One of the most important first steps to becoming a successful crypto investor is to come up with your own set of rules to determine what you need to do before entering the market.
In previous articles, I have also outlined some aspects that those who are new to trading should pay attention to. In this article, I will go deeper into one of the most important things in trading that I have learned from my seniors as well as from the books I have read about trading.
Okay, so how should we start the story?
So, think about a time when you have a trading idea in your head and you can't drive it. You turn on your computer immediately, wanting to execute this trade quickly because, you are confident in your decision, you believe that there is no way in the world that you can lose because of it.
If you feel like this, the first thing you should do is stop what you are doing and read – maybe this article or some other articles on here. or a trading book that you know. And in this article, I will introduce you to some basic strategies to help you maximize your profits and minimize your risks when trading.
One of the most important first steps to becoming a successful crypto investor is to come up with your own set of rules to determine the bet size of each trade you enter.
Position sizing
Position sizing is an investment term used to set up some kind of system that will help you remove emotions when determining how much to invest in any project. When investing in crypto, we must be very careful to NEVER bet all of our money on any one potential project.
Remember that cryptocurrency is a highly speculative investment and it is still risky even if you understand the risks. That is to say, even if you have done all your research and identified the perfect investment opportunity and you have timed your investments well, it could still go against you.
The reason why we still don’t understand it properly is because cryptocurrency is still a new industry and the majority of coins traded today are still mostly from startups or small projects.
Investing in startups is risky because a lot of things can go wrong in the lifecycle of a business from inception to maturity.
For example, the founders may suddenly fail, there may be unexpected issues, there may be bugs in the source code or the market may simply not be ready for the project’s proposed solution at the moment.
A crypto project can fail for any number of reasons – just like startups do.
So in this sense, investing in crypto projects is a lot like venture capital.
When venture capitalists invest in startups, they are investing in the team, their proposed vision, and the hope that they can successfully execute their vision. Above all, they are betting that everything along the way will go smoothly and that the company will be a winner – meaning it will go public or be acquired.
In the crypto market, we are betting on the same thing. We hope that, that project will grow 10x or more. However, the projects we invest in are not always profitable. There are countless projects and we have a limited number of clubs to hit, so to maximize our chances of getting the same huge profits, we need to have a systematic way of allocating our bets.
First, you need to decide how much money you want to invest in the cryptocurrency market in any given time period.
Let's say you use one year as the time period.
You should not invest more than 5% of your total annual investment budget in cryptocurrencies.
So, if you plan to invest a total of $100,000 this year in different asset classes (stocks, bonds, mutual funds, real estate, etc.), $5,000 is the MAXIMUM amount you should consider putting into cryptocurrencies.
Next, you need to decide how much time you want to spend researching projects and making trades.
For me, there are only 1-2 opportunities a month. Crypto requires more time and focus to trade than public stocks, so you need to factor in the time and energy needed to put in accordingly.
But remember that for every investment position you enter, you will need to have a strategy to exit that position to make a profit.
For example, for me, my goal is to divide my entire annual budget into about 10 investments over a one-year period. So in this example, I would take my total budget, $5,000, and divide it by 10. That gives me 10 investments with an average investment size of $500 each over any one-year period.
The exact number depends on each person's personal preferences, risk appetite, trading time, and frequency of finding investable projects.
But that's the general idea. Whatever system you decide on, write it down and stick to it.
So why are we doing all this work and what results can we expect?
We hope that some of our bets will lose a little or gain a little and not change much.
We should also assume that some will go to 0 or close to 0.
But all we need is 1 or 2 of them to hit 1000% and we will have made enough to cover all our losses and book profits that will bulge our pockets.
This is also the investment strategy that successful venture capitalists use to generate outsized returns on the portfolios they invest in. And every now and then, you will hit a rare run of 2000% or more - and those are the ones that will really make you rich.
But you have to be in it to win it!
Once you have determined how many investments you want to make and once you have figured out your average position size, then you can get a little more excited.
You can start to resize your position based on how confident or excited you are about a particular investment.
A simple way to do this is to divide your investments into three sizes: small, medium, and large.
But it’s important to make sure your average investment size is still $500, based on the current scenario.
So if I find a coin that’s really interesting, but I have one or two reservations or concerns about it, I’ll classify it as a small bet and risk half of my average bet, like $250.
If there’s a coin that I really like and I’m extremely confident that it’s going to go up in the near future but the current times aren’t great, maybe the market just started going down and there’s a bunch of bad news, then I’ll probably classify it as a medium bet and invest $500.
But if the market conditions are good and this is a perfect investment opportunity and I have also found some information that this project seems to be on the rise, I will go big and invest $750.
Note: here the average of 250, 500 and 750 is still 500. So my average bet does not change.
Of course there will be slight variations and deviations to what I have shared above.
There may be periods where you cannot justify doing anything more than placing small bets on multiple consecutive investments.
There may also be periods where you simply cannot find ANYTHING worth investing in.
And finally, there may be periods where EVERYTHING starts to look like a great investment.
And these are completely normal, because crypto has a lot of dynamics - when things are good, we see things as good and when things are bad, we see really bad.
But as long as you come up with a set of rules for sizing your bets - even if it's just like the example above - and you consciously stick to it…
You'll be able to maximize your profits and minimize your risks.
Happy investing!
Editor: TonyCapital team
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