Buying Crypto? Whitepapers and Tokenomics Can Guide Investment Success

INTRODUCTION:

Ashish Singhal, ET CONTRIBUTORS, writes that making money requires taking risks, Morgan Housel, author of the ‘Psychology of Money’, contends in his book that keeping money requires humility and fear that what you’ve quickly gained can be taken away just as quickly. Over the last 18 months, many people have made money in the crypto markets, with some making large amounts of money, some losing money. The markets are restless causing pundits and tipsters to come and go leaving a changed narrative, and it’s when the water recedes that we find who’s got no pants on. Following an investment strategy through these rough times is critical.

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But before that, let’s quickly take stock of where we are. Today, retail investors hold nearly $6 billion of this emerging asset class in India. By 2021, India was already the second-highest in crypto adoption globally. Millions of digital-savvy Indians have started their crypto investing journey fueled by the awareness about the benefits of buying crypto in other countries and the urge to experiment. Indians are buying crypto at par with how most people are buying it across the globe.

The market optimism was fueled by quantitative easing in the United States to stimulate the economy. That is, the Federal Reserve buys assets, which results in greater liquidity and lower interest rates. This in turn means investors could seek out assets that gave higher returns than fixed-income assets. A large portion of this allocation went into stocks. A big chunk also came into the crypto market.

The total market capitalisation of crypto assets touched an all-time high of $3 trillion in November 2021. The price of Bitcoin, the most popular crypto asset worldwide, grew from $28,000 apiece in January 2021 to a high of $68,000 in just about 11 months. This meant more and more people became aware of this asset class and entered the market.

With the Fed now looking to raise interest rates, and several early crypto investors booking profits, the markets have been down in the past few days. Like all other asset classes, crypto has been testing investors’ endurance. The golden rule of investing, “you should never try to time the market,” holds for crypto too and one should not misconstrue this asset class as a get-rich-quick scheme.

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If you take the price of Bitcoin as a bellwether, you’d see that it has seen several dips in the past but come back stronger. In 2014, Bitcoin’s price dropped 86% to $200. In 2017, it reached an all-time high of $19,700. In 2018, it fell from $20,000 to $3000. In 2020, it lost 50% of its market value. In April 2021, it touched an all-time high of $64,800. What this means is that volatility of asset prices is a fact of life.

The point I’m getting at is: your investment strategy should not depend on the tide, tipsters, or tomatoes (and definitely not on this column). Your investment strategy should factor in your own risk appetite, and some basics such as the creation of an emergency fund, medical and life insurance, a disciplined goal-based approach, and diversification.

As for crypto, think long term. Evaluate the fundamentals of crypto assets you plan to buy and invest only if you believe in its potential. Invest what you can afford to lose. Factor in your risk appetite. As always, avoid acting on random tips and FOMO (fear of missing out), and do your own research.

The author is the founder and CEO of CoinSwitch Kuber.