Written by Rasha AlSharqawi
Investments in stocks and cryptocurrency are becoming increasingly prevalent among modern populations as a means to expand income and grow wealth that exceeds salaries and gig payments. Despite being relatively new, the cryptocurrency market is expected to soar beyond its current 130 billion dollars market cap in the coming years; this growth will be spurred on by the metaverse and the rising consumption of virtual products and experiences. That being said, investing in blockchain technology is no easy feat and everyone will want a piece of the pie, so how do you go about investing? Here are six tips on how to start planning your crypto investments.
1- Lay the Foundations
2- Outline your Constraints
3- Set your Goals
4- Research the Digital Currency
5- Know the Risks
6- Decide on an Action Strategy
1- Lay the Foundations
Read more about crypto wallets and exchanges here.
2- Outline Your Constraints
While constraints are considered obstacles in the journey of achievements, when investing they are a blessing in disguise. When you are able to outline your constraints, you represent a mature understanding of your personal situation, your financial capabilities and investment environment. Don’t be afraid of your constraints, embrace them and analyze them so that you are fully cognizant of the parameters you can move in. There are two types of constraints:
A- Internal constraints
These are parameters you set based on your preferences and capabilities and include your liquidity, and time horizon. By liquidity, I mean the amount of money you are willing and able to set aside for investing, which varies according to how much debts or financial responsibilities you have. It is generally advised that you invest between 20–30% of your income if you are able to cover your bills with 50% of it, and that you should invest after you cover your bills and necessities. Furthermore, considering the fluctuating nature of the cryptocurrency market, you should invest money you are willing to lose.
The second important personal constraint relates to how much you assign for your returns: your time horizon. Is there an impending need for your returns, are you looking to multiply your savings in 5 years or are you raising money for a trip next month? Do you want to invest long-term or short-term? Identify the timeline for your investments and their returns, doing so provides a clear framework and direction for your investing process.
You can identify other constraints such as personal agendas or principals that can deter you from a project, this is similar to when you choose not to invest in tobacco or alcohol companies. Remember that internal constraints are a mixture of your resources and your beliefs merging together to formulate a space in which you are free to invest in.
B- External constraints
These constraints are ones you have no control over but you need to take into consideration. Taxes and regulations make up a big portion of these limitations, banking procedures and fees are others that you need to consider. It is imperative that you learn and understand how your bank and government handles and translates crypto investments, which reflects on your taxes and income. The last thing you want is to receive a legal warning from your government requesting you pay a fine or claiming you are evading taxes. These legislations can also affect the time of a trade, how you approach investment opportunities, or how you go about investing. Bottom line, you need to have an understanding of the law in your home country so you can protect yourself and your assets.
3- Set a Goal
Like any journey you impart on, you need a destination, or if not a destination then a purpose. Similarly, you need a goal when investing to give you a direction or purpose to work towards. A goal will guide your decision-making process and ensure that the steps you take are leading towards your intended results. To make the most of your goals, phrase them clearly and succinctly, making sure they are SMART (Specific, Measurable, Achievable, Realistic, and Time-specific). An example of a good phrasing could be: ‘to double my income in the next coming year’ or ‘to create a steady second income that exceeds $3000’. Investing without a goal is like running in circles for an unlimited amount of time, don’t be that runner and decide on a destination!
4- Research the Digital Currency
This is one of the most important things you can do for yourself when investing. Do your research and don’t rely on others to give you intel on what’s up-and-coming or what they expect to be the next big thing. Much of what you find online is a hyped up version of reality, so make sure you know the following about any potential cryptocurrency you intend to invest in:
A- The Litepaper
A litepaper is a document that the developing team or founders of a cryptocurrency publish, and it should explain everything about a token. It contains information about the development team, how the token is used, why it was created, how it is distributed, and much more. While there is also a whitepaper which contains a more detailed explanation of the token and is more technical in nature, a litepaper provides a sufficient synopsis for an investor and can shed light on issues that hint at a scam.
B- The Team
A crypto project is as good as the team who creates it, it’s as simple as that. Learn the names of the team members working on the cryptocurrency, dig into them and their professional history, and validate this knowledge if possible. You might think this is a bit paranoid, but it’s not. Multiple scam projects were launched and thousands of people invested in them and lost their money afterwards; so learn from the mistakes of others.
C- The value of a cryptocurrency and its market
Simply put, every cryptocurrency was created for a purpose or as a solution to a problem. Learn this solution, analyze it, and then decide whether you are convinced enough with this solution to invest in it or not. The second part of this valuation process is to see if the value the market is placing on this token. There are cases where a token is undervalued, in which you will have to decide if you’re willing to take the risk on a project that is currently unrecognized. An undervalued cryptocurrency with a low price will probably take time to increase in value and therefore might be suited for a long-term investment rather than a short-term one.
Another way to assess the value of a token would be to understand how it can be utilized in the blockchain realm. Consider how the FLAN token is minted on the Celo blockchain and is based on the Ethereum blockchain. The Ethereum token allows for flexibility and multiple functionalities, allowing others to build on this chain and utilize it for new applications, as is the case of the FLAN token. In turn, this new functionality increases demand for Ethereum thus raising its value.
5- Know the Risks
Like any venture, a cryptocurrency investment contains risk. Risks for cryptocurrencies are not limited to market fluctuations and consumer behavior, they are also linked with crypto wallets, remembering where you wrote your private keys, security breaches on exchanges, and sending your tokens to the correct address. Crypto markets are relatively new with much left unregulated, or undiscovered; so be prepared to bend with the market and evolve with it. To sum up, the more risks you identify, the more equipped you are to deal with any fallouts and the more preventative measures you take to avoid these risks. Knowledge is power, and with crypto it’s no different, so know the risks and find ways to minimize them.
6- Decide on an Action Strategy
Once you’ve identified your risks, understood your constraints, and set a goal, it’s time to think about how you are going to achieve this goal and devise an action plan. Think of this action plan, or investment strategy, as your actions handbook, containing instructions on what to do, how to do it, and when to do it. Because strategies will differ depending on your token of choice and the time span you have for your goal, don’t be afraid to experiment with different strategies; however it is best to continue with one strategy once you’ve started acting on it.
Many argue that having a strategy to act by eliminates any kind of effect emotional turmoil creates during ups and downs in the market. While there are many investment strategies to act by, make sure you cover these main three points:
A- Investment time span
Time gives legitimacy to many of our decisions and therefore timing is everything when it comes to investing. The first determining factor for your strategies would be whether you are aiming for short-term goals or long-term goals; each of these time spans will steer you in a different direction and will therefore shape your assessment of a token and influence your investment. Risk is also directly correlated with time, since risk can be controlled over longer time spans; nevertheless, lower risks can mean lower return.
B- Market entry
If you have an annual budget for investing in crypto, then are you going to infiltrate the market with that entire budget at once or are you going to inject this money over a certain period of time at set intervals? Each approach has different ramifications and you will require different modes of action, given the fluctuating prices and risks. A lump sum can produce higher returns when invested in an undervalued cryptocurrency, whereas a regulated investment over a longer period of time can reduce the risk but miss spiking opportunities. Choose strategies that are compatible with your constraints and the risk level you are willing to take on.
C- Loss or return limits
Each investment has a tolerance threshold for you in terms of losses or earnings. What is the maximum loss you are willing to take on an investment? When would you sell an asset that is rising in value? Identify the upper and lower limits of these thresholds, and be clear about them. Almost all investment advisors recommend you keep your cool during a bearish market (when market value of a cryptocurrency drops) or bullish market (when market value of a cryptocurrency spikes). While this might not be the case, having a set plan of action for these times can prevent you from getting carried away and eliminate uncertainties or doubts that might take over.
I hope you find my tips useful and informative! If you have other tips on how to invest, share your thoughts with the FLAN community on discord, or email me at firstname.lastname@example.org! Stay updated with news about FLAN by following it on any of its social media pages: LinkedIn, Facebook, or Instagram.