Understanding the Cryptocurrency Market as a new investor
First and foremost, I would like to thank you for taking the time to read this blog. This blog will be part of a miniseries of me giving my thoughts on the cryptocurrency market and different assets within. It goes without saying this is not financial advice. I am not a financial advisor, nor do I have a history of advising people on how to go about managing their finances. The information provided in this blog should serve as merely another perspective that should help you form your own decisions whilst looking into this new market.
A Small New Pond with An Even Smaller Fish:
When someone asks what the cryptocurrency market is, they should know two things. It is a cumulation of digital assets, and one of or if not, the most volatile market in the investment world. The current market cap at the time of reading this summary is around 1.3 trillion pounds. In contrast to the rest of the markets in the world, it is still in its infancy and is without major regulations to protect retail investors (you and me who have a net worth below one million pounds) and thus it must be respected at all times.
If there is a single quote that I would like the reader of this blog to instill in their mind when it comes to investing in cryptocurrencies, if they are no longer interested in reading the remainder of this post, then it would be this:
“Investors must have the intelligence to take accountability for their own shortcomings in any market.”
This quote of mine alludes to an old biblical verse that I believe a new investor should be taught before they have access to a trading exchange… a fool is quickly departed from their money. The concept of making quick and easy money in cryptocurrency is a myth and reflects the personality and attitude of the investor who believes such claims. Having said that, I truly do believe that money will be made in this market, but more importantly, I believe that more money will be lost than made by the majority of investors. A person expecting life-changing wealth or wealth above their means of living without basic fundamentals in investing is someone I would like to recommend selling an Igloo to in the south of England.
Simply put naïve.
I must reiterate that it is asinine to assume that you, a new investor in an infant market, can jump in and out with no investing experience and make substantial amounts of money, you are once again reflecting the mindset of a novice investor and will be targeted by whales and sharks who have no regard for your mental and financial wellbeing. I, by no stretch of the imagination, would consider myself an experienced investor in the cryptocurrency market. I don’t consider anyone who hasn’t experienced a single bull run (rapid increase price action over a short period of time) and whole bear market (insignificant price action or price action that declines over a long period of time), to be an experienced cryptocurrency investor.
Now having understood this, it is important to understand the size of the market you are stepping into. To understand how different the size of this market is compared to traditional markets, I would like to refer to the total market cap (price multiplied by the circulating supply) of a couple of assets, not even whole markets (the specific grouping of similar assets). Gold’s market cap across the whole world is between 7-8 trillion pounds. Silver’s market cap is 1 trillion pounds. Keep in mind that the cryptocurrency market at the time of writing is only 1.3 trillion pounds as a whole, and is practically only comparable to a single asset within another established market. Now in relation to the total market cap for other mainstream traditional markets, the New York Stock Exchange (as of 2020) had a market cap of 20 trillion pounds, the Nasdaq was 9 trillion pounds, the Japan Exchange Group was around 4 trillion pounds and the London Stock Exchange was around 2 trillion pounds. All of these markets are regulated to a high degree by government agencies, some ran better than others if I do say.
Why was it important for me to flex the different sizes of traditional markets compared to cryptocurrency, you ask? The crypto market is a speculative market as it is without regulations and if it hopes to blossom into one of the top markets in the world, with significant staying power, then without doubt regulations will be either enforced or provided as guidelines. It is not a matter of if, but when.
That might lead you to another question.
Why should I care about regulations, the market seems to be growing just fine on its own?
The following section of this blog post will tackle perhaps the number one question that most investors aren’t thinking about, but smart money and big institutions are.
What to look for in a speculative market and why?
I believe there are three common ways to make money in the investment world and in life. Not regular money that you can get from the government or your regular 9-5 job, but actual meaningful money that can last a long time in life. The first is being the smartest and hardest working person in your profession. This is easier said than done and if it were possible for everyone to do this, then we would not be here investing in cryptocurrencies. The second way is to find loopholes and cheat the system, this is appealing if you aim to become a drug lord or can’t afford rent and you are eyeing up a prison cell for the winter, but I can assure you not everyone will find this appealing, unless you’re a politician or in a position of power… which usually happens to be both… but that’s another blog post in the making. The third way is one that only the top 20% of people in the world do, but a method anyone outside of the top 20% could have done. That is to be first! Being first simply means being an early investor before all the money floods into the market by the majority of other retail investors and sometimes before major institutions. The benefit of being first is it allows one to be able to scope the whole market and pick the best investments for a cheap price before anyone else. It is not however a divine right given to the lucky chosen, it is simply an advantage obtained by people who were curious enough to delve into a new market before anyone cared. If you are reading this before the cryptocurrency market hits two trillion pounds in market cap placing it in the top ten markets in the world, congratulations you’re first!
Now that the easy part is done, the area that 90% of retail investors fail to do when reaching this point is picking a good asset. Now I should note that there is a difference here between someone who is able to select a good asset and a good trader. A good trader will be able to use most crypto assets to their advantage to make money by looking at price movement on a short and long-time frame based on how the market has reacted previously. In turn, they use the past to predict future events. However, history does not always repeat itself. Now scoping the market for assets with future staying power should be done with the thought of predicting the future using a constant factor. Fundamentals.
There are over 8000 different cryptocurrencies in existence and by the time regulation comes into play here it may be over 10,000! Your role as an early investor is to pick not just a good cryptocurrency but a diamond in the rough, one that will have staying power. One that will become part of the top 200 in the future.
You might ask why you shouldn’t just pick the hottest new coin in the market or the one that has already risen a thousand percent in the last 24 hours?
Or why you should be concerned about regulations affecting cryptocurrency?
If you understand only one thing about the cryptocurrency market at its current state after reading this whole blog post, I hope it is that neither you, nor your mum, dad, sister, brother, uncle, the guy you met at your Christmas party a year ago, or Warren Buffet can predict the future and make a guess on the potential of a speculative market! If I told you the only reason a specific asset has any market value was that people had confidence in an asset, I would hope you’d say that asset was bullshit! Well, I hate to break it to you, actually, I don’t, but the whole cryptocurrency market whilst in its infancy devoid of regulations is just speculation. If people lose confidence in a specific currency with no underlying value, then simply put that token would have a greater chance of falling to zero than it would be going to one pound, a hundred, thousand, or even a million! Even Bitcoin falls into this category as there is no such thing as too big to fail in cryptocurrencies. Evidence for this is to check old crypto market cap rankings from 2013 to the present day and see if even half are even in existence.
However, there is hope! If the cryptocurrency market is to get out of its infancy and become a traditional market like Gold and the US stock markets before it, then it must be driven by intrinsic value. The value that you and I can’t dismiss and must accept is needed in this world. This is utility. The following points below are characteristics of an ideal cryptocurrency to help you find gems in this infant market and dictate what will be a winner and manage to survive up to adulthood. The utility is important because in the end when regulation arrives, out of the 8-10,000 crypto, only 100-300 will survive and it will be the ones with the Utility that you and I can’t live without, evidence for this is in the 1990s dot com bubble that led to the birthing of tech giants, Apple; Amazon; Google and Microsoft.
What to look for in a Speculative Cryptocurrency Market???
There are five characteristics I suggest researching about an asset before you even dare put a penny towards them: Protocol; Team; Milestones; Tokenomics; Partnerships. 4/5 must be at an exceptional standard to even consider investing in, if not then look away to another asset.
The value of any asset in crypto is not in the price but is rather in the protocol. The protocol is the real-world use case the cryptocurrency aims to solve. The protocol is what will drive the utility of the currency and thus give its real value once the market moves from infancy to adulthood. If the protocol solves no problem or is easily out-competed by other competitors then the protocol is useless once in a utility-driven market and so is the currency. This goes the same for if a token has failed to live up to its original protocol. An asset may be speculatively undervalued due to the price, but if there is no protocol it will always be overvalued if the price is above zero pounds!
To find out the protocol read the white paper, if the paper is complex and confusing then it can be a reflection on the quality of the team at hand. The white paper is the point of entry to allow for anyone with a large amount of money regardless of intelligence to want to invest and understand the project and goals. The white paper can also be an indicator of the target audience of the team.
It goes without saying that this is one of the most important aspects when looking at a currency. It's no good having an amazing protocol but underperforming creators and a team who aren’t able to design it with quality. Think of it as a child with the ability to draw a really cool car, would you then trust them to build and construct it with a large sum of money? No! If this is the case then why would you trust a team with no reputable background and experience to carry out making a well-made currency to solve a world problem? If the team is unknown or doesn’t interact with its community of investors, then these are red flags, this would indicate that they don’t want to be asked questions that could undermine their ability or the project itself or they could be an ass.
So, you found a great Protocol and Team, but what have they achieved to date? Are they just handing out empty promises, is this all smokes and mirrors? If I’m putting a large amount of money into a currency, shouldn’t I see progress in the project? If the team doesn’t disclose their milestones and targets for the year or publish annual reports on the company’s performance then you should take that as a red flag!!! Remember you’re investing in results and you want to be finding things with the actual value being displayed.
So, you’ve found a great protocol, a great team, and one that is achieving milestones, but the Tokenomics look horrendous. You’re in a dilemma that can make this a hit or miss situation for many currencies. Tokenomics refers to supply and demand. In a speculative market, because the utility isn’t being used, the next most important thing to understand is Tokenomics. If a currency has a large supply (to me this is anything above 5 billion) then the demand to drive the price higher has to be great. However, if any of the previous points, the protocol, team, and milestones are at a miss, then the demand will suffer and so will the value. It should be noted that if the demand is high and the supply is low, then regardless in a speculative market the value will be high, but in a utility market, this will not matter as much and will just be a bonus.
The ideal Tokenomics is a low supply and market cap (in the millions) and great demand (protocol, team, and milestones). However, it should be noted that a high supply may mean that a token becomes undervalued for a long period of time even though the demand is high, and would require the value to catch up. This is good for long-term investors who want to minimalize their risk but would mean they would see less immediate returns. However great Tokenomics can fool people into believing the coin is the next best thing in the world, this is why the other characteristics are in place to safeguard against this.
Finally, you’ve found a great protocol, team, Tokenomics, and milestones, but there is a lack of partnerships with the currency. Partnerships by a cryptocurrency are large institutions that are looking to help provide further funding, guidance or utilize the project. These partnerships can be strategic, and it is important for any currency to have achieved key partnerships to allow for mass adoption (utilization) of their currency. For example, if a currency is solving problems in the financial sector, it is reasonable to assume they would need to partner with gatekeepers of the financial world i.e., banks and governments. Without such a partnership then there is little reason for its utilization outside of retail investors and it will not grow out of a speculative asset, and still falls susceptible to becoming worthless.
Now, I would like to thank you so much for reading to the end of this blog post. I would like to state again this is not financial advice but merely a different perspective outlined on how to go about investing in the cryptocurrency market. Feel free to share this blog post with friends and family and to use it to make better decisions in the future. I will be posting more things in the future on cryptocurrencies, mainly on specific assets that I believe have great long-term value. Give me a follow on my social media and direct message me if you have any questions about assets that I mention in my tweets as well as to keep up to date with when I post my next blogs.