The range of crypto currencies available today is massive and, according to Investopedia, there are over 4,000 of them as at January 2021. Coins are the investment opportunity of the moment with critics and proponents in equal measure. Accessibility to buying and selling coins using a Nigerian bank account has been curtailed and labelled illegal, this is in direct opposition to and demand for crypto trading in Nigeria which the BBC says is the number 3 ranking country globally, after the U.S. and Russia, for cryptocurrency trading.
Let’s say that theoretically you have access to purchase crypto currency or want to get your feet wet, which coin should you buy? I have some thoughts on this, read on.
Things to consider when investing
When choosing an investment there are a number of factors that should be considered including:
- Liquidity
- Accessibility
- Utility
- Price
- Costs
- Investment size
- Investment time horizon
This is not an exhaustive list and excludes a number of important investment considerations such as risk appetite, expected returns, available information about the investment etc. These and other important considerations will be covered in more general investing pieces. For a list of the coins that i am invested in, skip to the last paragraph or read on as we take a look at each of the factors in turn.
Liquidity
Liquidity is a measure of the ability to sell an investment at or close to its market price in a reasonable time frame for the asset type. The more liquid an investment is, the easier it will be to achieve this. Illiquid instruments tend to take longer to sell and may have additional costs, longer time frame to sell and fewer markets on which they are sold to consider.
The following factors give an indicator of how liquid a coin is:
- The number of exchanges that it is available for sale through – the more the better.
- Trading volume / Popularity. Popularity or significant trading in a coin provides comfort that you will be able to sell it at the right time. I went for an excellent cryptocurrency / blockchain course a few months back and always repeat the advice (for beginners) that we were given by the facilitator which was to ‘stick to the top 10 coins on an exchange’. By doing so you can be more assured that there is a ready market for your coin of choice and also improve the likelihood of being able to get our of your position.
Accessibility
With the exception of coins that are created solely for their exchange the broader the number of exchanges that a coin is available through speaks to the ability to come in and out of positions . Coins that are traded on multiple exchanges also have a broader market, are more popular and also likely to be easier to offload when the time comes. Accessibility is linked to liquidity ie the more exchanges or mediums the coin is tradeable through the easier it is to trade and vice versa.
Utility
I look for the utility or ‘usefulness’ of the coin outside of simply being a crypto coin. For me, this provides an indication of the coins long lasting appeal outside of current market hype or sentiment.
- Ada. Ada is the coin that runs on the Cardano blockchain which in turn can be used to build smart contracts and dis used on the Binance exchange as a medium of
- Uses – store of value, similar to cash and can be used in exchange for goods and services. Additionally, and this is a key difference, owners of ADA are the ones that are able to vote for changes in the Cardano protocols.
- XRP. XRP is a ‘digital asset built for payments ‘ it is the currency of the Ripple exchange.
- Uses. Medium of exchange, it can be sent instantly as payment and the coin that Does it operate in a way that
- Bitcoin. The list of companies that accept bitcoin as a medium of payment is growing, according to this article, this integration into day to day life is a good indication that this is coin is here to stay.
Price
Price is a key factor for me as a new coin investor. Cheaper pricing means that I can buy more units and hopefully the lower the current value of the coin. the more i stand to gain. Affordability is my key driver here, I like the idea of being able to own many units of a coin rather than a fraction of a more expensive coin. Its based on personal preference. My preference, at the moment, is for coins that come in at under $10 per unit. Whilst it is possible to purchase units of more expensive coins such as BTC you should also take into consideration that fractions of coins might be less liquid than whole ones.
Costs
The old investing adage ‘Buy low, sell high’ is relevant for those thinking of getting into coin investing. The ideal is to buy lower than you sell inclusive of costs so you must consider the expenses associated with the transaction which can include fees charged by the exchange, transfer costs for movement of fiat currency or coins, taxes and other costs. When documenting your investment it makes sense to include these costs as part of the unit price so that you don’t over or understate any gains made. Costs related to sale / purchase vary from exchange to exchange so its a good idea to understand what these are up front as it may impact the decisions you make about the best exchange for you to use.
Investment size
The amount you invest at any particular moment should be considered from two perspectives:
- Your total wealth
- Individual transaction size
Firstly, do you have an idea of how much of your total wealth you want to invest in cryptocurrencies? Limiting the proportion of your wealth that is invested in a particular asset, sector or asset class is a risk mitigation approach that will help you limit your downside and present you losing all of your money from one investment. You can apply the limit to a single investment type (e.g. Bitcoin) or investment class (e.g. Cryptocurrency) and this approach will help to ensure that if you lose on a particular investment, that it doesn’t cause you to lose all of your wealth.
For high risk investments such as cryptocurrency I am prepared to allocate a maximum of 5% of total wealth. For example if my total wealth is ₦1m then the maximum allocation to cryptocurrency would not exceed ₦50,000. Within that 5%, in order to diversify further i split the investment between 3 coins at the moment because that is a manageable number for me. You could easily split the investment into more or just focus on one coin that you feel strongly about.
My preferred approach to investing is to make regular investments of smaller amounts rather than lump sum investments.
- Furhter to this point, before you buy a coin make sure that you are plugged into the information resources that are available for crypto. Too much information can get overwhelming but I would suggest that you sign up to resources that you will keep up with such as whatsapp groups that talk about crypto, websites, etc. Find one that suits you and follow them for tips
Investment time horizon
Whether you are planning to trade coins and take advantage of the volatility to benefit from regular price movements or follow a ‘buy and hold’ or other strategy, it pays to be clear, before you enter into any investment what your approach is going to be. If you are actively trading it is imperative that you are plugged into the information resources that are available for cryptocurrencies more generally and also cover the coin(s) you are interested in. Sign up to resources that will keep you close to what is happening including crypto focussed whatsapp groups, websites, newsletters. Find one that suits you and follow them for tips which will also help if you are a longer term investor in coins.
My picks
The 3 coins that i currently am invested in are:
Ada
XRP
BNB
My picks represent my top priorities which are pricing, utility and liquidity.
Thanks for listening