Crypto Beginner’s Guide to Not Losing Everything
Here is my shot at making a guide to keep everyone (but especially the newbies) in happy, healthy financials as they enter the space.
I’ll TLDR this now for those who don’t want to read a long post, but these are lessons everyone has heard. The depth of this post is to show you the real logic behind those lessons.
Anyway, TLDR is: I AM NOT A FINANCIAL ADVISER but people aren’t “unlucky” in not seeing returns when they buy into a hype investment through FOMO. It is economics and mathematics dictating that you’re probably not getting in at the right time. ONLY invest money you can afford to lose, and ideally only in projects you honestly believe in.
Naturally, need to start with street cred or else who would bother with what I say, right? I’m not a hugely active poster but been in the crypto space since 2016 and investing for much longer than that. Unsurprisingly means there are a lot of painful lessons that have been learned through the years. So let’s start on the journey.
Our journey starts where it often starts for most people just jumping into a new investment trend. It tends to take the form of “Interesting… it’s been going up and up. If I invest $ now and it goes up another 900%, then I’ll have $$$$$$$$$. Heck, even if it goes up another 100%, I’ll have $$ and I can just cover my expense. But I need to jump in now before it gets to its peak!”
I suppose you know what FOMO is, but for the truly uninitiated, it stands for Fear of Missing Out, and you can imagine what that means. You’ve also probably heard that it’s NEVER good to follow this and maybe even intuitively understand why. You probably think of that understanding along the lines of “I’m never lucky on these things.” but there’s a bit of (informal) math to explain this as well.
Supply and demand. You know it. I know it. Anyone who’s heard of crypto is probably informed enough to understand the most widely-known economic principle in the world. Price is highest when demand is high and supply is low, but let’s look at that in the context of a crypto pump.
Supply: Cryptos tend to be ‘mined’ through predominantly two different mechanisms, which I won’t get into here, but the salient point is that crypto’s supply growth (at least for any token you’ve likely heard of) is independent of the market. This is why it’s sometimes called “digital gold” in that it has built-in scarcity. So supply has limited impact on pricing other than to be the wall that demand runs up against.
Demand: This is where we see the big pumps – when lots of people come into a token or group of tokens wanting to buy. Again, common understanding says that when lots of people want to buy, then pricing goes up. So when demand is highest, price is highest. Which means, and this is the key part, when the most people are buying, the price is at its highest point and will start to go down from there. The natural, statistical conclusion from this is that you’re most likely to be buying at or near the highest point, with nowhere to go but down. So those suppositions of “900% or just to be safe, 100%” are entirely wrong. If you’re lucky, you might catch it on the upswing, but let’s be honest. You’re not going to sell at that 5% gain when everyone is in their euphoric “HODL HODL NO FUD” space, at which point you’re just climbing to the top of the hill only to roll down again. It’s not luck, it’s just math.
This sort of flawed assessment is also typically fuelled by seeing the absolute bottom value and the absolute top value, and comparing the difference. “It was at min of 0.07 last night and shot up to max of 0.49 this morning, so if I picked my spots right, I could have made 7x value.” But you have to know that have the hundreds of transactions that are done every second of a bull run, only a few people actually bought at that low, and only a few people sold at that high. And it is incredibly unlikely that those two groups contained any of the same people. So no, not even the best performers got a 7x return on that investment, and for all the reasons we already discussed, you certainly won’t either.
BIG BUCKS ARE BIG GAINS, BUT…
It does make sense. The more money I put in, the more I can earn. Ya know, the rich get richer and all that. Yet everyone keeps saying you need to only invest money you can afford to lose. As before, we’ll start with why someone would do this, then talk about why the logic they would use is flawed.
“I could afford to lose $200, but even an unbelievable 250% return on $200 is like $500 at best and that’s not enough for me to do anything I really want… But if I invest $20,000, even a 10% gain is $2,000 and that gets me a down payment on a car. I’m not looking for a lambo like those other crazy folk so I should be OK.”
It almost seems logical at that point, since you don’t NEED those crazy returns we talked about in the first section to achieve the financial goal you’re setting. But like we said in the first section, you probably aren’t investing at the right time at all, and the most common point that anyone (yourself included) is buying is at the absolute peak of the market. So while a 10% gain is theoretically reasonable, you are statistically unlikely to have bought in at the right time to get that, so now we REALLY need to think about the inverse. Because the math on the other side of the hill looks really painful.
Let’s say your $20,000 investment dropped 10%. You’ve now lost $2,000 and if you’re a fairly sensible person, you might just cut your losses and go. But if you’re the type of sensible person who also doesn’t like to walk away with a loss, you might see a 50% decline down to $10,000 before you cut and run. So now, how do you recover that investment? You need to turn $10,000 back into $20,000 just to break even, meaning you now need a return of 200%, or a 4x magnitude increase over the magnitude of your loss. You keep playing the game, trying to make back losses, but the mountain you have to climb is much bigger, and you’re starting with a lot less. This is why when you think of risk, it isn’t risk. It is punishment – and in investing, the punishment is greater than the reward.
This is an important lesson for any investor to learn. You need to start using the word “punishment” instead of “risk”. Taking risks sounds sexy, like you’re a brave maverick unafraid of the obstacles you might face. Heck, we’re often even taught that we need to take risks to succeed in life. But punishment is what it actually feels like when your investment doesn’t work out. You will feel regret. You will feel stupid. It’s all normal and natural, even for people who have been doing this for years. But you don’t want to couple that with the stress of having to scramble to preserve your financial future because you decided to gamble with your tuition money.
BUT WHAT ABOUT YOU?
All of this might make it seem like you simply should not invest, especially if you don’t have more than a few hundred to few thousand dollars to invest with. At that point, you might be asking why someone who invests and trades crypto would be telling you all of this and perhaps wonder if they had some ulterior motive to it. So let’s clear this out of the way, investing is good. If you have the cash of any amount that you’d like to hold on to, invest it, but do so wisely. Here is a rundown of how to do that and why they’re considered sound advice:
– You should pay yourself first with whatever income you have, meaning set a budget and put the savings portion away as soon as you have it.
– You should have the bulk of your portfolio in low and moderate-low punishment investments that will bring stable returns over time. I AM NOT A FINANCIAL ADVISER SO DO YOUR OWN RESEARCH PLEASE, but many people recommend ETFs or Index Funds for those of you who want to leave your money somewhere and let it grow.
– Speaking of the “I AM NOT A FINANCIAL ADVISER” clause, you should understand the legal meaning of this. It means that the person who’s giving you that info is not a fiduciary. In plain English, that means they have no obligation to care about your financial future. If you want professional advice, always ensure it’s from a fiduciary (and remember, not everyone who claims to be a financial professional is a fiduciary). Otherwise that person may simply be spreading information to further their own interests.
– Check to see if a 4% YoY return on your portfolio balance will get you where you want to go financially in the long term. If not, you’re probably best off feeding that base first. If you’re set there, you can start to play around a bit more.
– Now that you’re working with cash that you won’t miss, DO YOUR RESEARCH. Remember what we said about fiduciaries? No one on Reddit is obligated to give you good advice, and everyone has their own interests. I know it’s annoying to have to do the work, but seriously, would you do the same in real life? If someone you didn’t know walked up to you and started talking about how Bird.Money is definitely the future would you go home and throw cash into it? Not knocking Bird.Money, but you’d at least want to know more about it first.
– You also need to be aware that all crypto should be considered medium to high punishment. Even BTC (Bitcoin) and ETH (Ethereum) are volatile by most investment standards, and altcoins can be even more volatile.
– The other critical reason that you must do your own research is because you should invest in things you truly believe in! All those people who became millionaires after a huge spike? They didn’t get in because the news said that it was the hottest thing on reddit. Most of them got in well before others knew about it and genuinely believed in the project. Certainly VERY unlikely that you will also become a millionaire or anything like that, but even so, the worst thing that can happen is that you supported a project you honestly believed in. If we all do that, the crypto space will be better for it.
Much love to you all. Don’t buy Doge. Thanks for reading!