Before investing in cryptocurrencies it is important to understand that this new investment sector does not adhere to most of the traditional beliefs and behaviors of more commonly utilized investment classes. Volatility is of course one of the key difference but beyond that it is an entirely different asset concept. Traditional measures of value such as P/E ratios, annual yield, or earnings report are totally irrelevant when investing in digital currencies because they are not tied to any one particular company, service, or product. Conversely at times we use the same metrics for analysis when compared to an asset class like stocks. For example, the trading volume of a currency, the market cap of that currency, or the pricing history.
Human tendency is to want to place everything in a box that we're already comfortable with but in this new space unfortunately that is not an option. Therefore we have created this investment club to guide you through the learning and investing process to increase your chances of meeting your personal investment objectives. To properly invest on your own in cryptocurencies you first need to have a deep understanding of core investment principles and various successful models but additionally you must also spend extensive time researching each digital currency to understand the differences between them. For those who do not have the time or interest to dive in that deep, but who still wish to participate in this new investment opportunity, we are here to go step-by-step. Unlike traditional investments which offer unified platforms for investment cryptocurrencies often involve multiple exchanges, both domestically and abroad, and multiple steps to convert your fiat currency (USD for example) into a digital currency which can then be freely traded.
While investing in cryptocurrencies is not easy working with us is. Please begin your education below and join us when you're ready to fully participate.
Short History of Price of Bitcoin (BTC)
Volatility of Bitcoin vs. S&P 500
Case Study in Risk vs. Reward
Tracking bitcoin through bull market and recent correction
To demonstrate the volatility of cryptocurrencies in Chart #1 above we see Bitcoin, the largest coin by market cap. In just 25 months an investor would have seen his return skyrocket to a max gain of about 4,500%! However, if he purchased Bitcoin at the all-time high and viewed his returns just one month later he'd see a loss of about 51%. CRYPTOCURRENCIES ARE VOLATILE! In fact, similar corrections have occurred throughout Bitcoin's pricing history. A 94% drop occurred in 2011 and a 79% drop occurred in 2013. And this is just Bitcoin. Ethereum and every other seasoned digital currency have all seen dramatic price fluctuations and they are caused by a number of factors.
Additionally, Chart #2 shows the relative difference in volatility between the price of Bitcoin (red line) and the S&P 500 (yellow line) during a period for the S&P 500 that set per-day records for both losses and gains looking over a period of several years before. The S&P 500 line looks peaceful compared to the price of Bitcoin and yet each one of them was experiencing record-breaking volatility. The lesson to be learned then is that weathering the storm of digital currencies takes an expert and that is what we are here to assist with.
Having said that cryptocurrencies do offer high-risk investors a tremendous opportunity for unparalleled gains. The formula to remain disciplined with cryptocurrencies still boils down to asset allocation, and more specifically, what percentage of your total investment portfolio should be invested in non-crypto and crypto asset classes.
Chart #3 below demonstrates the vast market capitalization difference just amongst the top five cryptocurrencies. With thousands of digital currencies currently being traded, and arguably at least 10-20 that are actually relevant as worthwhile investment considerations, it is important to recognize the variation in scale between the market caps of each currency. Though any digital crypto assets do move parallel to each other this variation means that even between the various choices of investments there can be large risk differences and therefore a strong strategy plays a key role in navigating these choppy waters.
Cryptocurrency Market Caps (in USD Billions)
“Diversification is the best hedge for volatility."
Learn the lingo:
What is cryptocurrency?
Simply put, cryptocurrencies are digital units of value that can theoretically be exchanged for goods or services. They can be called "coins" or "tokens" but the basic premise is that similar to a paper form of currency such as a US dollar ($) a digital currency can be used to either store wealth, invest in things, or buy things. This is grossly oversimplifying it and we are not technical experts in the cryptography and programming that goes into the creation or development of various cryptocurrencies. Instead we curate and moderate the sharing of worthwhile articles and new developments in our regular webcasts in our members only group.
what is blockchain?
A blockchain, originally block chain, is a continuously growing list of records, called blocks, which are linked and secured using cryptography. In plain English this means that blocks are linked together to form a digital record of an underlying process that has taken place. The security of a successful blockchain comes in the inherent inability to modify the record. Cryptocurrencies are not blockchains but rather they rely on blockchains to function. In a more traditional exchange we could call a coin/token a dollar and we could call the blockchain the ledger that tracks where that dollar came from and where it went. For example, you earned a dollar and chose to spend it on a coffee and you wrote that transaction down in your monthly budget to track your expenses. But, if you wrote it down wrong then a critical error in your budget has occurred and blockchain technology looks to solve this problem by making the recording digital.
what is bitcoin? Ethereum?
Probably the two best known cryptocurrencies at the moment would be Bitcoin and Ethereum but they are by no means the only digital currencies available to invest in. There are currently thousands of crypto currencies available to invest in and here we prefer to categorize them by size (defined as market cap). Currently these two currencies have the largest market caps and thus are considered to be the safer investments but with all investments past performance is never a true indication of future performance. Smaller cap currencies are generally referred to as "alt coins" and while many feel they have the highest potential for explosive growth they undoubtedly have the highest potential for declines as well. Each currency is unique in both their mission statement and their technical makeup and before investing in cryptocurrencies it is important to understand these differences. A current list of all cryptocurrencies by market cap can always be found here.
what are alt coins?
Simply put "alt coins" are digital currencies with vastly smaller market caps when compared to the more commonly known coins such as Bitcoin. This is typically due to either their original point of creation being more recent, their community of support (current investors) being smaller, their coins being less desirable for trade and/or purchase of goods or services, or some combination of factors. While many feel that alt coins have a higher chance of the highest gains they also carry with them significant risk.
what is an "ico"?
An "ICO" is the abbreviation for an initial coin offering. Similar to an IPO of a stock this is an opportunity to invest in a new asset, in this case a cryptocurrency, before it is available to the public market. Unlike an IPO, the founders of an ICO do not have any regulatory oversight by the SEC or similar organization so their project documents do not have to adhere to certain guidelines. Additionally, the founders of a new crypto project can have a varying level of experience in the crypto sector or otherwise and often their project is still in the infancy phase whereas an IPO of a stock is almost always a company that has been operating privately and therefore you have significantly more information about the underlying business model being offered. As a general rule our belief is that ICO = NO meaning in general we do not believe investors should get involved in ICO's. Though plenty have succeeded far greater numbers have failed and without a vast amount of technical knowledge combined with a healthy amount of luck the risk-vs-reward proposition being offered is not advisable (in our opinion).
what is a fork?
A fork could also be called a split and this occurs when a coin or token goes through a split whereby a blockchain that has been operating up to a certain time and date now splits into multiple blockchains that go off into different directions. A new coin is created when a hard fork occurs and perhaps the most notable example of this was the fork that occurred within Bitcoin on August 1st, 2017 which resulted in two separate currencies, Bitcoin and Bitcoin Cash. Though similar in name they are totally separate and an investment in one has no relation or correlation to the other beyond coincidental incidents.