I have found putting together this write up very necessary due to the massive feedback I have received since the time I published my first article on cryptocurrencies. It signals that there is a great craving for the right retail investment education on cryptocurrency investment.
Also, the rise in fraudulent cryptocurrency investment schemes has placed undesirable fear and panic in many, preventing them from taking advantage of the superior potential returns associated with cryptocurrency investments. But I trust that this article will wipe away all fears and provide readers with valuable information on cryptocurrency investment.
Most of the people I have received queries from are essentially beginners who know quite little about the financial markets. So if perhaps you are like many others who have been searching for sure-enough knowledge and information about how to invest in Bitcoin and other cryptocurrencies, stay tight with me because I wrote this article for you.
Before we proceed further, I must emphasize that, as a trader, I do not trade cryptocurrencies, but as a market analyst, I watch them like a hawk.
In this article, I have managed to put together a step by step process and in very simple terms such that any new entrant seeking to invest in cryptocurrencies may follow to do so. I will also try to address some of the issues that have come up in my interactions with people about cryptocurrency investment and I trust that individuals who have no clue as to how they can go about investing in cryptocurrencies will find this piece very helpful.
To begin with, let me state that as a newbie, it is highly essential that you have a firm understanding of the nature of the markets. The market is a loosely organized exchange whose members bet that prices will either rise or fall. You are against everyone and everyone else is against you. Every trader wants to take money from the market that the market has no intentions of given it to them stated differently, every dime of profit you make in the markets is coming directly from someone else’s account who had no intentions of given it to you when they placed their trades.
The market is designed to attract more losers because winners walk away with the money of losers. Additionally, the prosperity of winners is reliant on losers and losers keep the markets thriving.
You must, therefore, take aggressive steps to protect your capital. In view of that, you must establish a firm investment objective of what you intend to achieve from your cryptocurrency investment.
Your investment objective must rest on four main pillars, which are – your investment capital, your investment knowledge and experience, level of risk tolerance and your personality.
Having a sincere and firm understanding of your position in these four key areas is essential to your progress and success. Let me go ahead to explain these points into details one after the other.
Investment Capital: your investment capital is essentially the amount of money you have at hand to put to work in the markets. All other things have been equal, the bigger your investment capital, the higher your potential returns will be. Certainly, a trader with a $10,000 investment capital will make more money in the long run than someone having only a $1000 to invest. Essentially, you should not rush to make quick large profits if your investment capital is small. Many beginning traders face the temptation of wanting to make quick large profits even when their capital at hand is very small, this is a gambler’s mentality and should be discarded.
For instance, if you have only $100 of investment capital, you can’t expect to make $50 profit out of that every month, because that would mean you are taking too much risk, and the market can wipe you out at the least instance it goes against you. On the other hand, if you have about a $1000 to trade with, setting a monthly target of $100 profits is reasonable and quite achievable if you work hard. This is much more than what various banks or mutual funds in this country can give you on a $1000 investment and so you must appreciate it.
I must further add that, whether big money or small money, the method and approach of trading Bitcoin and other cryptocurrencies do not change.
Investment knowledge and experience: gaining proficiency in investing is the same as in any other profession, it requires experience, and experience takes time. As Michelangelo said, “if people knew how hard I worked to get my mastery, it wouldn’t seem so wonderful at all”. Every professional was once a dabbler who has spent years practising their craft to achieve mastery.
Sometimes it’s baffling when people come to the markets and they want to make quick money without the appropriate knowledge and experience. In our part of the world, university degree takes four years, but learning to trade is a skill-set that when acquired will enable you to make money with just your laptop and internet connection for the rest of your life and you want to get it all in just a day? That’s absolutely not going to happen.
Failure to realize that trading is a professional endeavour and treating it as such can lead to your ruin. Trading in Bitcoin and other cryptocurrencies is not a get rich quick endeavour and those who fail to understand this fundamental truth do not stand to have a good chance of success.
Take your time to learn and decide that you want to be a trader even twenty years from now. In this manner, you set your mind up for success. As a beginner with very low investment knowledge and experience, if you are able to average between four to six per cent return on capital on a monthly basis, with time you will be in a very good position.
Risk tolerance: your investment objective must also be guided by the level of your risk tolerance. As in every other investment enterprise, cryptocurrencies aren’t different. There exist a positive correlation between risk and rewards when trading cryptocurrencies. The higher your dollar risk per trade, the higher will be your return on investment if the market goes in your favour and the higher will be your loss if events do not conform to your expectations. The risk management rule we apply to trade the markets is that a trader must never risk more than three per cent of their account equity on any single trade.
The way traders measure risk and reward is such that we always make more money when we are right than we lose when we are wrong.
For instance, the standard risk-reward ratio many traders apply in the markets is 1:2.i.e we are looking to make at least two times our risk on every trade we take.
Suppose your dollar risk is $100 per trade, that means, you are looking to make at least, $200 should the market move in your favour, but stand to lose $100 if events do not conform to expectations.
Risk and rewards measured in this manner would imply that you wouldn’t need a 100% win rate to be profitable. On average, a 40% win rate is all you would need to be profitable on a 1:2 risk reward ratio. For instance, if you are to take ten trades, you don’t necessarily need to win all of your trades in order to be positive. On a worst case scenario, if you lose six trades but win four trades, your total loss will amount to $600 while your total gain will be $800 - you end up safely banking $200 as net profit. Risk reward ratios, when effectively applied, yields superior returns on investment.
Personality: at the most fundamental level, we are how we trade and we trade the way we are, the market is the largest mirror to the soul. Ironically, this is the bedrock of trading success. Inscribed upon the ark of Apollo for over two thousand years, is the inscription “know thy self”.
The investment objectives and trading methodology you design or adapt must resonate perfectly with your personality.
By personality, we are looking at the duration of which you wish to hold your trades – whether at the short term micro trading level or long term macro trading level.
There are individuals who like to hold trades from a few seconds to only a few minutes but never beyond an hour, while other individuals prefer to hold trades for several hours but never beyond a day.
More so, other individuals prefer to hold trades for just a day or two, but never beyond a week and finally, we have very long term macro sophisticated investors, who are always looking to hold positions from several weeks to several months and even a year.
These different groups of traders employ different methods and trading styles to the markets and you must be able to settle on which category you appropriately fall into. No group is better than the other, so long as they all do it right, they will all be profitable over the long run.
There is always the temptation to think that the more one exposes themselves to the markets, the more money they will make. Anytime I am in a conversation with an aspiring trader, and I ask how often they will like to trade the markets and whether for short term or long term - their reply always goes like, “I want to do it every day and for short term profits”. New entrants must understand that the amount of money we make from trading the markets is not a function of how often we trade and that both short term and long term investors make money as long as they do it right.
More so, it is difficult, if not impossible, to become a successful high-frequency trader when you have a day job to keep. Because, the most conducive time for scalpers to trade the markets is in the afternoon, and by that time most people are busy at work.
Studies have revealed that individuals who are very much action oriented, who love to drive fast cars, fast motors and find themselves in lots of action most of the time are predisposed to be scalpers (short term/high-frequency traders).
On the other hand, folks who are more relaxed, calm and cool, and don’t engage themselves often in high adrenaline activities are more suited for long term swing/positional trading.
After establishing a firm investment objective based on the guidelines above, the next and most exciting question new entrants love to ask is, how can I trade Bitcoin live? First of all, to be able to trade cryptocurrencies live, one has to be registered with an online licensed broker – these are financial institutions that provide electronic trading platforms for traders and investors to buy and sell global securities online. Once you successfully register with a broker, they will furnish you with their trading tools to download and install on your computer. The various online brokers that provide Bitcoin and other cryptocurrency trading includes Etoro, Avatrade, Plus500, Bitfinex, Voyager and Coinbase among many others.
It is essential to note that, not all global online brokers operate within Ghana’s jurisdiction, for instance, Coinbase operates only in Canada, Singapore, U.S, U.K and other parts of Europe.
Investing with an online broker implies that you will need a laptop and a stable internet connection. One may also use an iPad or a tablet or any smart mobile device to connect and trade the financial markets live in the pulse of their hands. This is the good news that makes trading really exciting!.
Nevertheless, I personally do not encourage the use of smartphones, iPads and tablets as the primary device for trading, because people turn to overindulge and abuse it.
I will recommend the laptop as the primary device for trading the markets to any new entrant looking to trade cryptocurrencies online.
Bitcoin and all other major cryptocurrencies can be traded on forex, hence many forex brokers have added them to their trading instruments and they are traded as CFDs against major currencies like the U.S Dollar and the Euro. So you will see something like BTCUSD (Bitcoin against U.S Dollar) or BTCEUR (Bitcoin against Euro) when you log unto the trading platform your preferred broker will provide you with.
The cost of trading cryptocurrencies includes commissions, spreads, swaps and slippages, as well as internet data for logging unto the broker’s platform. These charges vary among brokers and it will be your duty as an aspiring trader/investor to shop for the broker with the lowest of these charges.
After you have followed due diligence to select a broker, do well to stick with that broker, there are no universally perfect brokers who can meet your preferences outrightly. Once a broker is able to satisfy your major preferences, you should be able to work with that broker. You would be required to open a trading account with the broker and as you do, they will send you a link to download and install their trading tools on your computer or smartphone, iPad or tablet. Most CFD brokers use the MT4/MT5 trading application unique to them After the platform have been downloaded and installed you will need to know how to operate the functionalities of the MT4/MT5 trading station and customize it to suit you.
Understanding and going through these stages effectively will bring you face-to-face with the global financial markets in the pulse of your palm or on the screen of your computer. You would then need to develop a trading strategy/methodology and a money management plan to trade with.
A trading strategy will signal to you that if “A” happens, then either “B” or “C” is likely to happen and then you enter the markets accordingly. In the heat of the trading day, your money management plan will serve as a defensive mechanism that will protect your capital and keep you in the game long enough to grow your money.
As with every other form of trading, remember that cryptocurrencies are highly volatile financial instruments and so your capital is always at risk and you can be wiped out very quickly if you lack the required skills, experience and psychological resources necessary for trading highly volatile financial instruments.
One good news is that you can practice demo trading first to get familiar with your broker’s platform and also to know and understand market signals and how prices move. Demo trading will also help you to backtest your trading strategy to know its win rate. Should it happen that you are unable to develop a trading strategy all by yourself, you may check online to find one that would suit you. Above all, demo trading will help you to decide whether trading leveraged instruments is really a thing for you or otherwise, without putting your real cash on the line.
After you are successful with practising demo trading and backtesting your trading strategy, start by trading a small amount of money. This will help you build up your level of confidence as you develop a firm understanding of market signals. It will also help you gain more experience and get your feet on the ground without putting too much capital at risk. You can scale up your risk to increase your profit potential as you progress. Because cryptocurrencies are highly volatile financial instruments, be sure not to invest with money you cannot afford to lose, such as your house rent or school fees.
Investing with ‘scared’ money as a beginner positions you at a very discomfort zone, and you will not be in the right frame of mind to interact with the markets properly.
I hope this article has been very helpful to you? Of course, there are more nitty-gritty that any individual or organization considering cryptocurrency investment needs to know and consider but generally, these are the basics. If you’ve found this write up useful, I would love to hear from you, reach out to me with further questions and I would be glad to assist you.
In conclusion, I would like to say that trading CFDs carry a high degree of risk and uncertainty and may not be suitable for everyone. Trading attracts those who love puzzles, risk and brain-teasers and repels those who avoid risk.
Do not venture the markets with money you need for immediate use since it’s not a ‘get rich quick’ endeavour. Many folks who approach the markets with a ‘get rich quick’ mentality lose and wash out of the markets.
It pays to assume a long term approach to trading cryptocurrencies. There are no shortcuts and you need to avail yourself to the learning process. If you do, you will realise that your efforts will greatly payoff – you will change everything in your life without changing nothing.
The author is a Certified Chartered Financial Economist with certification from the Global Academy of Finance and Management (GAFM) and the Association of Certified Chartered Economist (ACCE). He is a Professional Currency Speculator, Economic Columnist and Investment Analyst.
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