Cryptocurrencies: What Retail Investors Should Know (Part 2)

Disclaimer: Points shared in this article are based on my own personal understanding of the Cryptocurrency space and also conversations that I have had with blockchain developers and VCs. They are not meant to be financial advice nor should it be viewed as concrete evidence to current market circumstances.

This article continues on to the fifth point. To read part 1:

Cryptocurrencies: What Retail Investors Should Know (Part 1)_Disclaimer: Points shared in this article are based on my own personal understanding of the Cryptocurrency space and…_hackernoon.com

Point 5— Overvalued Crypto Companies

Yes, Captain Hindsight is in the house but let us take the time to reflect on what has happened.

Call it market manipulation, call it whales’ screwing with the market but since the failure to implement SegwitX2, Cryptocurrencies have experienced an insane level of unsustainable growth which have attracted quite the attention from all sectors of the world. Regulatory clarity is a matter of the utmost importance that institutions need before entering a market.

Regulations

Clear policies and laws that will clearly define the code-of conduct in any given circumstance in regards to Cryptocurrencies.

First, to protect retail investors from potential life-changing losses. Second, allowing large institutional money to be safely transacted into the market.

There are people with MILLIONS at hand to invest but due to the lack of clarity in policies and laws from governmental entities, they are still waiting by the sidelines.

Cryptocurrency Regulation Update (May 2018)_This piece is part of a monthly series covering regulatory updates related to cryptocurrencies (here are January…_hackernoon.com

Bitcoin and Ethereum were under the spotlight about being a security or not. It is safe to assume that most retail investors do not understand the importance of this clarification, as did I. But knowing whether Bitcoin and Ethereum are securities or not, will greatly influence how regulators will dish out legislations and laws. For both retail investors and more importantly, institutions.

Next, Institutions actually have a ‘magic number’ to follow. Read below.

Great Prices

85% rule is used by institutional investors and VCs regarding a product/asset. They will ONLY think of investing in an asset after it retraces by 80–85% from its recent all time highs.

I wanted to find out if this is true so I look at charts and see it for myself. I shall show you some charts below so that you may see it very clearly.

Point 5.1 — The 85% Rule

This rule applies to both BTC value and USD value. Charts are as of 29th June 2018.

BITCOIN

ETH / BTC

NEO / BTC

NEM / BTC

XRP / BTC

XRP / USD

Would Bitcoin drop to $3,000? No one knows. But what we can investigate is the previous price action using technical analysis and prepare our portfolio accordingly.

Also, I don’t think Bitcoin will drop all the way down to $3,000 as there are too many positive news right now. And this below:

On the off-chance that it might just drop there, save your capital or funds that are NOT in Bitcoin or in crypto, and enter the market ONLY when it reaches below $3,500.

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Point 6— We are victims of marketing and hype.

The market has been battered by FUD news from the big investing names like Warren Buffet, Ray Dalio etc saying “Cryptocurrencies have no intrinsic value.” To a certain extend, I believe they are right. Most of the crypto companies out there don’t even have a product yet they were worth more than what they should be.

Some of them even have an unstable product that is buggy and unpredictable yet retail investors, influencers are calling them high potential coins. 90% of Crypto companies will disappear as they can’t possibly rival the development rate of Bitcoin and Ethereum as well as the expertise of their developers.

Now, the tips from this point is just let you be AWARE that you are investing purely based on speculation. I am not saying these companies are bad or are scams although there are similarities. Just be extra careful on your next coin investment especially ICOs and low cap coins.

Real Product VS Promised Product

From the conversations that I have had with a few developers, some crypto companies are shunned by developers because apparently, they aren’t able to back their main net or platform with real codes and programming. A few developers went to the extent of calling them — “The Lamborghini that you don’t need in order to get from point A to B but want to have because it is cool and everyone talks/has them.”

Have you ever notice that there are CEOs who regularly brag about their rank on Coinmarketcap? Or “know” that they will be up a rank or two? Also, there are some CEOs who have claimed to sell their holdings at the top of the bull season in January.

Just think of Bitconnect.. it is a scam but they managed to raise BILLIONs from marketing and hype creation. Now I am not saying that other Cryptocurrencies are a scam. I am saying that they are really overvalued. They might just do well when they do finally have a great product.

Something to consider my friends. 😊

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Point 7— FIAT AS AN ASSET

**SELLING IS THE WAY TO WIN**Contrary to the HODL maximalists, the way to win is not to HODL, it is to sell and rebalance. I am sure everyone who invested in Cryptocurrencies last year will know about this. As of today, the risk of holding Bitcoin is MORE than the risk of holding cash. Look at the stock market —

Stocks haven't seen this much volatility since the financial crisis_Investors were anticipating a more volatile 2018, but few expected the severity and frequency of the swings seen on…_www.cnbc.com

Money is being moved around and it is hard to find undervalued investments. Stock markets are at a decline (finally) so what would be the best play today? Holding Cash, hedging to commodities. How about Cryptocurrencies? Maybe.. if Crypto are deemed to be massively undervalued, then yes, we can expect to see some money being transferred into the space

Cryptocurrencies have been touted to replace the current financial systems but the reality is, until we can pay for services with Bitcoin, fiat is still the undisputed king today. Some may argue that some people HODL from 2014 and today they are millionaires. But the likelihood of early adopters holding 100% of their Bitcoin bought back then, is very low. During the time, they have sold their investments, bought houses, living life to the fullest.

FIAT IS THE TRUE KING, NOT BITCOIN

Fortunately, it is possible to have FIAT act as an asset in a portfolio.

Having a FIAT portion in your portfolio can greatly minimise risk and force you to take profits. Of course you should save some Bitcoin for the long term, so never sell everything. Again, the key thing to do is to sell and rebalance.

I have created an asset allocation that can help you sleep through any sort of volatility.

This topic will be further discussed in another article.

As simple as it looks, most of crypto investors have 100% in Crypto which we all now know is very dangerous since the start of the year. Use this allocation and strategic rebalancing and you will live through any crashes in Bitcoin and/or altcoins.

Here a story that I made up to properly explain the benefits of having a fiat portion:

EXAMPLE

Jack and Tom only have $10,000 to invest.

Jack bought 1 Bitcoin at $10,000 with $10,000With $0 capital left to invest.

Tom wants to keept a 60/40 Crypto to Fiat ratio so:

He bought 0.6 Bitcoin at $10,000 with $6,000With $4,000 capital left.

What happens if Bitcoin INCREASES by 50% from $10,000 to $15,000?

Jack has 1 BTC now worth $15,000 (+50%)His total portfolio is UP by 50% or $5,000 and is now worth $15,000

Tom has 0.6 BTC now worth **$9,000 (+50%)**With $4,000 capital left, his total portfolio is UP by only 30% or $3,000 and is now worth $13,000

In this example, Jack would have profited $2,000 more than Tom. But ultimately, BOTH APPROACHES have seen gains.

Now let’s look at what happens when the market is BAD

Same scenario: Jack and Tom only have $10,000 to invest.

Jack bought 1 BTC at $10,000 with $10,000With $0 capital to invest.

Tom bought 0.6 BTC at $10,000 with $6,000With $4,000 capital left.

What happens if Bitcoin drops by 50% from $10,000 to $5,000?

Jack has 1 BTC now worth $5,000With $0 to buy the crash, his total portfolio is down by 50% or $5,000 and is now worth $5,000

Tom has 0.6 BTC now worth **$3,000**But with $4,000 in the sidelines, his total portfolio is down by only 30% or $3,000 and is now worth $7,000

In this example, Tom would have saved a whopping $2,000 more than Jack.

Here’s something extra-

In a bad market: Bitcoin drops by 50% from $10,000 to $5,000?

Tom has 0.6 BTC now worth **$3,000**With $4,000 capital left, his total portfolio is down by only 30% or $3,000 and is now worth $7,000

Keep in mind, Jack has no capital left to buy or do anything. But Tom decides to rebalance his portfolio to keep up with the 60/40 Crypto to Fiat ratio with Bitcoin priced at $5,000.

Tom will then have 0.84 BTC now worth $4,200With $2,800 capital left.

If Jack wants to break even, Bitcoin has to double (2x) OR increase by 100% from $5,000 to $10,000 just to break even on his $10,000 investment.

For Tom, Bitcoin only has to increase by 40% to $7,000 to break even on his $10,000 investment.

In other words, The market will take less effort for Tom to breakeven as opposed to Jack. This is how we can use defensive tactics to ultimately win in the long run.

By the time Jack breaks even when Bitcoin returns to $10,000, Tom would have seen his portfolio grow to $11,200 or increase by 12% ($1,200).

Of course it is not easy to predict which is precisely why sometimes we just need to remove the emotional aspect and rebalance when its due.

A flawed perspective with selling your asset is “selling for profits”. The better way to view ‘selling’ is “Removing risk of loss”. Once you get this philosophy into your investing game, you will start to think like the big players. The big players absolutely worship this phrase — Never Lose Money. Lots of early investors of Cryptocurrencies have sold back in December/January as they trade predominantly on macrotrends. They knew the growth that happened in December was artificial and a great time to sell. They did and now waiting for the next point to enter.

By removing part of the risk, they expose less of their investments yet still contain enough to take advantage of the notion “you’ll never know what will happen in the market” and a further moonshot from where they sold. Remember point 5, they KNOW market cycles better than us so they have all the time in the world to wait for a great price.

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ENDING NOTE

Some of these points are hindsight bias. But that doesn’t mean we cannot learn from them.

From today onwards, my strategy to DYOR and investing will be to:

1. Listen to Developers. Look into the company’s technology so that I know their technology is solid
2. Find out if the marketing team isn’t stronger than their product
3. Venture Capitalist and Angel Investor friendly
4. Stop exposing my capital to the market unless the coins have retraced down to 85% in BTC or USD value.
5. Sell when it is time. Re-enter when it is time.

Last but not least, please do not see this article as financial advice and always act according to what YOU feel is comfortable. These points are just things that I learnt while speaking to the big players and developers. Normally, retail investors do not have access to these people so I hope you can learn a thing or two here!!

Have a good investing journey, my friends. ❤

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Here you can read my price analysis of Bitcoin for the month of July.

Bitcoin Price Analysis — July Month Outlook_Let me begin by saying, these are merely my own studies and observations. My studies are not financial advice and only…_hackernoon.com

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Iliya Zaki is the Marketing and Community Manager for Moonwhale Ventures.

Moonwhale Ventures is a Consultancy for Blockchain Applications in Corporations, SMEs or Listed Companies to improve the efficiency of the value chain, and new innovative ways to funding business expansion through STO, ICCO (tokenization).

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