How to Invest in Crypto
Interested in dipping your toes into the exciting, sometimes mysterious world of cryptocurrency investing? Learn the lingo and secrets of the industry in this guest post from Coinrule, one of our portfolio teams that offers a special service for novice crypto investors.
The evolution of token economics
The last few years, we have been continuously hearing about the same refrain at almost every gathering of blockchain enthusiasts: ‘The revolution is coming! The era of obsolete financials institutions imposing unfair fees on innocent customers is finally over!’
Then real life came into play, regulators started getting involved and joined the conversation, driving the market towards unexpected pumps and terrible dumps (insider trading scams where investors collude to raise the value of the crypto asset and then sell it off to unsuspecting new buyers).
There were moments when you almost could see the symbols of the newly-released coins painted on the average hobbyist crypto investor’s eyes, with the symbol of the day changing frenetically depending on whatever coin was hot at the time.
Driven by greedy speculation, investors forgot about the fundamental analysis – and ultimately understanding the underlying technology behind crypto projects – that precedes an informed investment decision.
Fast forward a couple of years and a new typology of assets was created (and in some cases, duplicated) according to peculiar business cases.
Suddenly, the core, trust-building elements of cryptocurrencies – such as decentralization of data, the delegation of the consensus to digital protocols and the fast movement of virtual assets across interoperable systems – were put on hold. All this happened in favour of mere speculation driven by intense trading activities.
In an effort to differentiate themselves from these more speculative investment choices, the crypto-currency sector came up with the name of token economics, and a new jargon was created: tokenomics, tokenization (the art of creating tokens for one’s business use), etc.
The world became the shape of a coin, a flat circle by which one can exchange anything. After learning how to create value, the human race finally found a way to exchange it across cultural and physical borders.
To proceed with our explorations, let’s now see how a hobbyist crypto enthusiast can join the party and start investing in interesting tokenized projects by starting with a simple question: ‘What type of tokens are out there?’
Typology of Tokens
Many aspiring crypto investors get lost in the large amounts of crypto coins and tokens in the market. On Coinmarketcap alone there are over 2,500 separate projects listed. As a beginner, where do I even start?
It is important to understand that not every coin and token in the cryptocurrency world is created equal. There are different types of tokens, but these are the four most common types:
Currency tokens are designed to be used either for peer-to-peer based payment systems or as a Store-of-Value, similar to Gold. The most prominent example of a currency coin is Bitcoin and others include Litecoin, Bitcoin Cash, Decred and also ‘privacy-coins’ such as Monero or ZCash.
You have by now probably heard that Blockchain technology does not only power cryptocurrencies but can be used for many different use-cases. Often, those use cases will require computers connected to a specific Blockchain to run some computation, for example, to operate Smart Contracts. To pay for these computations, they use the so-called protocol coins such as Ethereum, EOS, Tezos and more. You can think of protocol coins as the ‘gas’ required to run computing on a specific Blockchain.
Utility tokens are designed for specific use-cases in applications built on Blockchains. You can think of them as the ‘flight-miles’ of the Blockchain world. Utility tokens give you the right to use a certain application, potentially to participate in some governance of the Blockchain in question or to receive other benefits, such as priority access to additional platform functionalities. Utility tokens do not exist independently of the ‘parent’ Blockchain on which they run. For instance, the Basic Attention Token runs on the Ethereum Blockchain and is connected to a Browser application called Brave, while Filecoin is built on IPFS and gives holders access to file storage.
Security tokens are a not-yet widespread class of tokens, but they carry a major promise. While other coins and tokens only represent a value recorded ‘on-the-chain’, a security token is tied to a real-world asset, be it legally-secured equity in a company, a company’s revenue-stream or dividend payments. Security tokens are an extremely exciting new asset class as they can combine the advantages of using Blockchains, such as easy transferability, security and liquidity, with some form of legal rights as normally attached to ‘traditional’ assets such as stocks, real estate and so on. Some examples of security tokens are tZERO, Nexo and the Spectre-Dividend Token.
Research Before You Buy
Even if you are investing a smaller amount, you should always do your research before investing. Here are some of the typical techniques investors use to help them make decisions about their investments.
A good starting point is to understand a project’s fundamentals. Here are some questions you should be looking into:
- Who are the founders and developers behind the project?
- What use-cases is it trying to solve?
- What are the levels of adoption? Is anyone using it already?
- Is there a strong community or solid partners behind the project?
Maybe most importantly and crypto-specifically, you need to get at least an idea of the so-called “tokeneconomics.” A project might be ticking all the right boxes, but keep in mind that you are not buying equity, you are buying a coin or token that is in some way connected to a project. Think carefully about the price incentives built-in. Why should anyone be holding the project’s coin? Is there a clear use-case for future adopters to be buying and holding the coin which would, in turn, drive up its value? If not, you should probably stay away.
Some of the more active traders use charts and technical analysis indicators such as Moving Averages (MA) or Relative Strength Index (RSI) to predict short-term price movements. There is a lively debate going on between those who ‘believe’ in the power of technical analysis to predict price movements and those who consider it ‘Black Magic’. However, technical analysis can easily become a self-fulfilling prophecy. If enough traders look at charts and take action based on their technical analysis, the markets will move in line with it.
Unless you are looking to trade very actively, as a beginner, you should focus on the basics of fundamental analysis first.
The cryptocurrency industry is packed with groups, communities, Twitter discussions and YouTube channels, all full of investors looking for the latest market developments and updates. You might want to start by following some of the projects you are interested in on Twitter and Reddit. If you are looking for a group to join where you can ask questions and get help quickly, Coinrule’s Trader Community on Telegram is a safe place to start.
Traditional financial market players look at an asset that loses >80% of its value as essentially dead. Yet, as any crypto trader knows, Bitcoin survived such drops 3 times. At a time when traditional financial markets are entering a tumultuous period, Bitcoin has proven its resilience.
It is therefore not entirely surprising that the operator of the New York Stock Exchange, Intercontinental Exchange, is launching a platform name Bakkt, for physical delivery Bitcoin futures contracts. These are futures that are actually backed by underlying Bitcoins. Regulated and run by a well-respected operator, this is opening the door for very large institutional investors.
In related news, Fidelity Investments, a large Asset Manager with 2.46 trillion USD of Assets Under Management, launched a new branch to operate a full-service, enterprise-grade platform for securing, trading, and servicing investments in digital assets.
Is now a good time to invest in Cryptocurrencies? We leave the decision to you!
How to get started
Are you getting excited and feeling more confident in your abilities to navigate this market? If you decide to join the party, here are the three last recommendations for you:
- Open an account on Coinbase to buy your first Cryptos with your Dollars/Euros/Pounds or other ‘Fiat Currencies’ and Start reading the main crypto sources online, such as Bitcoin Developer Jameson Lopps’s resource library and to follow the discussions on Reddit, the crypto enthusiasts’ best friend.
- Remember to invest only in projects you understand. One of the common misunderstandings is that the technology behind cryptocurrencies is rocket science. Well it is not, otherwise, that tech would be used for building rockets, isn’t it?
- Invest only an amount you would be okay to lose. Bonus-points if you are looking to automate some of your investing and trading – then try out Coinrule!
Now the last step left for you is to press that Buy button and hope for the best, but don’t worry, sit back, wait a few years and relax… Blockchain is here to stay.