Based on normal fundamental financial principles there is no way to mitigate risk with crypto investing. The valuations are not based on any measurable formula. When you buy a stock the price per share is the market cap divided by the number of shares. The market cap value is determined by the assets and value of future business. Goodwill is one aspect of that valuation that you can’t determine mathematically. But a number if given to it when you figure out all the other valuations of a stock using the financial statements. The Goodwill number is what explains a stock valuation that is trading at a premium or a discount. The value of Goodwill will change as the company grows or encounters problems.
Crypto has a market cap number liker stocks which is the cost per coin times all the coins in circulation. Another difference that crypto has compared to stocks is that stocks are regulated by the Security Exchange Commission. When any single owners holds 5% or more of the company they need to register publicly. If they buy or sell shares of stock this would become a public event. With bitcoin for example it is suspected that 1000 individuals own 40% of the currency. These owners are not public by the very nature of the investment instrument so when a single holder of coin makes a big trade that valuation of the coin can be affected and no one will ever know why. This kind of event causes unpredictable fluctuations in price.
The biggest risk in crypto is losing possession of your coin. This can happen from thrift (hackers), lose or damage of hardware, software or paper. Keep in mind that hardware wallets are safer than software wallets. Cold storage is safer than hot storage (connected to a computer and or the internet). Paper storage can be easily stolen just like a real dollar bill.
In the investment community some of the best ways to lower risk might apply to crypto-coins. Investing is more than one coin lowers risk. If one coin goes bad then you don’t lose everything. With stocks brokerage accounts are insured. Crypto wallets are not insured. You can lower the risk of a wallet failure by not holding all assets in one wallet. Another way to lower risk when buying stocks is what they call dollar cost average. The idea with dollar cost averages is that you buy continually over time at specific intervals to catch different price points. For example you could invest in your 401k once a month on pay day. If you do this every month over a few years then you buy shares at low points and at high points. If you buy crypto when it goes up and also when it goes down then over time the average price you paid per coin will average out to a median value that will return a profit. You wouldn’t buy at the lowest value but also wouldn’t pay the highest either.
Ways To Lower Crypto Investment Risk
- Diversify investment in to numerous coin types
- Dollar cost average in to buy coins at various prices
- Store coins in numerous wallets and wallet types
One way a lot of crypto buyers are making huge returns is by investing in what they call Initial Coin Offerings. This is similar to IPO investing in newly public stocks. With ICO because of the lack of regulation and lack of investment bankers combing over financial statements to determine the fair market price, you risk investing in a coin that ends up being worth less. The biggest risk is that the coin never actually hits the open market. With so many people trying to grab their share of the gold, there are a lot of unscrupulous people behind these currencies. Taking a look at the founders past projects is one good way to determine ICO risk. Also checking the white paper to see how actively it’s being modified demonstrates how much effort is being put into the project. Like any good movie evaluating the story or theme of the ICO will give you some indication of how good an investment the project is. Does the ICO meet some unrealized demand. For example lite coin was designed to speed up transaction times. Ripple was designed to help lower transaction fees between different country currencies. The best alternative coins fill an unmeet need in the market place.
Probably the biggest risk is government valuation. It’s debatable if government regulation is a bigger risk than hackers and theft. At least you can determine risk induced by governments by analyzing what leaders say and which rules they put in place. Regulations generally don’t happen all of a sudden. Generally the leaders debate the topic and hint at pending regulations which provide an opportunity to adjust your holdings. Make no mistake about the threat coins pose to governments. Until coin investment becomes large enough to cripple economies government involvement will most likely remain moderate. Once the perceived threat of crypto is felt by leaders then you can expect a threat to your portfolio. Be sure to monitor not only the jurisdiction you live in and or hold coins in but also all governments around the world who’s residents hold large numbers of coins. Especially keep an eye on South Korea, China and the United States. But don’t ignore countries in the European Union and Canada.
Investment in crypto is risky. No one knows if a coin value is going up or going down. You can only guess which coin is going to increase in price and which coin is going to drop in value. Unlike the stock market that is based on the under lying businesses financials, coins mimic valuations of commodities like gold. Unlike gold the value is not based on a tangible asset.