How to invest in cryptocurrencies smartly

Written by Faisal Khan ·  4 min read >

Over the past couple of weeks, a lot of friends, family, and associates have been asking me if they ought to invest in Bitcoin? Have they missed the boat? Is there still an opportunity to make money?

First, let us get something out of the way: I am not investment Oracle. Not even close. I can barely understand the world of investments myself. I too, like many other people, started investing and saving very late in life.

I am not qualified to dispense investment &/or savings related advice and neither are a large number of people out there advocating what to buy (or not).

How high will Bitcoin go? No one knows. I think it is fair to say, 99% of the trade happening in Bitcoin’s volume is for speculative purposes or investment (long -term).

Read also: This is how you can buy Bitcoin & Ethereum through Credit Card or Cash

Here are some rules you need to abide by if you’re thinking about investing, there are:

Rules for Investing in Crypto-Currencies.

  1. Be prepared to lose all your capital.
  2. Be prepared to lose all your money forever, if your wallet is hacked.
  3. Be prepared to lose all your money forever, if your wallet provider gets hacked.
  4. Be prepared to lose all your money forever, if you are tricked into sending money to someone else.
  5. Be prepared to be questioned by lawful authorities on the money that you have stored in cryptocurrencies.
  6. Trying to mask vast amounts of wealth for purposes of tax evasion &/or flight of capital will be unmasked. You’re not that smart. The LEAs (Law Enforcing Agencies) are a lot smarter.
  7. If you cannot show the origin of your capital or refuse to disclose your ID, expect trouble.
  8. The crypto-currency could be deemed illegal and cashing out becomes impossible.
  9. The crypto-currency could be a fraud and you can lose all your money in an instance.
  10. Do your homework. You must read up on what you are buying. If you don’t you’re an ass!
  11. If you decide to buy coins because you read an article or a friend or relative told you — you’re an ass!
  12. Whenever investing, do your homework. Go to YouTube, going to CoinDesk and Coin Telegraph and read articles. Ask around. Listen to podcasts, etc. DO YOUR HOMEWORK! Do not invest blindly.

Having gotten this out of the way, let us talk about investing in Bitcoin. This is an example how I would do it. Nothing else. I am not dispensing advice how you should do it. This is how I do it.

There is a LOT of information for and against Bitcoin out in the media. You will be convinced that Bitcoin is the instrument to invest in, and then as always, there will be articles telling you, Bitcoin is poison!

I did my own research earlier on, and I was okay with Point # 1 in investing in Bitcoin. If I lost the money, that was okay too! Only I was to be blamed.

There are tons of cryptocurrencies out there. The four currencies if you will that made/make sense to me are:

  • Bitcoin
  • Ethereum (Ethers)
  • Ripple (XRPs)
  • Litecoin

The newest one is ERC20 Tokens or other Non-ERC20 Tokens. Will speak about them separately.

Within the Bitcoin world, you now have TWO currencies. Bitcoin Classic and Bitcoin Cash. Think of United States splitting up into two countries and you might end up with the US Dollar Classic and the New United States Dollar. Same way, Bitcoin has two:

  • Bitcoin Classic, denoted by BTC
  • Bitcoin Cash, denoted by BCC

Ethereum is another currency so to speak. The currency’s name is “Ethers’. Ethers are used to power Ethereum blockchain or smarter contracts. There is a lot of fantastic work being done on Ethereum which puts the demand for Ethers high!

Ripple is another distributed ledger technology company that is aiming to change the way money is moved across the world. The Ripple solution uses something called “XRP” to move money within the Ripple ecosystem. Even this is being debated, but for now, we can assume that will be the case and the XRP’s value has slowly been rising. Just like to follow a stock and then bet on the price, the same way, I look at Ripple, study what they are doing and then make an investment if I feel confident in the management and what they are doing.

Litecoin is another currency that is almost as old as Bitcoin. Its price is heavily pegged to the price movement of Bitcoin. I have it — for no other reason that I was a very early investor in it. It is liquid enough, mined a lot and then exchanged for other crypto-currencies.

These are the four base currencies I invest and dabble in.

From a portfolio viewpoint, here is how I have it configured with the four base currencies:

  • 50% of the portfolio investment is in Bitcoin
  • 25% of the portfolio investment is in Ethereum (Ethers)
  • 15% of the portfolio investment is in Ripple (XRPs)
  • 10% of the portfolio investment is in Litecoin

The goal here is not to make mega money! Who wouldn’t like that? Of course, everyone would love that! The goal here is to make sure the money I have invested stays ahead of the curve, ahead of the traditional investment instruments (of which you should also invest in — more on that later in a different article).

If the US Dollar is losing its purchasing power or the Euro or Saudi Riyal, then what the heck do you invest in? Gold? Ummm, I don’t know about that, but crypto-currencies were a god send.

If you don’t get greedy and are able to exercise restraint and discipline, you can very comfortably attain a net positive portfolio that will have its performance better than existing investment instruments and general currencies and precious metals.

One year ago, Ethererum was priced at about $12. Today it is over $300. So, by that example, if you had invested US$ 1,000 one year ago, you would have US$ 25,000 today! That is astronomical by any standard. At US$ 300 people wonder if it is the right price to get in the action? The answer is — it depends! If you’re thinking there will be a repeat of x25 returns within the next 12 months — I dunno! It could happen. However, if you want to stay ahead of the general market, like get a 10% return, I think that could very easily happen, but then again, refer to Rules of Investing in Cryptocurrencies.

How much of your money should you invest in crypto currencies? I would say maybe a quarter or a third of your portfolio. Certainly no more!

In addition to the four somewhat dominant coins listed above, there are a lot of new coins (read cryptocurrencies) that keep coming out. There is IOTA, Dash, zCash, Stratis, Monera, etc. you will have to do your own research and decide if these are coins you want to take a position on. Buying a few will not hurt, provided you adhere to the Rules of Investing in Cryptocurrencies, as well as do your homework.

You will also recently read about something called ICO (Initial Coin Offering). ICOs are token or coins being issued for a very specific function. For some examples of successful ICOs are Tez0s, Filecoin, Everex, etc.

Investors have been pouring money into ICOs. Most of the money is speculative money, however, all astute investors know what the company stands for, what their solution means and what these token offerings are for, not to mention, understand the global and local regulatory laws under which the company might operate.

Play smart, invest carefully and remember, if you go in blind, expect the unexpected to happen.

The story originally appeared here and has been reproduced with permission.

Written by Faisal Khan
I provide an independent Banking & Payments Consulting and advisory services for banks & fintech companies. Most of my work is based on architecting payment networks, products and solutions for clients or doing product/idea validation. Profile