Top 4 Golden Rules Of Bitcoin Investing & Trading With Cryptocurrency

Before you get started on trying to wade through all of the information about cryptocurrency investments, I think it is best to start with 4 very simple rules.

Don’t be fooled by their simplicity, because they are critical, and they can be the difference between huge profits and stunning losses.

Memorize them, and keep them in mind at all times, but especially when you are about to click that “Buy” button on any investment in cryptocurrency. Almost every trade in the cryptospace has a “winner” on one side and a “loser” on the other when it comes to profit vs loss.

Following the rules helps you maximize your chances of putting your money in more winning bets than losing ones.

Rule #1: Leave Emotion Out Of it

So you want to get into investing in crypto because it’s exciting, game changing technology that represents all that is bright and glorious about the future?

Maybe you decided that cryptocurrency is the solution to corrupt governments, the answer to the widening income gap that will finally level the playing field for all people oppressed by the banking industry or whatever boogeyman you hold personally responsible for the plight of the poor.

Perhaps at long last there exists a technology that will bring wealth to the unbanked, single-handedly lift small African villages into the light, with lots of safe drinking water and happy smiles all around.

When it comes to investing or trading cryptocurrency (I’ll explain the difference in a minute) guess what?

None Of That Fucking Matters.

Seriously, it doesn’t. Skip your cries of “it’s not fair” when your position doesn’t pan out as hoped even though you’re sure it was in a currency that was going to change the world. We’re not saving the whales here. If you are investing in the field of cryptocurrencies, there is one goal, to make money. Whining about the “good” of the technology, or that all the money put in crypto will be for some higher cause or better society, guess what?

The market doesn’t care. The minute you think you should put your hard-earned money into a cryptocurrency position for any reason other than “I think I will get more money out of it then I put into it”, stop right there. Financial markets are cold harsh places; they don’t care about the greater good of society, or about your feelings.

Maybe a few of the participants do, and if you’re one of those people that is great, maybe you can use your crypto profits to start a music school for underprivileged dolphins later on. But when it comes to putting your hard-earned money into any cryptocurrency to make an ROI on that money, no whining.

Leave Your Feelings At the Door.

You can contribute your time or expertise or social media commentary to improving your favorite cryptocurrency if you want, but once you contribute cold hard cash, it’s time to put on your big-boy pants. An emotional trader is a bad one; base your cryptocurrency investment decisions on logic and numbers, nothing else.

Rule 2: Know The Difference Between Investing & Trading

Just like investing on Wall Street, (or in any asset class really), there is a difference between Investing and Trading. For most, the difference is time. The typical Buy-and-hold stock investor tries to buy an asset at a fair price that will pay out some sort of dividends over time, and then they hold that investment for as long as possible.

Likewise, a trader tends to be focused more on the short term, finding that one hot tech stock that is about due for a pop, then buying it low, selling it high, and moving on to the next trade. Cryptocurrency works similarly, but with a few distinct differences.

First, 99% of cryptocurrencies don’t pay out any type of dividend or coupon, so trying to use typical long-term investor metrics like dividend yields or coupon interest rates don’t really apply.

A long-term investor in cryptocurrency is often someone who buys one of the big 3 (Bitcoin, Ethereum, or Litecoin) and then holds it until it reaches some high level in the future that they want to cash out at. By comparison, traders look more towards moving in and out of the big 3 over short periods of time, and likely dipping their toes into the so-called “altcoins” like Ripple, Monero, or Dashcoin in search of higher gains.

Those with an even higher tolerance for risk will wade into the dark corner of the market of ICOs, where high returns and even higher risks await. As you have probably guessed, the crypto industry attracts more “traders” than “investors,” and with that mindset comes additional risk of being a crypto-loser, not a crypto-millionaire.

No matter which type of player you are, don’t fool yourself about what you are or what your level of ability and risk tolerance is. Just because you made 2 bitcoins a few years ago selling a bag of oregano to some sucker in Florida on Silk Road does not make you a genius qualified to analyze the cash flow and payback period of an Initial Coin Offering in the aerospace industry.

Fortunes will be made in the cryptocurrency arena, but some of those will be made taking money from the suckers. The news is filled every day with stories of exchanges going under, hackers stealing wallets, pump and dump altcoin schemes, and backers of ICOs raising fortunes and disappearing overnight. Don’t overestimate or overextend yourself trying to make the big score, Wall Street is littered with the bones of people who tried that in a well-regulated and centralized market, protections that the crypto industry doesn’t have yet.

Don’t risk money you can’t afford to lose, and don’t trust anyone else is looking out for you in the crypto world. Which leads us to Rule #3.

Rule #3: Define WHY On Each Crypto Investment

Now before you say “To make money, stupid,” let me clarify this rule. We all know the overarching goal is to make money with each and every crypto investment. We also know there are no guarantees that a crypto investment will go up in value (although the skyrocketing values of the past few months may tempt you t question that).

To properly implement this rule, you need to dig a little deeper into your reasoning behind each and every penny you sink into crypto. Is it because you have a fear of missing out after reading the breathless news stories about the eye-popping increases in bitcoins in recent months?

You are not alone; FOMO is a common driver of the “herd mentality” that is bringing more and more people into the crypto investing space every day. If you just want to login to an exchange long enough to buy one bitcoin and tuck it away and forget about it because your friend told you to “diversify”, fine, do just that, and don’t look back. If you are looking to be an active investor or trader in the crypto space though, you have to be able to justify (out loud even) why that is, on each and every transaction.

You can believe in a cryptocurrency’s mission, its founders, even the superiority of its tech, and still consider it to be a bad investment. The reasons behind “Why” you make an investment should all relate to the potential to make additional money above your invested dollars.

So, if you have done your actual homework (not to be confused with” surfed twitter to find crypto-tweets that agree with you”) and you think there is potential in making a particular crypto investment, you should consider something known in the finance world (and gambling world) as an EV calculation.

An EV (or Expected Value) calculation takes the possible outcomes of an investment, assigns a value to each one, determines the chances of each outcome occurring, multiplies that chance by the value of each, and sums them up. That may sound complex, but in reality the math is very simple.

An Example EV Calculation

Joe is looking at buying into an Ethereum-based crypto token that just started trading. The current price of it is $2. Joe has done his research..

Joe has done his research and knows that an upcoming planned fork of the coin would make it worth at least $10, but there is only a 50% chance the miners will agree to that fork. Joe’s research says that there is the same 50% chance the fork will fail, and the token will drop to $1.

The “Maths”

Outcome #1: 50% chance x $10.00 end value = $5.00
Outcome #2: 50% chance x $1.00 end value= $0.50

Add those values up and divide by the number of possible outcomes (2), and you get a total expected value of $2.75. That means for every $2 coin you buy now, you should expect to make an average profit of $2.75, making it economically viable (any number <$2.00 has an expected loss, and shouldn’t be done).

Understand that this is just probabilities, not actual guaranteed payout. There can also be many more than just 2 potential outcomes (for example, what if there was a 25% chance the fork failed, but the increased interest from the fork debate meant the value only dropped to $1.50, etc). Finding these types of unbalanced risk vs reward (where you can make a lot more than you can lose on the same possibilities) is key to making an overall profit, even if some bets go badly.

Remember, no serious investor makes a profit on every trade, the key is to make more winning bets than losing ones, and to always try to make bets that have more potential upside (e.g. a 5x return) than potential downside (e.g. a loss of 50%).

Rule 4: Math Always Beats Stories

Folks, if you pay attention to nothing else when it comes to investing in cryptocurrency, one thing you should always remember is: math always wins. I’m not talking about difficult math involving hundreds of variables and equations that take a team of geniuses several months to figure out either. I’m talking about basic “1 + 1 = 3” type of math you see violated every day in the crypto space. If you are getting into bitcoin now because you heard of someone who bought it at 17 cents years ago and sold it today at $17,000.00, and you think you can get the same return, than you are ignoring the basic math.

The value of something that has gone up 100,000x, can NOT go up another 10,0000x from its new high value without exceeding the value of all commerce, everywhere. Returns may be great, people may double, triple, or even 10x their money getting in at today’s all-time highs, but the difference between going from 17 cents to $17,000 is much easier than later going from $17,000 to $1,700,000,000 per bitcoin.

Exponential growth can only go so far. Doing the same 100,000x return from today’s value would mean the market cap of bitcoin alone would exceed the value of all goods and services produced today combined worldwide, it can’t happen.

Likewise, you have to have realistic expectations when some new ICO or crypto guru is promising you gains of ten or twenty times your money in a short-time period. Bernie Madoff ripped off thousands of very experienced investors who never bothered to check the most basic math.

The trades he claimed to be making to generate his profits in the public markets should have been obviously false, because he claimed to be making more trades than actually occurred in those assets from all traders combined. If a plate of cookies only had 12 cookies on it, and multiple people ate some cookies, you don’t have to know how many cookies each person ate to know that one person could not have eaten 14 cookies themselves. Basic math like this gets ignored every day in the cryptospace.

ICO’s promise that coins that have no limit on the number of coins that can be mined will somehow always go up in value, but you as an investor should know basic math says something with an unlimited supply, has a ceiling on its value. Monet paintings are expensive because more aren’t being made, gold or silver has value because there is a cost in producing more.

Don’t let some clever marketing pitch convince you to put your hard-earned money into an “asset’ that can someone else can just print more of any time they want. Scarcity drives pricing, air doesn’t cost anything because there is no scarcity, remember that the same rules apply to cryptocurrency that can be generated at will.

These 4 Rules should be considered just the “baseline”, and not inclusive of every factor involved in cryptocurrency investments. Consider them the guidelines you always follow before you start doing the actual calculations on making any cryptocurrency investment, and refer back to them when you are preparing to exit out of a cryptcurrency, whether at a loss or a gain.

As we get down into the nitty-gritty of what makes individual cryptocurrency investments worthwhile, I’ll refer to these rules often, the basis behind them is the same that professional traders have used for decades in other markets, and they will serve you well in the cryptocurrency investing arena too.