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The Crypto Investment Budget

Detailed 101 guides: Start with $100 to try out crypto investing

Why Not Both?

The Crypto Investment Budget – The obvious question is the first to be answered. Wouldn’t it be better to just invest in all of the cryptocurrencies that interest you? First, let’s consider a few factors. Investing in diversification might not be worth your while if you do not have sufficient cash available.

If you had $100 dollars, we would suggest investing it equally across the 10 cryptocurrencies, meaning $10 in each. Suppose that after a month, one of those cryptocurrency prices went up by 10x, another by 3x, then 5 of them went down by 50%, and the last one went to zero.

If you invest your initial $100 in just the two cryptocurrencies that source serious returns, your total profit would be much lower than if you invested it all in just one.

Although it’s much easier said than done to predict whether certain cryptocurrencies will produce 3x or 10x gains, this can be estimated with some accuracy based on the factors. Later on in this post, I will talk about this.

The third and final reason why investing in just a few cryptocurrencies might be better is fee-related, specifically exchange fees and transaction fees.

In addition to the small fee associated with purchasing a cryptocurrency, many vendors force you to buy an amount that’s larger than what you would normally pay for one cryptocurrency.

Trading cryptocurrency involves a minimum amount for most exchanges. The minimum purchase amount of any cryptocurrency on Binance is $10.

Besides holding your crypto in your own wallet till you sell, some exchanges charge very high fees and minimum withdrawal amounts.

When you buy Bitcoin, Ethereum, or ERC20 tokens, transaction fees usually aren’t an issue. If the Ethereum network is crowded, transfers of tokens such as AAVE can cost more than $100 as Ethereum gas fees can exceed $50 for BTC transfers.

You may also want to consider investing in fewer cryptos if you prefer to be practical.

The task of keeping up with more than a dozen cryptocurrencies and keeping up with price action is difficult, and missing one of these could lead to a 2x or a 10x return.

The cryptocurrencies in my personal portfolio are currently number 17 if you’re interested. While crypto is my full-time job, I know I’d be unable to stay on top of much more than that.

Why do you want to buy these?

We’ll get back to the subject at hand now. Several cryptocurrencies appeal to you, but you can only invest in a few. Please feel free to write out each of these cryptocurrencies on a piece of paper and tick them off as you follow along with this post.

Your first step in triaging cryptocurrencies is to think about why they are on your list, in the first place. Cryptocurrencies that have been hyped as rising in value should be immediately dismissed from your list if you want to invest in them solely for that reason. An all-time high may be reached tomorrow for a coin inspired by dogs.

Social Engagement

However, there is a strong correlation between social engagement and the price movement of a cryptocurrency coin. You should also consider this when making your decision.

In fact, there could be a cryptocurrency on your list that has every advantage but does not receive any online attention and is quite possibly non-existent.

Checking their Twitter followings and watchlist counts on the coin market cap is the easiest way to determine if the cryptocurrencies on your list have sufficient engagement.

Referencing the top 100 cryptocurrencies, they usually have Twitter followings and a CMC watchlist exceeding 100,000.

There are between ten and 50,000 cryptos on CMC’s watchlist for coins in the top 200.

Consider whether the cryptographic keys on your lists meet these minimum criteria. Quite a bit of price movement you might be seeing on the cryptos you’re considering may be a result of manipulation if they have a low following compared to their ranking.

Since there is virtually no community engagement, the trading must be done by someone else.

In CoinMarkeCap and CoinGecko, unscrupulous activity is usually quite evident. Trading volumes are low with sudden spikes and exchange support is limited, which are dead giveaways.

To put that into perspective, most cryptocurrency trading volumes in the top 100 are in the billions or at least count in the hundreds of millions.

There are at least tens of millions of dollars traded in the top 200 firms during daytime hours. If you notice any unusual behavior in the crypto you’re considering, then take note.

Sell Pressure

After establishing that the cryptocurrency you’re looking at doesn’t just have hype, you can proceed to examining its social engagement. Next, you will check the sources of supply and the drivers of demand.

The supply of cryptocurrency is largely determined by inflation and vesting. Coins and tokens reserved for private investors or the project team are unlocked during this period.

Most cryptocurrencies on the market have some real inflation if we are being technically accurate. The supply of coins or tokens will not reach a maximum as new ones are created every day.

There is an average inflation rate of 5 to 10% for most cryptocurrencies. You can earn DeFi tokens in the hundreds of percent inflation rate by earning yield farming tokens.

Investing in a cryptocurrency for a short period of time won’t really cause inflation issues. By staking your coin or token during the waiting period, you can sometimes offset inflation.

If inflation is combined with vesting schedules, you can end up with some serious consequences, and this is something even the most experienced crypto investors tend to ignore.

My post about tokenomics discussed the fact that most cryptocurrencies were pre-mined, meaning they were created in advance by the creators.

Most of this initial supply goes to venture capitalists, private investors, and the project’s team, with a very small percentage sold to retail investors like you and me.

In order to determine how cryptocurrencies were initially allocated, you can usually use ICO drops or Massari to find out how that cryptocurrency has been allocated.

To prevent the price from crashing too soon after the market starts trading, private parties usually have a long unlock period for their coins and tokens.

Although vesting schedules are available in all shapes and sizes, the most important thing to watch for is any large vesting cliffs since this sudden distribution of tokens so quickly suppresses the price.

Polygon’s MATIC token might be able to illustrate how its price appears to have stagnated for a week or two after vesting cliffs when private investors sold some of their unlocked tokens.

A major disadvantage of many cryptocurrency projects is that their initial investors are allowed to stake their coins or tokens whilst they are vesting. In other words, the rewards for waiting are inflationary.

Sometimes, tokens or coins have been staking for years and have accumulated inflationary rewards even before the crypto on the market was even listed.

A 10 million token allocation can turn into a 12 million, 15 million, or even 20 million token allocation for unlocking. Whenever that vesting cliff comes, there is a possibility that a crash will follow.

Buy Pressure

In staking, you might want to avoid coins or tokens with high inflation schedules and aggressive vesting schedules. The demand drivers must be strong for it to succeed.

Cryptocurrency is driven by multiple demand drivers, but two of the most powerful are institutional use cases and demand from consumers. ETH’s primary use case is to pay for gas fees on the Ethereum network, while BTC’s primary use case is to store value.

Bitcoin and Ethereum are in high demand due to their robustness and their size. Regardless of how high the inflation and aggressive vesting schedules are for the cryptocurrencies, you’re considering. There is a strong possibility that demand could surpass supply in some of those fields.

Polygon’s MATIC token is yet another example, despite its vesting policy, MATIC has been flying because of the smaller fees associated with Ethereum dApps via Polygon’s layer-2 blockchain.

Investing in cryptocurrencies might give you an opportunity to find out if some of the coins you’re considering going on the radar of institutional investors.

A number of exchange-traded products, like Grayscale’s Crypto Trusts, have been opening up markets to institutional investors so they can gain exposure to altcoins.

The company has been buying bitcoin for its clients and is currently working on getting approval for almost a dozen more trusts to purchase bitcoin on their behalf.

It is important to be aware of the fact that many cryptocurrencies will advertise their partnership and institution connections even if the partnerships don’t have any real impact on their crypto project. Does this claim require more research?

Consider whether there are any applications beyond speculative investing that could drive up the cost of the coins or tokens you have selected.

It is ideal for the demand to come from the use case and not be driven by short-term incentives.

After you identify those use cases, ask yourself if there are other crypto projects competing in the same niche, which are better at what they do or can do better.

According to my experience, the best cryptocurrencies have practical applications in niches with little competition. AVA tokens are a good example of Travala tokens.

It goes without saying that most cryptocurrencies that have a strong use case, or those that have institutional investors, tend to do well during bull markets. I now bring you to one final point to consider.

Growth Potential

Assuming that the cryptos on your list are highly engaged on social media, have minimal hype, and their drivers outweigh their suppliers, the last thing you should consider is their growth potential.

Let’s face the facts. It would be somewhere between 4 and 8 months before we could call this bull market over.

The prices of most cryptocurrencies have risen more than 10 times already. Despite this, even large cryptocurrencies like bitcoin and ethereum will likely reach a double-digit increase in price by the year-end.

If you go with bitcoins and ether, you will lose a lot of this money in exchange fees and transaction fees, as I mentioned earlier.

The good news is that there are many cryptocurrencies that could double or even triple in value in the near term.

As you go through your list, order the remaining cryptos by market cap in ascending order.

Market capitalization is generally inversely proportional to growth potential. Risk is involved here. Despite their volatility, smaller caps are not guaranteed to pump.

After that, you should revisit CoinMarketCap or CoinGecko and see which exchanges these cryptos trade on.

It is possible that one of them could be listed on Binance or Coinbase if they keep seeing community growth and development despite not being traded on Binance or Coinbase. Due to being listed on the grey day exchange, investors will rush to the stock and the mere announcement will boost the price.

You can also use a crypto project roadmap as a growth metric besides the market cap and potential exchange listings. Their websites usually have these and if not, they have telegram groups.

You might get a roadmap with a schedule or at least an estimate. The price is bound to increase when news of the listing is picked up by crypto news outlets.

In addition to basic price analysis, you can also check for growth factors. Most cryptocurrencies have still not broken back to those all-time highs from the last bull market. There is no guarantee that they will break these records. It is possible that this will happen if the momentum is there.

In contrast, you may find that the current price of some of your cryptos barely registers when compared to the long-term price history. You should only invest in newer cryptocurrencies in which there has not been a previous all-time high and which have maintained an upward trend.

Ideally, you should be able to refine your list to only a few cryptos that are worth your money. Identifying the right time to sell is the remaining step.

Disclaimer:

I‘m not a financial advisor and this article is simply for educational purposes. It should not be used to make any decisions regarding your finances. If you need investment advice, please contact a qualified financial advisor.

Previous Post: Bear Market of Crypto

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