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The Bitcoin Investing Mindset and How to Minimize Your Risk

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In a market as volatile as cryptocurrency, it’s important to minimize your risk as
much as possible. With potential market changes of 10% on a daily basis, it’s
important for your portfolio, as well as, your peace of mind.
First off, never invest more than you can afford to lose. It may be tempting to try
and hit a home run, but in doing so you will cause yourself sleepless nights and
anxiety ridden days.
Secondly, unless you are day trading, don’t check crypto price charts every few
hours. Doing so will only give additional anxiety. The price is liable is swing by
large percentage margins on a daily basis, that’s just the way of the Bitcoin
market, just remember that so far, over the long run, the price has continued to
increase.
Dollar Cost Averaging
One of the best ways to minimize your risk in a volatile market is to use what is
known as ‘dollar cost averaging’. This simply means dividing up your total
planned investment and buying Bitcoin at regular intervals instead of all at once.
With dollar cost averaging, you are simply buying less of an asset (in this case,
Bitcoin) when the price is high, and more when the price is low. Your total
exposure is less because you are only exposed to part of any decline in the
market, as opposed to all of it with a lump sum investment. Your average cost
per coin is therefore likely to be lower.
Let’s use an example, both Alan and John have $1200 to invest in Bitcoin at the
start of 2015. Alan decides to invest all $1200 on January 1st, John on the other
hand is going to use dollar cost averaging. He will invest $100 on the 1st of each
month, for a total of $1200. The prices used in this example are the actual
Bitcoin trading prices as of those dates.
January 1st 2015 – $305.32
February 1st 2015 – $237.18
March 1st 2015 – $263.57
April 1st 2015 – $255.23
May 1st 2015 – $226.45
June 1st 2015 – $233.44
July 1st 2015 – $260.73
August 1st 2015 -$283.04
September 1st 2015 – $229.00
October 1st 2015 – $240.10
November 1st 2015 – $325.28
December 1st 2015 – $375.95
Alan’s total investment in BTC = 3.93 (1200/305.32)
John’s total investment in BTC = 4.55 (1200/269.60)
Price on January 1st 2016 – $433.57
Alan’s Portfolio Value = 3.93*433.57 = $1704.02
John’s Portfolio Value = 4.55*433.57 = $1974.37
Alan’s ROI = 42%
John’s ROI = 64.5%
So by using dollar cost averaging, John’s average BTC purchase price was
$269.60, whereas Alan bought a lump sum at $305.32. By having a lower
average purchase price, John’s ROI is higher over time. Alan bought her coins at
the peak of the market before a prolonged downturn, whereas John utilized this
downturn to his advantage.
Remember, time in the market beats timing the market. Generally speaking, the
longer you are invested in something, the better.
FOMO & FUD
These are two terms you should become familiar with if you are going to be
investing and trading in Bitcoin, or any cryptocurrency for that matter.
FOMO – Fear Of Missing Out
This is most commonly manifested when you see news reports of <insert hot
shiny new altcoin here> increasing by ridiculous numbers like 100+% in a day.
It may be tempting to trade a proportion or even all (terrible idea) your Bitcoin
in for the latest cool cryptocurrency object, but it’s incredibly risky. Many
smaller altcoins are backed up by purely theoretical technology, and have no real
world adoption for whatever product or service they are backing. Remember to
do your due diligence regarding coin news. Just because the headline might read
“Amazing Altcoin linked to Amazon deal”, doesn’t necessarily mean the deal is
anywhere close, or if there even is a deal in the first place. Check your facts
before investing.
It is important to understand that Bitcoin has now reached a point where there
are real world uses, and it is by far the most adopted out of any cryptocurrency.
Therefore, Bitcoin has greater market saturation and thus is unlikely to skyrocket
in value like smaller coins. The opposite is also true though and with great
rewards comes great risk. Many smaller coins can, and do lose up to 80% of
their value in just a few days (for further reading check out the Chaincoin pump
and dump scheme of July 2017), whereas Bitcoin continues to hold strong. If
you are planning to buy and hold a single coin for the long term, Bitcoin should
be your only play.
FUD – Fear, Uncertainty & Doubt
FUD is the spreading of misinformation by uninformed sources. Many of these
sources have their own nefarious reasons for doing so. It may be to promote an
alternative coin, or they may have shorted (bet on the price decreasing) Bitcoin.
Of course, legitimate criticism of Bitcoin as a technology is fine, and should be
encouraged if the technology is to advance. FUD however is mostly slander and
baseless accusations about Bitcoin as a technology, the people behind it or the
people invested in it.
How can you avoid FUD? Simply by obtaining your Bitcoin and other
cryptocurrency news from reliable sources, who don’t have a vested interest one
way or another. It is important to use multiple sources to get a well rounded view
of the situation.

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