By Jonty Sacks, partner at Jaltech
In the world of cryptocurrencies, time moves at an extremely rapid rate. In order for you to become familiar with this popular form of investment, learn crypto innovations and the many ways on how to invest, you first need to master the basics.
One of the most frequently asked questions is – where do I start? First, we need to understand the meaning of “cryptocurrency”.
What is crypto?
Cryptocurrency, or tokens, are forms of digital assets that circulate without requiring a centralised monetary authority such as a bank. Currently, they are mainly used as a form of speculation or investment into promising new technologies that are looking to disrupt finance and other sectors. They are the technology used to facilitate the transfer of value over the internet.
How do you know if someone invests in cryptocurrencies? They tell you. They fill the room with stories that are mostly about how much money they, or someone they know has made, or how well certain cryptocurrencies are doing in the market.
The fact is that the people who have made a significant amount of money from investing in cryptocurrencies are those who have been investing for years and were able to stomach periods of volatility.
For those of you who haven’t invested, it could be that the known instability of cryptocurrencies still concerns you. What you really should be thinking is, how do I get the right risk adjusted exposure to this asset class, because it has produced incredibly high returns?
A small investment amount may provide you with exceptional returns without having to take on huge risk – a concept referred to as asymmetric returns.
For example, the investor who had the foresight (and finances) to invest R10 000 in Bitcoin 10 years ago, today would have an investment value in the region of R35 million. They however only stood to lose R10 000 (much less than R35 million) in the worst case scenario.
How to invest?
What is the difference between a gambler and an investor? An investor has interest, research and patience, however in contrast, gambling is fuelled by the desire to get rich quickly, emotion, hot tips and bar room chatter.
In order to buy cryptocurrency, you are required to open an account with an exchange where you can transfer real money to buy cryptocurrencies such as Ether or Bitcoin. When it comes to cryptocurrencies, utility and adoption are one approach. This means that the cryptocurrencies – or the underlying technology they represent – must have a real use in society and must be widely adopted or show signs of adoption. If not, their price movements are more than likely driven by speculative investors which can lead to a sharp rise followed by a sudden fall.
Picking the right ones
How do you ensure you have the Google and Facebook of cryptocurrencies, and not Yahoo and MySpace? One method is to ensure your personal crypto portfolio allocation consists of diverse cryptocurrencies that have good security credentials and are showing signs of wide adoption, avoiding the need to speculate and pick winners.
Choose the right basket
At the outset one needs to set criteria that are critical for cryptocurrencies to be successful in the long run:
- Have been widely adopted – we use market capitalisation as a key metric to determine adoption and by rebalancing quarterly, we can ensure that we gain exposure to winners as they grow and remove cryptocurrencies that are on their way out;
- Be globally and readily available – the cryptocurrencies need to be available on three or more reputable public exchanges;
- Be traded in huge volumes – this offers investors liquidity to exit the investment on short notice (1 to 3 days);
- Have an excellent security history and are decentralised – this is the best test to determine how safe a cryptocurrency is from being hacked or manipulated.
In applying these criteria, only seven cryptocurrencies met our very high standards, these include: Bitcoin, Ether, Solana, Matic, Litecoin, Polkadot, Uniswap, Chain Link and Aave. There were a number of cryptocurrencies that just missed the mark, such as Binance, which has a market cap of over $70 billion, however, it didn’t meet the requirement of being listed on multiple reputable exchanges.
Benefits of using a broker
Using a broker is a helpful option when wanting to purchase cryptocurrency. There are several advantages to using a broker, which include:
- A broker already has an established system, they are able to avoid any technical issues that might arise during transactions;
- One of the main advantages is that they can set you up easily with options from the get go;
- They have more advanced technical instruments such as mobile apps, websites and platforms that they use.