Thinking about investing in bitcoin or altcoins? For some, the decision is largely a knee-jerk reaction to stories of bitcoin millionaires. As you can probably surmise from reading our blog regularly, Bitcoin Market Journal recommends a more reasoned approach.
This article takes a look at the nine questions a new investor should ask before committing any money to the market.
Question # 1: Are You Prepared to Lose Your Investment?
This seems to be an obvious question, but it is one that deserves serious consideration. With any investment, there is the possibility of the investment failing and the investment capital being lost. With altcoins, this situation is more acute, as the basis for the investment is virtual and therefore has little inherent worth.
You must be willing to accept, before investing any money in altcoins, that your investment will be lost in its entirety. This is not the same as taking a loss; history has shown that the altcoin that you may be investing in may take a sudden downturn and drop to less than a cent per coin without any warning. The biggest mistake a novice investor can make is to bet your security on the promise of huge returns on investment that may never materialize.
Even if you can afford to lose your investment, you should have a well-defined high-risk investment strategy. With a financial professional, you should determine your risk tolerance and create an investment strategy that best brings in the expected ROI for your portfolio at the least exposure.
Question # 2: Do You Understand What an Altcoin Is?
A sad reality is that most people that invest in altcoins do not really know what an altcoin is. For many investors, the most important aspect is the ROI, leaving investors subject to risk when the coin fails to perform. Understanding what an altcoin is and understanding what your particular altcoin is can help to prepare you for this eventuality.
An altcoin, generally speaking, is a virtual measure of worth or work held on a distributed ledger. It is the defining characteristics of the altcoin that would determine the investment worthiness of the coin. Some of those defining characteristics might be:
- The purpose of the coin (Is it a utility token or a digital currency?)
- Whether or not the altcoin’s ledger is centrally held or distributed
- Whether or not the underlying servicing company is financially fit
Understanding these characteristics for the altcoin you are considering is key to avoiding weak coins or coins with a poor chance of gaining a healthy ROI.
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Question # 3: Do You Know Your Legal Obligations for Owning Altcoins?
Every jurisdiction has different rules on altcoin investing, and it is important that the new investor knows these when investing. This knowledge should go a step further, however. Investors must also stay abreast of any changes to the rules. These rules can affect legality (Are altcoins banned where you live?), taxation, licensing of altcoin businesses and exchanges, and limitations on investment classes. Additionally, rules can vary on the local, state, and federal level. As violations can be costly, it is best to be prepared by understanding your legal obligations as an altcoin holder.
Question # 4: Do You Know How to Invest in Altcoins?
Unlike stocks, there are no commercially-ready sources of information on altcoin investing. While there are ready repositories for needed information available, such as this blog, there is no equivalent to CNBC or Bloomberg TV for the altcoin world. As such, knowing how to buy altcoins can be difficult, as each altcoin has its own registered exchange, and each exchange may or may not be available to you – depending on where you live in the world.
It is important to know where you can go to get the information you need. This may be social media groups, blogs, and whitepapers. The key is to be comfortable with your choices and to know that you can rely on their trustworthiness.
Question # 5: Do You Have a Plan?
It is dangerous to invest without an entry and exit strategy. For example, if the plan is to chase price spikes, you are likely to overpay for your coins or to mistime your purchases. If you do not have a well-defined exit strategy, you may allow too much value to evaporate from your portfolio before taking corrective action.
You should be able to answer:
- How do I buy new coins?
- What are my criteria for investing in a new coin?
- What is the most I can lose before selling?
- Is there a target price at which I am willing to sell?
- How large do I wish my portfolio to ultimately be?
Question # 6: Can You be Non-Emotional with Your Investments?
Investing is a sociopathic endeavor. You must be able to put your emotions, biases, and attachments aside to consider what is best for you and what is best for your bottom line. This means putting aside notions of community, of altruistic sacrifice, of taking a “noble loss.” Winning is what matters, and the wise investor is the one that can see that this is an act of selfishness, even from your better intentions.
It is important to realize that – before investing – you must maintain a clear focus on what you want and what you need to do to get it.
Question # 7: What Happens to your Investment Once You Die?
Altcoins are not like traditional investments. As they are basically just encrypted information, if you were to die, there is nothing tangible to pass on to your heirs. All of what you built will be lost to the winds forever. It is important that you tell someone you trust that you are not just investing, but what you are investing, where you keep your private keys, and what your passwords are. If you use two-factor authorization, you will need to make both your cell phone and your cellphone’s password available, as well.
This seems to be a lot to trust to one person. One way you can get around this is to create an addendum to your will on how to access your portfolio. Another way is to grant your financial professional or lawyer access to your wallet. Regardless of how you choose to approach this, if you leave this unaddressed, there is a strong likelihood that your altcoins will be lost upon your death or incapacity.
Question # 8: What Would You Do if You Fail?
One of the most important questions you can ask before investing is what will happen if you were to lose everything. Will you quickly get back into the market or take some time off? Will you transition any remaining altcoin assets to other investments? Will you be financially okay if your portfolio fails?
Being able to answer this question honestly will help to protect you if the worst were to happen.
Question # 9: What Would You Do if You Succeed?
A more important question, however, is what would happen if you succeed. What if you had a portfolio that showed an ROI of 2,000 percent? Would that be enough to consider your portfolio a success? Would you transfer your wealth to safer investments at that point?
Are you seeking a long-term position for your children’s education or your retirement? Do you have enough faith in the market to be happy with that?
At what point would you be happy with your portfolio and what would you do then? These are the hardest questions an investor can ask when starting a new portfolio, and having a clear plan can prevent unnecessary losses. These questions are a part of your risk assessment that you should take in determining your high-risk tolerance. Not asking these questions, however, will leave you exposed if and when these scenarios arise.
Investing in bitcoin and altcoins is not as simple as some other types of investment. It pays to do your research carefully before you dive in. We can help with that. Subscribe to the Bitcoin Market Journal PRO Newsletter for access to information about investing in the world of new finance!