Simply mention cryptocurrency or blockchain these days, and investors are sure to flock. Back in September, Overstock’s fintech subsidiary, tZERO, announced it was starting a cryptocurrency token exchange. The announcement pushed the company's shares up to $26.50, a 13 percent surge and a high since 2014. And in December, Long Island Iced Tea's shares closed 183 percent higher after simply announcing it would change the company's name to "Long Blockchain Corp." and focus on blockchain technology.
Cryptocurrency is certainly gaining a lot of media hype these days as altcoins soar in value and governments and investors struggle to keep up. Governments are grappling with how to regulate a nascent asset class whose use cases are rapidly stacking up and evolving. Investors, for their part, are trying to determine how different crypto investments fit into their portfolios. Adding to the confusion is the fact that many cryptocurrencies serve very different functions, yet they're all currently traded like stocks.
Despite all this, the cryptocurrency phenomenon has raged on. Making sense of it all is vital to successfully investing, yet we’re seeing a lot of backers play some very dangerous games, casting wider nets to invest in as many crypto companies as possible. Most investors wouldn’t invest in 20 tech startups on the off-chance that one or two become massively successful. Likewise, investors must carefully build their crypto investment strategies.
Research and education are important for any investment, but this holds especially true in crypto. The best way for reluctant investors to enter the market is with a highly liquid investment. Don’t let the flashy media headlines distract you. There's money to be made in cryptocurrency — if you know how to build a long-term investment strategy.
1. Understand the risk.
It's important to reiterate that the crypto market is extremely volatile. The upside certainly matches the potential to lose on the downside — Bitcoin alone is down 45 percent in 2018, and we’re still in the first quarter.
There are more than 1,500 cryptocurrencies on the market, and that number continues to grow. Warren Buffett recently claimed that the crypto sector is experiencing a bubble, and he seems to be right. The market simply can’t support the number of tokens currently available and will eventually correct itself. When it does, those who bought into the wrong companies are going to lose money, while others will see their investments grow in value.
If a company you're interested in promises huge returns for investors without clearly articulating the use case for its technology, that's a red flag. Companies set for long-term success will implement blockchain technologies into facets of everyday life, prove that those applications can generate revenue, and stay agile enough to bob and weave with industry shifts.
2. Don't bet the farm.
Investors who care about preservation of wealth need to understand that cryptocurrency investments can’t comprise their entire portfolio. While exposure to cryptocurrency can be a great asset, it’s unwise to make your stake more than 5 to 10 percent of your total investment portfolio or to go all-in on one cryptocurrency choice — diversification is key.
Bitcoin is certainly the most famous digital currency, but there are plenty of others, like Ethereum, Ripple, Litecoin, and Dash. Instead of tying your full investment to one token, carefully select a few tokens with varying risk levels to ensure you’re protected if one of them crashes. By selecting various coins with sound utility cases in top market cap profile, you can create a basket of coins with good long-term potential.
3. Consider the underlying tech.
In addition to tokens, there are the blockchain technologies and exchanges themselves. Looking past the coins to the underlying infrastructure gives you exposure to the industry without directly purchasing cryptocurrency. Do your research and spend time learning about the sector to find investments that will still have value after a potential bubble burst. YouTube channels, Reddit postings, and industry conferences are great places to start — but be sure to always consider both sides of the equation instead of taking information for granted.
Blockchain technology alone is attracting major enterprises and small startups alike. It’s seen by enthusiasts as the next generation of banking, investments, contracts, and more. Look into what’s being adopted, which technologies are building a thriving community, and how functional the actual blockchain is. You may find gold where few investors are looking.
It’s no longer enough to just know that you want to invest in cryptocurrency. There are too many players on the market, and you’ll end up throwing money away if you don’t know what you’re doing. That said, cryptocurrencies and blockchain tech are lucrative. With the right investments, you could very well secure your financial future.
Cale Moodie is CEO and director of Neptune Dash, a leading cryptocurrency company that constructs and operates masternodes of Dash, a digital currency built on the blockchain that’s designed to enable instant, private payments online or in-store. Cale's 10-plus year career in public market finance has included roles as founder, CFO, director, and audit committee chair for publicly traded companies. He's been an avid follower and investor in the digital currency and blockchain space since 2013.