, 9500, 9000, 8500 sat etc., up to where you expect the "bottom" of the current dump to be. In our case, our "buy sled" will end at 5000 sat, or 50% of the previous high of 10000.
("order book" view)
How to sell