Tools and Resources for Crypto Investors
Getting started: Tools and resources
You don’t have to be a programmer or techie to invest in crypto, but you should first learn the basics of how it functions. I find that this video by 3Blue1Brown is the best introduction to what a blockchain actually is and how it functions, because it explains it clearly and simply with visuals while not dumbing it down too much. If you want a more ELI5 version with cute cartoons, then Upfolio has a nice beginner’s intro to the blockchain concept and quick descriptions of top 100 cryptocurrencies. I also recommend simply going to Wikipedia and reading the blockchain and cryptocurrency page and clicking onto a few links in, read about POS vs POW…etc. Later on you’ll need this information to understand why a specific use case may or may not benefit from a blockchain structure. Here is a quick summary of the common terms you should know.
Next you should arm yourself with some informational resources. I compiled a convenient list of useful tools and sites that I’ve used and find to be worthy of bookmarking:
- http://coinmarketcal.com – Keeping tabs of everything going on in crypto is tough, wouldn’t it be great if there was some sort of calendar? Well this is a calendar of upcoming crypto events, whether its conferences, product releases, burns, exchange listings…etc. You can also filter by types of events, coins and month.
- http://coin.fyi – Great for following the news related to a specific cryptocurrencies
- http://cryptopanic.com – An aggregator of various crypto sites and news, filterable.
- http://coinspectator.com – Another aggregator from over a 100 different sources of crypto news.
- https://www.ccowl.com/news – News from major sites (CoinDesk, Cointelegram, Bloomberg…etc) on one page
- http://cci30.com – Kind of like the S&P500 for crypto, its an index of the 30 biggest cryptocurrencies
- http://eveningstar.io – this is basicall trying to be the Morning Star for cryptos
- http://icotracker.net – I like this site for looking at what ICO are coming up
- http://www.icoalert.com – Another good site for upcoming ICO tracking
- http://icodrops.com – More ICO listings and they have a “hype” rating
- http://bitcointalk.org – Probably the biggest crypto community, lots of Bitcoin old timers who have seen it all
- Both Medium and Steemit have plenty of blogs to follow depending on what interests you within crypto
- Telegram is the preferred chat platform, just stay away from PnD groups (same for Discord PnD groups)
- http://cryptowat.ch – Great charting tool owned by Kraken that gives you a pretty wide look at various cryptos across most major exchanges.
- http://coinmonsta.io/metrics – Want to see what the most shilled coins are on Twitter? This ranking multiplies the number of tweets vs. sentiment estimate to arrive at a score.
- http://onchainfx.com – A better version of coin market cap, has all sort of columns and you can add flags. Also I like their market segmentation filters.
- http://www.sifrdata.com/ – Great visualizations of various metrics. I find their correlations to be very useful.
- http://www.coingecko.com – includes useful information about crypto like the breakdown volume by fiat currency, social media stats, code repository stats..etc
- http://www.tradingview.com/chart/ – the best charting site that I use for stocks, however it has plenty of major cryptos
- http://www.iconomi.net/dashboard – basically forms different ETFs out of cryptos. Not a bad place to get ideas for your portfolio.
- http://cointrading.ninja/correlation – See a matrix of price movement correlatiosn between various cryptocurrencies over various periods.
- http://coinmarketcap.com – Useful for scanning the market, and finding the blockchain explorer and official website for each individual crypto. Their API is also quite useful for Excel based analysis.
- http://icobench.com – Another ICO tracker which does nice summaries, shows teams, milestones, financials and gives a rating for each IC
- http://cryptomaps.org – Visualization of price across different segments, primarily hashing functions and ICO release dates
- http://solume.io – compares the number of Twitter mention increase decrease to price
- http://www.badbitcoin.org – a list of all the known scam sites. Check this list before joining something.
- Delta and Blockfolio are the major mobile apps, I personally recommend Delta.
- For desktop I prefer to use a CoinMarketCap API Excel tracker that automatically draws live data from CoinMarketCap. Customize it to your own liking. There are also plenty of online tracking sites like AltPocket but I’ve never used them so can’t recommend one.
I generally don’t follow much on Youtube because it’s dominated by idiocy like Trevon James and CryptoNick, but there are some that I think are worthy of following:
- Crypto Investor – A background in finance gives Crypto Investor a much more nuanced approach, and he is very insightful in terms of investor behavioral psychology. Listening to his negativity and criticism of parabolic price action in a sea of lambo chasing is refreshing.
- CoinMastery – Carter Thomas takes on a rational mid-term to long term approach to investing in crypto, and has been a voice of reason many times.
- IvanOnTech – Brings a programmers perspective, goes through the Github and explains many programming issues with blockchains.
Constructing a Investment Strategy
I can’t stress enough how important it is to construct an actual investment strategy. Organize what your goals are, what your risk tolerance is and how you plan to construct a portfolio to achieve those goals rather than just chasing the flavor of the week.
Why? Because it will force you to slow down and make decisions based on rational thinking rather than emotion, and will also inevitably lead you to think long term.
Setting ROI targets
Bluntly put, a lot of young investors who are in crypto have really unrealistic expectations about returns and risk.
A lot of them have never invested in any other type of financial asset, and hence many seem to consider a 10% ROI in a month to be unexciting, even though that is roughly what they should be aiming for.
I see a ton of people now on this sub and on other sites making their decisions with the expectation to double their money every month. This has lead a worrying amount of newbies putting in way too much money way too quickly into anything on the front page of CoinMarketCap with a low dollar value per coin hoping that crypto get them out of their debt or a life of drudgery in a cubicle. And all in the next year or two!
But its important to temper your hype about returns and realize why we had this exponential growth in the last year. Its not because we are seeing any mass increase in adoption, if anything adoption among eCommerce sites is decreasing. The only reason we saw so much upward price action is because of fiat monetary base expansion from people FOMO-ing in due to media coverage of previous price action. People are hoping to ride the bubble and sell to a greater fool in a few months, it is classic Greater Fool Theory. That’s it. We passed the $1,000 psychological marker again for Bitcoin which we hadn’t seen since right before the Mt.Gox disaster, and it just snowballed the positivity as headline after headline came out about the price growth. However those unexciting returns of 10% a month are not only the norm, but much more healthy for an alternative investment class. Here are the annual returns for Bitcoin for the last few years:
Keep in mind that a 10% monthly increase when compounded equals a 313% annual return, or over 3x your money. That may not sound exciting to those who entered recently and saw their money go 20x in a month on something like Tron before it crashed back down, but that 3X annual return is better than Bitcoin’s return every year except the year right before the last market meltdown and 2017. I have been saying for a while now that we are due for a major correction and every investor now should be planning for that possibility through proper allocation and setting return expectations that are reasonable.
Quanitifying risk in crypto is surprisingly difficult because the historical returns aren’t normally distributed, meaning that tools like Sharpe Ratio and other risk metrics can’t really be used as intended. Instead you’ll have to think of your own risk tolerance and qualitatively evaluate how risky each crypto is based on the team, the use case prospects, the amount of competition and the general market risk.
You can think of each crypto having a risk factor that is the summation of the general crypto market risk (Rm) as ultimately everything is tied to how Bitcoin does, but also its own inherent risk specific to its own goals (Ri).
Rt = Rm +Ri
The market risk is something you cannot avoid, if some China FUD comes out about regulations on Bitcoin then your investment in solid altcoin picks will go down too along with Bitcoin. This (Rm) return is essentially what risk you undertake to have a market ROI of 385% I talked about above. What you can minimize though is the Ri, the aset specific risks with the team, the likelihood they will actually deliver, the likelihood that their solution will be adopted. Unfortunately there is no one way to do this, you simply have to take the time to research and form your own opinion on how risky it really is before allocating a certain percentage to it. Consider the individual risk of each crypto and start looking for red flags:
- guaranteed promises of large returns (protip: that’s a Ponzi)
- float allocations that give way too much to the founder
- vague whitepapers
- vague timelines
- no clear use case
- Github with no useful code and sparse activity
- a team that is difficult to find information on or even worse anonymous
While all cryptocurrencies are a risky investments but generally you can break down cryptos into “low” risk core, medium risk speculative and high risk speculative
- Low Risk Core – This is the exchange pairing cryptos and those that are well established. These are almost sure to be around in 5 years, and will recover after any bear market. Bitcoin, Litecoin and Ethereum are in this class of risk, and I would also argue Monero.
- Medium Risk Speculative – These would be cryptos which generally have at least some product and are reasonably established, but higher risk than Core. Things like ZCash, Ripple, NEO..etc.
- High Risk Speculative – This is anything created within the last few months, low caps, shillcoins, ICOs…etc. Most cryptos are in this category, most of them will be essentially worthless in 5 years.
How much risk should you take on? That depends on your own life situation but also it should be proportional to how much expertise you have in both financial analysis and technology. If you’re a newbie who doesn’t understand the tech and has no idea how to value assets, your risk tolerance should be lower than a programmer who understand the tech or a financial analyst who is experienced in valuation metrics.
Right now the trio of BTC-ETH-LTC account for 55% of the market cap, so between 50-70% of your portfolio in low Risk Core for newbies is a great starting point. Then you can go down to 25-30% as you gain confidence and experience. But always try to keep about 1/3rd in safe core positions. Don’t go all in on speculative picks.
Core principles to minimize risk
- Have the majority of your holdings in things you feel good holding for at least 2 years. Don’t use the majority of your investment for day trading or short term investing.
- Consider using dollar cost averaging to enter a position. This generally means investing a X amount over several periods, instead of at once. You can also use downward biased dollar cost averaging to mitigate against downward risk. For example instead of investing $1000 at once in a position at market price, you can buy $500 at the market price today then set several limit orders at slightly lower intervals (for example $250 at 5% lower than market price, $250 at 10% lower than market price). This way your average cost of acquisition will be lower if the crypto happens to decline over the short term.
- Never chase a pump. Its simply too risky as its such an inefficient and unregulated market. If you continue to do it, most of your money losing decisions will be because you emotionally FOMO-ed into gambling on a symbol.
- Invest what you can afford to lose. Don’t have more than 5-10% of your net worth in crypto.
- Consider what level of loss you can’t accept in a position with a high risk factor, and use stop-limit orders to hedge against sudden crashes. Set you stop price at about 5-10% above your lowest limit. Stop-limit orders aren’t perfect but they’re better than having no hedging strategy for a risky microcap in case of some meltdown. Only you can determine what bags you are unwilling to hold.
- Diversify across sectors and rebalance your allocations periodically. Keep about 1/3rd in low risk core holdings.
- Have some fiat in reserve at a FDIC-insured exchange (ex. Gemini), and be ready to add to your winning positions on a pullback.
- Remember you didn’t actually make any money until you take some profits, so take do some profits when everyone else is at peak FOMO-ing bubble mode. You will also sleep much more comfortably once you take out the equivalent of your principal.
Along with thinking about your portfolio in terms of risk categories described above, I really find it helpful to think about the segments you are in. OnChainFX has some segment categorization to think about:
- General Purpose Platform
- Crowdfunding Platform
- Lending Platform
- Distributed Computing/Storage
- Prediction Markets
- IOT (Internet of Things)
- Asset Management
- Content Creation
- Exchange Platform
I generally like to simplify these down to these 7 segments:
- Core holdings – essentially the Low Risk Core segment
- Platform segment
- Privacy segment
- Finance/Bank settlement segment
- Enterprise Blockchain solutions segment
- Promising/Innovative Tech segment
This is merely what I use, but I’m sure you can think of your own. The key point I have is to try to invest your medium and high risk picks in a segment you understand well, and in which you can relatively accurately judge risk. If you don’t understand anything about how banking works or SWIFT or international settlement layers, don’t invest in Stellar. If you have no idea how a supply chain functions, avoid investing in VeChain (even if it’s being shilled to death on Reddit at the moment just like XRB was last month). Buffet calls this “circle of competence”, he invests in sectors he understands and avoids those he doesn’t like tech. I think doing the same thing in crypto is a wise move.
What’s interesting is that often we see like-coin movement, for example when a coin from one segment pumps we will frequently see another similar coin in the same segment go up (think Stellar following after Ripple).
Consider the historic correlations between your holdings. Generally when Bitcoin pumps, altcoins dump but at what rate depends on the coin. When Bitcoin goes sideways we tend to see pumping in altcoins, while when Bitcoin goes down, everything goes down.
You should set price targets for each of your holdings, which is a whole separate discussion I’ll go in Part 2 of the guide.
Summing it up
This was meant to get you think about what return targets you should set for your portfolio and how much risk you are willing to take and what strategies you can follow to mitigate that risk.
Returns around 385% (average crypto market CAGR over the last 3 years) would be a good target to aim for while remaining realistic, you can tweak it a bit based on your own risk tolerance. What category of risk your individual crypto picks should be will be determined by how much more greed you have for above average market return. A portfolio of 50% core holdings, 30% medium risk in a sector you understand well and 20% in high risk speculative is probably what the average portfolio should look like, with newbies going more towards 70% core and only 5% high risk speculative.
Just by thinking about these things you’ll likely do better than most crypto investors, because most don’t think about this stuff, to their own detriment.