Cryptocurrency investing has become very popular in recent years. More people have been getting into crypto ever since the bull run of late 2017.
Unfortunately, the crypto market hasn’t been very kind to investors recently. But many believe that another bull run is imminent within the next few years.
One problem that most crypto buyers have, though, is a lack of funds. They either over-invested during the last bull run or tapped themselves out by buying every major dip throughout the bear market.
But all hope isn’t lost if you find yourself in one of these situations. You can still save up money and do a better job of properly managing your investment funds next time around.
Interesting enough, you can actually learn a lot about managing crypto funds by studying how gamblers practice bankroll management. I’m going to discuss more on bankroll management along with why it can help you as a crypto investor.
Cryptocurrencies Are Very Volatile
The cryptocurrency market is well known for its high volatility, or the tendency to change very rapidly.
The crypto market can rise or fall by 10% or more in a given day. Compare this to the stock market, which rarely sees daily increases or decreases of more than 2-3%.
Likewise, top cryptocurrency projects don’t stay the same from year to year. Several projects have fallen in and out of the top 10 over the past two years.
Here are the top 10 cryptocurrencies in terms of market cap from January 2017:
- Bitcoin – $16.1 billion
- Ethereum – $715 million
- XRP (Ripple) – $231.4 million
- Litecoin – $221.7 million
- Monero – $191 million
- Ethereum Classic – $122.2 million
- Dash – $78.5 million
- Augur – $44 million
- MaidSafeCoin – $43.9 million
- Steem – $37 million
Here are the top 10 crypto projects from January 2019:
- Bitcoin – $71.2 billion
- Ethereum – $16.4 billion
- XRP (Ripple) – $15 billion
- Bitcoin Cash – $2.9 billion
- EOS – $2.6 billion
- Litecoin – $2.4 billion
- Stellar – $2.3 billion
- Tether – $1.9 billion
- Bitcoin SV – $1.59 billion
- Tron – $1.53 billion
You can see that nothing stays the same very long in this market. In contrast, many top companies usually hold their lofty positions for a few years or more (e.g., Apple, Facebook, Google).
Bitcoin has been the main absolute, which isn’t surprising considering that it’s the first and most famous cryptocurrency.
The volatility of cryptocurrencies makes it extremely important to properly manage your funds. You’ll quickly lose most of your money by failing to properly handle your investment bankroll.
People have found this out all too well in the bear market following the 2017 bull run. Many Reddit users have professed to losing over 90% of their investments so far.
The losses were unavoidable for anybody who believed in crypto and held their coins throughout the bear market. However, many of the same people were new investors who put too much money in at the height of the bull run, or shortly thereafter.
These same investors are kicking themselves because they could have had far more funds to invest had they slowly put money into the market. Instead, they fell victim to the fear of missing out (FOMO) and paid the price.
Why Is the Crypto Market So Volatile?
Many people stay away from cryptocurrencies for the sheer fact that they’re so volatile. The same investors would rather stick with the stock market or commodities, like gold, silver, crude oil, cattle, and soybeans.
The crypto world can be a scary place to put your money, especially when considering the hacks and exit scams on top of the uncertainty.
But you might feel better about the matter by gaining an understanding of why cryptocurrencies are so volatile. Here are a few reasons why the market fluctuates so much on a short-term basis.
Cryptocurrencies Have Yet to Achieve True Adoption
The vast majority of cryptocurrency investments are made on speculation. Outside of Bitcoin, no project has achieved mass adoption.
Bitcoin (BTC) adoption is even somewhat iffy. More and more people are using BTC on a regular basis. However, the network doesn’t seem ready to support a massive number of transactions yet.
The 2018 Lightning Network update has helped increase the transaction speed on the Bitcoin blockchain. This update is a welcome sight considering that BTC struggled mightily during the 2017 bull run when people sometimes waited days for a transaction to be completed.
Unfortunately, we won’t truly know how effective Lightning Network is until Bitcoin experiences heavy congestion again. The general sentiment right now is that Bitcoin isn’t ready to handle the transaction volume of, say, Visa, which processes up to 24,000 transactions per second.
Back to the main point. Cryptocurrency projects are seeing minor usage. Some projects are forming major partnerships, which offers hope that crypto will become an important part of everyday life.
But for the time being, most cryptocurrencies are getting very little usage — if any. Given that the market is mostly based on speculation, wild swings are quite common.
Bad Press Has Created a Negative Perception of Crypto
Bitcoin still carries the banner for the cryptocurrency market. Unfortunately, a large number of media outlets and banks aren’t big fans of this virtual currency.
It’s quite common to see negative headlines regarding BTC. For example, JP Morgan CEO Jamie Dimon once called Bitcoin a “fraud.”
Interestingly enough, JP Morgan has since come out with their own “stablecoin.” But when the general population sees a major CEO bash Bitcoin, they tend to believe the establishment’s opinion.
Legendary investor Warren Buffett called Bitcoin “rat poison squared.” Buffett is considered the greatest investor alive today from a financial perspective, which means that his words carry heavy weight in the investing space.
Of course, big names aren’t the only ones who create negative press for cryptocurrencies. In fact, projects within the industry have done a pretty good job of it themselves.
The FBI shut down the Silk Road marketplace in October 2013. Thanks to the news generated from this event, many people still think that Bitcoin is only used by criminals on the dark web.
Mt. Gox sent the industry into a downward spiral when it suspended trading in February 2014 and finally admitted that they were hacked in late 2011. Over 850,000 Bitcoins — worth $450 million at the time — were stolen out of the company’s hot wallet. Given that Mt. Gox was handling over 70% of Bitcoin transactions at the time, their hack and subsequent bankruptcy crippled the market.
2018 forever became known as the Initial Coin Offering (ICO) boom. Unfortunately, most of these ICOs have failed to produce anything substantial.
Worse yet, some were downright scams that were only launched to steal people’s money. DJ Khaled and Floyd Mayweather brought public attention to the matter when they were fined by the SEC for promoting fraudulent ICOs.
Perceived Value of Cryptocurrencies Changes Regularly
Many people are still unclear on the exact value of cryptocurrencies. Some strongly believe that crypto and blockchain technology will play a huge role in society.
Others aren’t quite so convinced that blockchain will be such a game-changer. They merely see this technology as supplementing what’s already available, rather than causing a dramatic shift.
Bitcoin is still perhaps the best case of a crypto with hard-to-define value. Certain experts contend that BTC could eventually replace the US dollar and fiat currencies abroad. It’s especially considered useful in countries like Argentina and Venezuela, where currencies are undergoing wild inflation.
Others think that Bitcoin’s best utility is as a store of value, similar to gold. BTC has a fixed supply of 21 million, which means it’ll remain fairly scarce as adoption increases. This scarcity will only serve to increase BTC’s value as it becomes more widely adopted.
Unfortunately, Bitcoin’s volatility makes it hard to rely on as a currency or store value. Argentinians and Venezuelans can’t count on BTC if it’s just as volatile as their national currencies. People won’t want to store money in Bitcoin over gold or silver if it could be worth 50% less tomorrow.
Many other cryptocurrencies are suffering from similar problems, where their shortcomings and uncertain futures make them hard to rely on.
Ethereum, which is a platform for decentralized apps (DApps), is another perfect example. ETH offers the promise of DApps that can help solve various problems.
However, the Ethereum network’s DApps are barely drawing any users. Even the top DApps, such as CryptoKitties, only attract a few hundred users per day.
No True Exit Route for Big Holders
The cryptocurrency market has gone as high as $800 billion. However, its collective value has fallen to $130 billion at the time of this writing.
While $130 billion is nothing to scoff at, it doesn’t represent anything more than the size of a large company when looking across the investment world. McDonald’s has roughly the same market cap as the entire crypto market.
Somebody who holds a large amount of a certain coin will have major difficulty liquidating their position when the time comes. If they were to sell $10 million worth of EOS, for example, it would cause a serious price drop. They’d then have difficulty selling the rest of their EOS.
Even Bitcoin, which boasts a market cap of $66 billion at the time of this writing, poses a challenge for large holders who want to exit fast. That said, few institutions and whales are interested in buying lots of crypto right now.
The end result is that smaller whales can trigger big market moves with transactions that wouldn’t cause much noise in the stock market.
Uncertainty Regarding Taxes
Some countries are still figuring out how to handle cryptocurrencies for taxation purposes. For example, the IRS has declared that all cryptocurrencies are assets.
First off, Bitcoin being an asset hurts its adoption as a currency. Nobody wants to report every single time they buy a candy bar with BTC.
Secondly, the crypto market’s volatility creates sticky situations for investors. For example, those who held past 2017 saw their holdings diminish severely throughout 2018.
However, they’re still liable for the big gains seen in 2017. Some investors may feel like selling and getting out of the market as soon as they see a big gain to avoid experiencing a similar situation.
The Biggest Mistake That Cryptocurrency Traders Make
As opposed to stock and commodity markets, the cryptocurrency space is full of newer investors. These people haven’t learned the fundamentals of investing and are more emotional than the average trader.
Crypto buyers fall victim to FOMO far too often. This problem is exactly what led to the 2017 bull run and subsequent crash.
More and more people jumped on the bandwagon in November and early December. They saw that Bitcoin was rapidly increasing in value, which caused them to buy at or near the all-time high (ATH) of $19,783.
It took just six weeks for BTC to lose over 50% of its value. Of course, some of those who bought into Bitcoin also started researching and buying altcoins, such as Ethereum, Ripple, Litecoin, IOTA, Stellar, and VeChain.
Anybody who started doing this in late December and early January benefited greatly as most altcoins skyrocketed while BTC was dumping. Unfortunately, the same projects also started falling by the middle of January.
All the while, many held onto their cryptocurrencies under the assumption that the bull run would continue. However, the entire event — from Bitcoin to altcoins mooning — only lasted several weeks.
The same people who FOMO’ed into these projects were left holding big bags that they purchased from previous investors. Some of these investors have sold their diminished bags, while others continue to hold in hopes of a new bull run.
I mentioned earlier that some of those who bought into the market in late 2017 rapidly spent their free money. They now have little available funds to purchase cryptocurrencies at much cheaper prices.
The same people would have been better off if they had a solid plan in place that prevented them from spending too much at once.
Dollar cost averaging (DCA) is one of the most popular investing strategies. DCA involves dividing your total investment into equal parts that’ll be spent at regular intervals.
Here’s an example:
- You have $10,000 to invest in the crypto market
- You develop a plan to invest $500 on the first of every month
- Your $500 increments are spread out over the course of 20 weeks
DCA is a great way to reduce the volatility of cryptocurrency investing and help you avoid FOMO’ing into crypto and blockchain projects.
But it’s not the only strategy that you can use to spread investments and avoid taking too much short-term risk. You can also use a gambling bankroll management plan, which I’m going to discuss next.
How to Apply Gambling Bankroll Management to Cryptocurrency Investing
Managing a gambling bankroll differs based on the game. Therefore, you can go about the bankroll management process in various ways.
I’ll start with a simple example involving European roulette:
- You have a $500 bankroll
- You want to know how long your bankroll will theoretically last
- European roulette has a 2.70% house edge
- You’re making $10 bets
- The table is seeing 50 spins per hour
- 50 x 10 x 0.027 = $13.50 in hourly losses
- 500 / 13.5 = 37.04
- Your bankroll will theoretically last for 37 hours
The key thing to realize here is that European roulette is a fixed-odds game. Chances are that you’re going to lose money over the long term if you continue playing roulette.
Nevertheless, the underlying theme behind this bankroll management plan can provide guidance if you have no clue how to handle crypto funds. But you’re likely to get more value out of looking at bankroll plans for skill-based games.
Sports betting draws many parallels to cryptocurrencies and investing in general. A sports bettor can either earn large profits or lose big over the long-term, depending upon their skills.
The same can be said of crypto traders, who aren’t dealing with fixed odds either. Their knowledge of projects, the market, and investing emotions plays a big role in how much money they earn or lose.
The same bankroll management that many sports bettors use can also apply to cryptocurrency trading. Moreover, you’ll find that sports betting bankroll management offers an easy-to-learn model.
Many sports gamblers start by dividing their bankroll into units. Their unit size is often determined by their average bet size.
Here’s an example:
- You have a $5,000 bankroll
- You plan on making $50 bets on average
- 5,000 / 50 = 100 units
Dividing your bankroll into units simplifies bankroll management and helps keep you from worrying about money being made or lost. After breaking your bankroll down, the next step is to figure out how much you’re willing to bet on each outcome.
Professional bettors usually only wager 1% or 2% of their bankroll on any single outcome. Doing so helps them avoid taking too much risk with any single bet.
Here’s an example:
- A bettor breaks their bankroll down into 200 units
- Their regular bet will be 2 units (1%)
- But they’re willing to wager 4 units (2%) if a particular bet looks really good
Of course, cryptocurrency traders aren’t making bets that will completely win or lose. They’re instead making trades that could earn or lose a percentage of their investment.
It’s unlikely that they’ll let most investments go to 0% before selling. Nevertheless, anybody can still use elements of sports betting bankroll management to more successfully manage crypto funds.
Here’s an example:
- You have $15,000 to invest in the crypto market
- You want to divide your bankroll into 20 separate investments
- 15,000 / 15 = $1,000 per investment/unit
- But you want to put more money into projects that you’re the most confident in
- You invest two units ($2k) into Bitcoin, two into Ethereum, and two into Ripple
- 15 units – 6 units = 9 units
- 9 / 12 (remaining projects) = 0.75 unit ($750) into each remaining project
You should consider adopting stop-loss limits too, which are also commonly used by gamblers in all types of games. In crypto, a stop-loss limit refers to the point at which you’ll sell an investment based on losses.
The stop-loss is all up to you. But I suggest making the figure fairly reasonable so that you don’t lose too much money on a bad investment.
Here’s an example:
- You put $500 into Ontology
- You set a stop-loss limit of 20%
- 500 x 0.2 = $400
- You’ll sell Ontology if it drops to $400, which is a 20% loss
Many crypto day and swing traders use stop-loss limits as guidelines on when to sell. Of course, you don’t have to be a day or swing trader just to benefit from this concept.
Many people don’t like to sell, though, because they firmly believe that the market could skyrocket at any point. These investors are commonly referred to as “hodlers.” But we only need to look at the crypto winter of 2018/2019 to see that this isn’t always the case.
The crypto market generally follows the increases and decreases of Bitcoin. However, there are always exceptions that don’t completely follow the general market.
You don’t want to invest in one of these exceptions if it’s headed for a major downward spiral. Stop-loss limits can help you avoid getting burned on a single investment.
The investing world offers a number of strategies that can be applied to the cryptocurrency market. For example, DCA is a common method that people use in crypto and beyond.
But gambling bankroll management plans provide another interesting way to manage your funds. The sports betting strategy covered earlier is especially nice for crypto investing.
You can divide your funds/bankroll into equal parts across a number of cryptocurrencies and blockchain projects. This plan offers an effective way to spread your risk in case one or more investments suffer catastrophes such as a big hack (e.g., Nano, NEM) or are outright scams (e.g., Bitconnect).
Or you can put multiple units into projects that you believe in the most. Doing so allows you to better capitalize on cryptocurrencies that you feel are most destined for success.
Of course, you can always opt for a more traditional investment approach like DCA. But the point is that you should take the time to formulate some kind of strategy to mitigate your risk.
You also want to set stop-loss limits on investments so that you don’t hold forever and lose everything.
In summary, an effective way to go about investing in this volatile market is to treat your funds like a gambling bankroll. Divide them into units and invest wisely.
You may also consider looking into DCA more and opting for this strategy or tying it in with the sports betting bankroll management plan.