Recently, a friend of mine shared few ground rules that he follows in crypto-trading. Thought it will be beneficial if I share it with everyone.
Note: This is NOT an investment advice. Its a general guideline to help you navigate in the world of crypto.
1.Invest only what you can afford to lose: Even the most trusted markets in the word, like equities, had rocky couple of centuries. Its no surprise that the crypto-market will also go through a similar Wild West beginning. So invest only what you can afford to lose and it should be between 1-5% of your net-worth. And DO NOT borrow money to invest in cryptos .
2.Do Dollar-Cost averaging: Decide the amount you want to invest (ideally between 1-5% of your net-worth) and take a fraction of the amount & invest in a fixed regular period irrespective of crypto price. This commonly used technique which will help you average out the investment risk.
3. For God’s sake, read the white-paper: What gives a crypto value? To understand it, you must read its white-paper. White-paper should convince the users ‘why use a blockchain?’ and ‘what is the underlying utility value?’. (If you are a non-technical person then I strongly recommend reading all the crypto-essential reads which helped me.)
4. Don’t follow the crowd:
1. Don’t do FAD: Just because a random dude or friend of a friend suggest you to invest in a x-coin, doesn’t mean you should. Do your own research.
2. Don’t do FOMO: Just because a random dude or friend of a friend made a killing by investing in a x-coin, doesn’t mean you should. Do your own research. ( In short, Don’t be a lazy bum by not doing your own research. READ!!)
5. Calculate the Expected values: The definition of expected value is: the sum of all possible values for a random variable, each value multiplied by its probability of occurrence. The net expected value is positive. +EV is good indicator.
Suppose you are planning to invest $500 in Bitcoin. Let’s say, just for the sake of argument, the probability of bitcoin turning to $5 is 50% and there is 50% chance that the pay off is asymmetric, say 2x (x is the amount you invested).
50% * $450 = 225 (50% probability of losing $450)
50% * $1000 = 500 (50% probability of making 2x)
6. If you are wrong, admit it and move on: Everyone makes few investment mistakes here and there. If you’ve invested in the wrong project, accept your mistake & cut your loss early. Try to understand where you made the mistake. Did you fail to do your research? Did you get your macro or micro analysis wrong? Retrace, correct and sharpen your skills
7. Don’t be a sucker: If someones guarantees a fixed amount of returns by investing in their mining service or ICOs or any block-chain project, you need to shout “FRAUD” and run away from those scammers.