Crypto investing 101

*This content is brought to you by Jaltech

By Gaurav Nair* 

How do you know if someone invests in cryptocurrencies? They tell you. The stories are mostly around how much money they or someone they know have 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 invested for years and were able to stomach periods of volatility.

Gaurav Nair

For those of you who haven’t invested, I would imagine it’s because you are either risk averse and the volatility of cryptocurrencies concerns you, or you simply can’t get your head around the investment case.

What you really should be thinking is, how do I get the right risk adjusted exposure to this investment class because it has produced incredibly high returns. I gave an example in my previous article that “had you invested R10,000 in Bitcoin 10 years ago, your investment value would be in the region of R35m today.”

I use this example to illustrate that with highly volatile investments, a small investment amount may provide you with exceptional returns without taking on huge risk – a concept referred to as asymmetric returns.

How to invest? What people need to avoid is gambling as opposed to investing. Investing requires research, patience and an interest in the subject matter, whereas gambling is fuelled by greed and the desire to get rich quick, emotion, hot tips and bar room chatter.

When it comes to cryptocurrencies, utility and adoption are key. What I mean by this is 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 – a sharp rise followed by a sudden fall.

So how do you pick the right cryptocurrencies? How do you make sure you have the Google and Facebook and not the Yahoo and My Space of cryptocurrencies? My personal crypto portfolio allocation consists of diverse cryptocurrencies that have good security credentials and are showing signs of wide adoption, avoiding the need to pick winners.

How do you choose the right basket? At Jaltech we started off by setting out criteria that we believe are critical for cryptocurrencies to be successful in the long run. A few examples of the criteria include cryptocurrencies that:

  1. have been widely adopted – To determine adoption, we use market capitalisation as a key metric and by rebalancing quarterly, we can make sure that we gain exposure to winners as they grow and remove cryptocurrencies that are on their way out;
  2. are globally available – This criteria requires the cryptocurrencies to be available on three or more reputable public exchanges;
  3. are traded in huge volumes – This ensures that we can offer investors liquidity to exit the investment on short notice (1 to 3 days); and
  4. 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 the criteria, only seven cryptocurrencies met our very high standards, these include: Bitcoin, Ether, Cardano, Polkadot, Uniswap, Chainlink and Aave. There were a number of cryptocurrencies that just missed the mark, for example, Binance which has a market cap of over $70bn, however, it didn’t meet our requirements of being listed on multiple reputable exchanges.

How to invest? If you have the time to perform the required research, energy and interest in the subject matter, we suggest developing and implementing your own cryptocurrency investment criteria.

Or, consider investing in our cryptocurrency basket which focuses currently on the above cryptocurrencies with inclusions and exclusions being reviewed quarterly. For more information on our cryptocurrency basket, click here.

  • Gaurav Nair – Co-founder and partner at Jaltech. 

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