How You Should Look At Cryptocurrencies When It Comes To Your Financial Goals

Cryptocurrency can have a lot of potential as an investment if you have an informed and disciplined approach. You could invest in the long term, or as a one-time goal. Whatever the reason for investing in cryptocurrency, you should always have the reason why you’re investment top of mind. Maybe it’s a holiday tour in Europe, a luxury cruise in the Caribbean, or perhaps that amazing sports car, or home theatre system you’ve always wanted.

Perhaps you want to start out your own business when you retire, or create multiple streams of income with your cryptocurrency investments. Whatever your reason why is, cryptocurrency seems to be a very promising investment proposition. Your “why” will help you stay focused and committed to the task at hand. If you stay connected to your goals, you’re less likely sell because of panic or over-extend yourself.

The Internet has no shortage of success stories about Bitcoin, from the legendary pizza shop in UK selling two boxes of pizza for 10,000 BTC, the college dropout from Brooklyn who made the first dedicated ASIC miner, the teenage-school-boy-turned-Bitcoin investor from Idaho, to the Bitcoin millionaires and entrepreneurs the likes of Jered Kenna, and the Winklevoss Twins. But don’t pay attention to the hype. You’re not likely to become an overnight success story. You’ll have to do your homework and make smart decisions, otherwise you’ll run the risk of losing out big.

 

It’s Never Too Late

When talking about investing in cryptocurrencies at this point in time, people often speak of “missing the boat.”

“Bitcoin went insanely high in 2017, and I missed the boat.”

“If only I have bought Bitcoin and Ethereum back when they’re still pretty cheap. Now, it’s too late.”

Truth is, cryptocurrency is a relatively young industry. It entered the scene in 2009 and it’s continuously growing and improving for the last nine years. Sir Richard Branson is only one among many influencers who believe there might be currencies in the future that would match or even surpass Bitcoin as a digital asset and as a medium of exchange.

Just think back to the beginnings of Myspace. A lot of investors thought it was too late to invest in or create a new social media because Myspace was dominating the internet. Now Facebook is dominating and looks to rain supreme in the foreseeable future.

Vitalik Buterin proved cryptocurrency can be more than just a medium of exchange when he created the first platform and currency with a programmable blockchain – Ethereum.

Soon, Bitcoin will be more accessible to millions of everyday users, commercial establishments, and businesses worldwide through a second layer, known as the Lightning Network, which could render transaction speeds ten times or even a hundred times faster.

These are cryptocurrency’s first wobbly steps in creating a better way to transact and store value in a completely decentralized financial system.

In comparison, many of our industries today are decades-old and have already produced some of the world’s technological breakthroughs; things we often take for granted like the cars we drive at work, the phones we take our pictures with, or the Internet we use every single day.

These industries just keep getting better with each passing year. The automotive industry didn’t stop with Ford’s “Model T” or Mercedes-Benz’s “Motorwagen”; today we have hybrid, electronic and self-driving prototypes by Tesla and Google.

The Internet didn’t stop with email, TCP/IP and packet-switching; now, there’s Worldwide Web, HTTPS, cloud computing, streaming media, free Internet calls, video conferencing, mobile apps, and a host of other features people thought were not possible with the Internet (back then, it took several hours to upload/download a single jpeg image).

And let’s not forget our mobile phones which started out as clunky, metal-and-plastic bricks with large keypads and small monochrome backlit screens. Today, we have Apple and Android Phones which crosses between mobiles phones and mini-computers with HD cameras, internet and browsing capability.

People still invest in these technologies despite some of them being half a centuries-old. Cryptocurrency isn’t even half as old as many of our industries. Much of our cryptocurrency and blockchain space is uncharted territory, waiting to be explored, and harnessed to its full potential.

So, is it too late to invest in cryptocurrencies? Of course, not. In fact, we’re just getting started.

 

Knowing Your Investment Goal

Generally, we want to invest our discretionary income (disposable income minus living expenses) into something we want to enjoy much later. It’s the kind of money we can part with or set aside, and won’t have any hard feelings if everything goes south.

We don’t want to use money we pay our bills and mortgages, or buy groceries with. Or, heaven forbid, owe huge sums of money from banks at interest just to buy cryptocurrencies and ICOs. More often than not, this attitude of chasing the hype and FOMO will get people crushed.

People often invest in cryptocurrencies as a retirement option. This is not a good idea. Cryptocurrencies are highly volatile and should not be relied upon to retire with.  A safe and conservative approach is to set a small amount of discretionary income, say fifty to a hundred dollars a month, (depending on your income) to buy Bitcoin and other large-cap currencies – also known as dollar-cost averaging. Investors stick with that amount regardless of how often or how much the markets turn. It’s like a savings account, in a way, but in cryptocurrency.

Some people don’t wait for retirement and want to get out as soon as they have the opportunity. They want to store up some money as an employee so they can start out on their own. Maybe a small business, an S-corp, or an LLC. And what better way to grow capital than to invest?

Cryptocurrency exchanges are a good place to start when studying markets that would potentially grow in value. You can take short courses in financial literacy on how to invest in stocks and apply those concepts in cryptocurrencies such as asset allocation and portfolio management. Or, you can take it to the next level by learning some codes and understanding how cryptocurrencies work under the hood.

Some investors become full-time cryptocurrency traders and investors over time. These are usually angel investors, and venture capitalists – people who make risky financial decisions in order to make a lot of money. Returns can vary widely from zero to ten times the initial capital. Investment options include ICOs and new or emerging cryptocurrencies. The goal is to maximize returns while minimizing risk exposure.

Other reasons for investing in cryptocurrencies is simply to gain first-hand experience. Few people were lucky enough to have hit the jackpot, or bought in just before the big breakout out of sheer luck. However, these are just rare occurrences, and we need to be aware of “survivor bias” when it comes to personal stories and testimonials about people who got rich trading or investing in cryptocurrencies. Most people hear about 1% of the population who actually made it, but forget the 99% who failed.

 

A Smart Way to Invest

Your investment capital will depend on your age, income, priorities, and investment goals. Tax laws can also impact your ROI. You can check the legal status of cryptocurrency in your country from Coin.dance’s site (https://coin.dance/poli), or seek competent legal advice about the possible implications of investing in cryptocurrencies.

That said, here’s a sample of how you might want to structure your cryptocurrency investment. Let’s look at it from the perspective of a middle-class employee earning a net income of $3,500 a month.

The first step is to subtract the living expenses from the net income. What you’re left with is your discretionary income which you can freely use to plan for your future or hedge against financial losses. (Note: Do not invest all of your discretionary income. You should put it aside for entertainment, holidays, emergencies, and donations to good causes.)

 

$ 3,500.00               net/disposable income (after-tax)

2,500.00                    living expenses


= $ 1,000.00               discretionary income

 

Another option is to have multiple income streams, or side jobs aside from your typical 9-5. From here we’ll set up an account and possibly allocate our resources, thus:

20% emergency account
40% freedom/savings account
30% capital investment
10% trading/speculating

 

Here is a good way to look at our income. The first two (emergency and freedom/savings) are considered a necessity because of the fact that life is unpredictable. Anything can happen, so it’s always best to prepare for the unexpected. Remember Murphy’s Law: “If something can go wrong, it probably will.”

Your emergency and freedom account act as your “safety net” against life’s unpleasant surprises. An emergency account is used to cover your expenses like medical bills, repairs, etc. Others may spend them on health, car, and home insurances, which is also a viable option.

Freedom/savings account will cover your living expenses for six to twelve months in case you get laid off or choose to leave the company (some companies may offer a severance package, but not always).

The last two (capital investment and trading/speculating) is where you make crucial financial decisions that could potentially change your life or move yourself upward in today’s economy. You can have a choice between entrepreneurship and becoming a full-time trader/investor.

Being an entrepreneur gives you greater control over your finances. In the context of a cryptocurrency or blockchain-based business, you could run a cloud mining rental service, pool mining website, or cryptocurrency exchange. Once your company gains traction, you can start growing your business by raising capital through crowd-sales (check the legal status of ICOs in your country). Some start-ups may go with crowd-sales straightaway.

You can become a full-time cryptocurrency trader and invest heavily in cryptocurrencies where you’re constantly on the lookout for trading and investing opportunities, such as breakouts, funding blockchain start-ups, and ICOs. Beginners are often discouraged from getting involved in cryptocurrency trading and investing particularly those with very little or no background in dealing with financial markets. We don’t recommend this option unless you have an entire backup plan. Full-time cryptocurrency traders should have millions of dollars in fiat currency just in case they lose everything.

Some look at investing as the polar opposite of entrepreneurship, requiring a different strategy and mental disposition. For one thing, investing is market-dependent and may not necessarily have a steady cash flow, whereas in an entrepreneurship, cash flow is the difference between growth and going out of business.

Finally, the last 10% of your investment might be used for trading in a speculative market, particularly new, or small to medium cap currencies, tokens, and altcoins. Bitcoin and Ethereum are worth less than a dollar at launch; today, they’re valued by the hundreds and thousands. Although we can’t compare them with new, emerging currencies, we can’t discount the possibility of such a currency taking the same path in the near future (think EOS, Monero, and Dash)

Should I Invest In Initial Coin Offerings?

Blockchain projects and start-ups open up a new world of opportunities for many cryptocurrency investors and venture capitalists. Initial coin offering allows investors to gain a decisive edge as pioneers and early adopters of new cryptocurrencies, and the latest applications and innovations in blockchain technology.

There’s a lot of success in recent Initial Coin Offerings (ICOs) of 2017, raising more than 3 billion USD in capital investments and token sales. (More about this later.) It became the latest buzz since Ethereum, and today we have more than 600 tokens created through these events – and counting.

However, ICOs recently came under fire and had been thoroughly scrutinized, or banned outright in some countries, due to their mostly unregulated status and reports of unsuspecting investors losing thousands, or even millions of dollars in ICO scams. In fact according to a report by the Wall Street Journal, around $300 million was money raised by coin offerings has gone to fraud or scams.

In this chapter, we’ll look at ICOs from a well-founded, and unbiased point of view, considering both pros and cons to help us come up with our own financial decisions whether or not to invest in them.

 

What are Initial Coin Offerings?

An initial coin offering is the stage or period in the development of a blockchain project where start-up companies or a group of people generate funds through crowdselling – a form of crowdfunding that issues tokens to contributors. Upon completion, creators and organizers of an ICO would launch the project (cryptocurrency, blockchain app, platform, etc.) and distribute tokens to all its participants. Some ICOs have their tokens already listed and traded in exchanges before the network launch to stimulate hype and move its value up through market price actions (e.g., EOS).

Some investors and regulators compare ICOs to initial public offerings (IPOs) because they’re both used to generate funds by issuing financial instruments tradable in a public exchange. However, such reference is made irrespective of the time of their execution.

Unlike IPOS, most ICOs are done when start-up companies have yet to prove themselves, and there’s nothing to back their claims except for several pages of whitepaper outlining their business model or concept. Participants usually buy indirectly through the ICO’s website and receive their tokens at a specified distribution date.

IPOs, on the other hand, are done on a public exchange, after companies have long been established and have already proven their worth. The main goal of an IPO is to raise capital to support its operations and to grow the company on a massive scale.

The financial instruments issued by ICOs and IPOs may also be classified as securities, but they may not exactly be of the same type. Tokens sold prior to, or within an ICO period are considered IOUs or (loosely) bonds with a set face value. After a successful launch, tokens are issued to all the participants, at which point, they may no longer be considered IOUs or bonds, but more like shares in an IPO where their value is determined by the market. But the main purpose of ICOs and IPOs from an investor’s point of view is essentially the same.

Currently, there are no fixed regulations about ICOs. However, there are a few who perform KYC on their contributors. It’s the mostly unregulated status of ICOs that make investing in these blockchain-based ventures extremely high-risk. But on a positive note, they can also be extremely profitable by as much as tenfold compared to other markets. In contrast, IPOs are highly regulated and closely monitored by authorities to protect the rights of investors. Certified investors in an IPO must also meet certain qualifications before they can be allowed to invest on a stock.

ICOs typically last for several weeks and may consist of token sale “rounds.” Prices of tokens increase in value with every round. Some ICOs run for months and had their tokens already listed on exchanges before the project launches. There’s also a pre-sale or pre-ICO where tokens are sold at wholesale prices to institutional investors and some small investors to jumpstart the project. Some pre-ICOs offer perks and exclusive bonuses to early adopters.

ICOs can be a great way to raise funds, and not just for companies looking to create a new cryptocurrency. Anybody from traditional companies, tech companies, and even Venezuela is getting in on the act. However, the United States is trying to block American citizens from purchasing the digital currency issued by Venezuela which, according to President Nicolas Maduro, raised $5 Billion.

In fact, ICOs have become a new mode of crowdfunding, blending investment returns with the possibility of an actual physical product.  Indiegogo, the crowdfunding platform is testing out a new product where you can invest in ICOs and blockchain. The first ICO they helped sell tokens for was called The Fan-Controlled Football League, a fantasy-style league which lets the football audience decide everything in real time. They are selling up to $5 million worth of tokens.