It’s absolutely a wise step you have taken toward gaining relevant knowledge about crypto investment. Here I’ll unravel the relevant information about the blockchain industry that can change your life forever. You’ll surely learn about some crypto topics, how crypto technology works, and how you can trade crypto assets profitably.
Blockchain and сryptocurrencies
Blockchain is a database popularly known as a decentralized ledger for cryptocurrency transactions. To date, the real identity of its inventor has remained unknown, but the honor of its creation is accredited to the pseudonym Satoshi Nakamoto. One incredible thing is that on only one blockchain are all the world’s Bitcoin transactions. Nonetheless, each blockchain features a similar special set of skills.
Blockchain, as a decentralized system, allows a number of independent individuals to work unanimously, perpetuating the network. Besides, data stored in a blockchain is unchangeable. Moreover, blockchain technology, driven by cryptography, is characterized by immutability and uncensorability, meaning that its transactions are unforgeable.
Many a time, people often use the terms blockchain and cryptocurrency interchangeably. Nevertheless, they are different. On the one hand, cryptocurrency is simply a digital asset that uses blockchain as a leger for crypto transaction record storage. On the other hand, blockchain comes with numerous uses that supersede cryptocurrency. It is used to store and access financial records, logistic information, supply chain, and medical data.
Some notable crypto assets include Bitcoin, Ethereum, Altcoin, and Stablecoins. Based on how many individuals perceive the world’s centralized fiat financial system, it is claimed that cryptocurrency will be the future of the financial market. Notably, cryptocurrency is born out of the idea of providing a solution to the rising crisis in the global economy. And based on the decentralized nature and finite supply of digital currency, the centralized financial systems will be perfectly improved.
The use and storage of cryptocurrencies
To use and store cryptocurrencies, you need to buy them first. So how can you buy cryptocurrencies? The digital assets are available on cryptocurrency exchanges or any secure sites that support the buying and selling of crypto. Precisely, the three major types of crypto exchanges are fiat on-ramps and gateways, crypto-to-crypto exchanges, and peer-to-peer exchanges. I will recommend that you opt for fiat on-ramps and gateway as they are characteristically easy to use, quick to set, and safer compared to any P2P exchange. Some popular fiat on-ramps include Binance, Coinbase, and Kraken.
After successfully purchasing your digital assets, how can you then store, send, and receive them? You store crypto in a cryptocurrency wallet. This wallet is software that helps keep private (like your email password to access your wallet and confirm your payment) and public (a kind of email address) keys for transacting crypto. The three distinct categories of crypto wallets are software, hardware, and paper. Software wallets can be desktop, mobile, or online. Some popular and leading crypto wallets you should know about include Ledger Nano, Trezor, and Trust Wallet.
What are the use cases for crypto? Crypto is great for low-cost money transfers, storing values (wealth), investments, anonymity (privacy), non-cash remittances, incentivized rewards & payments, traveling around the world, payments, and shopping.
How to secure your crypto from hackers
As a crypto investor, one of the essential steps you need to take is to protect your crypto assets. A Crypto account can easily spell disaster when it gets compromised. There are different types of cyber-attack you need to protect yourself against. The common ones include exchange hacks, phishing attacks, social engineering, network hacks, and phone hacks.
To avoid being hacked, there are several crucial steps you should take. These include:
- Use an end-to-end encrypted email that is separate from your primary address and not connected to anything associated with your work or personal life.
- Avoid two-factor authentication by SMS.
- Use a secure domain name system (DNS).
- Install the AdBlock browser extension.
- Avoid clicking links to unfamiliar websites or those that seem dodgy.
- Educating employees at corporations on how to prevent social engineering-related situations.
- Protect the answers to your personal security questions online.
- Carry out adequate risk assessments to prevent leaks.
- Be wary of third-party vendors that hold large volumes of data for multiple companies.
- Use VPN on public internet connections.
- Get a firewall with Deep Packet Inspection (DPI).
- Call your provider from a different phone in case of SIM swaps.
- Back up your wallet early and often.
- Keep your applications up to date and run the latest versions.
- Adopt a multi-signature security system.
- Whitelist your Nano Ledger addresses.
Value investing and a benchmark
Value investing is purchasing high-quality assets when they are cheap. In other words, it is about whether an asset seems cheap or expensive. A benchmark is a price-earnings (PEs) ratio that typically ranges between 5 and 100. The specific calculation here is the price per share divided by estimated earnings per share two years from now.
Are you curious to know when famous value investors buy and sell? Famous value investors such as (Warren Buffet) buy when a high-quality asset is cheap (during a crisis or recession) and sell if the asset changes in character and becomes expensive. For Bitcoin, you can value invest simply by being creative and inventing your own metric or combination of patterns. Generally, you can value invest in crypto by finding projects with long-term staying power, featuring a low market capitalization relative to their competition.
Risk management in crypto
Every trader and investor must take the concept of risk management crucial. In finance, risk is the degree of uncertainty or loss inherent in an investment decision. The types of risks within the financial markets are business risk, credit or default risk, country risk, liquidity risk, and market risk.
There are also risks in crypto. In fact, critics believe cryptocurrency is one of the riskiest assets in the financial markets. These risks could be because of several reasons, including being a new field of finance, lack of trust in crypto’s functionality, price variability, and lack of a comprehensive and unified system to regulate the distribution and use of crypto.
How can you manage and hedge the risks in crypto? There are risk management tools (like stop-losses) and strategies (like hedging) available for use. For risk, the safer way is to reduce your position size or close your position altogether. But hedging is a valuable strategy for traders who wants to maintain their original crypto holding but create a neutral exposure.
How is risk measured? The most popular way to measure financial risk is by calculating the amount of volatility or the difference between actual returns and expected returns. For quantitative risk management models, there are basic concepts and techniques you need to know. These include risk factors and loss distribution, risk measures based on loss distribution, factor models, scenario analysis/ stress tests, Monte Carlo simulation, tail risk management, and model risk.
Building a crypto portfolio
For asset allocation, you need to identify your investment goals and degree of risk. With this, you will be able to determine your investment strategy with short-term investments (tactical asset allocation) or long-term investments (strategic asset allocation).
In crypto investing, there are three basic types of portfolios. These include aggressive, balanced, and conservative. After determining a portfolio style, you need to allocate capital to the appropriate asset classes. This is where underpriced assets will be chosen based on factors such as fundamentals, technology, technical analysis, and performance metrics to diversify portfolios.
In building crypto portfolios, you must learn how to diversify. A diversified portfolio is achieved by purchasing asset classes with the minimum correlation between each other. This action will help when one asset moves down, and you want another to compensate for that by moving up.
How do you construct portfolios and allocate risks? Your risk appetite will determine your exposure to specific cryptocurrencies. And you should know where you are on the risk-reward spectrum. Besides, you will always want to remember that your basic assumption is that the cryptocurrency market will grow over time.
When constructing your portfolio, the things you must consider include blue chip assets; large-cap, mid-cap, and low-cap assets; Markowitz optimization models; quantitative allocation strategies (market cap weighted, equal weighted, fundamental weighted, risk-weighted, equal risk contribution weighted, Max Sharpe ratio weighted, and mean-variance weighted).
How can you rebalance your portfolio? You should expect changes in your initial portfolio weights due to price fluctuations. So, there will be a need to readjust your portfolio if you notice changes in factors such as your future needs, your ever-changing financial situation, and your risk tolerance. You should choose a time horizon for a periodic rebalancing of your portfolio and ensure that you stick to the selected rebalancing period. With this, you can automate the process of buying low and selling high.
With fundamental analysis, you can make better investment decisions. While developing this framework, close attention is paid to the differences between traditional financial assets and crypto assets.
For crypto assets, there are 29 different factors across different categories, including initial screening questions, market standing, liquidity, reputation, team, marketing, development, security, scarcity, and quantitative performance metrics. The factors that Token Metrics borrow to create a framework for analyzing crypto assets are the macroeconomic environment, entry barriers, and management. Besides, Token Metrics can help with wise critical investment decision-making by uniting fundamental and technical analysis.
In crypto investing, trading is the art and science of buying low and selling high. It comes in different ways, including margin trading, options trading, and futures trading. There are different order types (market order, limit order, stop order, and stop-limit order). For profitable trading, the correct order type must be chosen. For the use of order types, the ideal step is to take profits of a long or short position when a coin is either pumping rapidly or dumping.
An important concept in trading is technical analysis. It is the study of market price action. Technical analysis can be quantitative or qualitative. For ideal trading, I’ll recommend any quant-based tool such as Token Metrics. Other concepts you should be interested in include why most traders lose money, managing emotions, hedging, and supply and demand.
Evaluating crypto technology
The main concerns here are how to evaluate crypto technology and how analysis can make a difference in investing. To be a better investor, it’s crucial that you have a basic understanding the blockchain technology. After this, you can then move into learning about how crypto technology can be evaluated. With this, you will know how to avoid scams, reduce loss, and minimize the risk associated with investing in cryptocurrencies.
The crucial area to explore here is the initial screening, characterized by the whitepaper, blockchain use cases, feasibility, viability, security, innovation, the performance of similar projects, practicality, total addressable markets, and uniqueness. Other areas include how to review blockchain architecture, how to review code quality, roadmap, useability for infrastructure projects, and team structure.
Token sales: ICOs, IEOs, and IDOs
A token sale refers to the limited period of time during which a set number of tokens are made available for purchase to the public.
ICOs (Initial Coin Offerings), IEOs (Initial Exchange Offerings), and IDOs (Initial DEX Offerings) are fundraising tools.
IEOs have close similarities with ICOs; however, they feature an extra layer of screening by reputable exchanges that lower the risk. IDOs are not far from IEOs, but they are decentralized. Before investing in the project, it is advisable that you research to know the safety of investing in token sales, the different stages of token sales (such as seed round, private sales, public pre-sale, public token sale whitelist, and public token sale), and how to invest in token sales.
Security tokens are a digital representation of a real-world asset. You also call them digital securities, smart securities, programmable securities, or crypto securities. A security token can be a form of equity, debt, hybrids, or derivatives. With this innovation, there is the possibility of the emergence of never-before-seen liquidity to illiquid securities and the opening of the entire world’s capital markets.
Some relevant subjects here include where to trade security tokens (tZero and OpenFinance), security token issuance platforms (Securitize, Polymath, and Harbor), where to find security token offerings (SharePoint, STO Market, and Bank of the Future), and the possible concerns with security tokens.
Decentralized Finance (DeFi)
DeFi is a broad category of financial applications built on top of open, trust-minimized, programmable, and censorship-resistant networks. It involves a brand-new monetary system built on public blockchains. Besides, it focuses on interoperability, accessibility, and fast liquidation. From a clear standpoint, the DeFi market is entirely in its early stage; nonetheless, there is the possibility of seeing how it helps transform traditional banking systems. Some important things to learn about DeFi include the Defi platform and how to use DeFi.
Since most things come with pros and cons, DeFi is no different. But its advantages (such as transparency, accessibility, and minimization) supersede its drawbacks (such as Ethereum dependency and smart contract vulnerabilities).
Mining and staking
Blockchain consensus mechanisms link participants and procedures associated with consenting transactions on a chain. They function to guarantee a blockchain transaction’s authenticity and validity. The parameters that define these mechanisms include decentralized governance, quorum structure, integrity, authentication, nonrepudiation, privacy, fault tolerance, and performance. The blockchain mechanisms are Proof of Work, Proof of Stake, and Delegated Proof of Stake. PoW, PoS, and DPoS are the most prominent and developed forms of consensus out there.
Staking refers to the process of actively participating in transaction validation (similar to mining) on a Proof of Stake blockchain. Staking requires few resources, unlike conventional crypto mining. You don’t need to burn lots of electricity or buy a supercharged computer to participate.
Non-fungible tokens (NFTs)
Lately, a lot of individuals have developed an immense interest in NFTs. They are commodities that you are already familiar with if you have ever bought tickets to a concert or purchased baseball cards.
Non-Fungible Tokens are a sort of cryptographic token on a blockchain that embodies a unique asset. They can be digital assets or tokenized versions of assets that exist in the real world. Even though NFTs are uninterchangeable, they are capable of proving authenticity and ownership within the digital realm.
NFTs are characterized by digital ownership, permanent data storage, permissionless blockchain, uniqueness, and programmability. With them, data and value can be transferred on the blockchain, and a number of opportunities can be facilitated.
Some examples of NFT projects and sectors include art and marketplaces (such as SuperRare, Nifty Gateway, Rarible, Async Art, etc.), collectibles (such as cryptoPunks, cryptoKitties, Aavegotvhi, etc.), and utility such as domain names, tweets, and more.
Some relevant subjects you should research under NFTs include what to do with NFTs, where to buy them, how to use them, why to invest in them, and their future.