The New Rich: How to Invest in Cryptocurrency like a Market Maker

How to Invest in Cryptocurrency
BTC, ETH, & LTC

Cryptocurrency sounds like something out of a sci-fi movie. But it’s here and it’s here to stay–and you could make real money if you’re a smart investor.

The operative word here is if.

Cryptocurrency is unlike any other investment class. You have to know what you’re doing and you have to know how to navigate the ups and downs.

Luckily for you, you’re in the right place. Here’s how to invest in cryptocurrency, from the basics right up to the moment you buy (and plenty of helpful tips in between).

A Quick Cryptocurrency Dictionary

Before we dive into the technical side of cryptocurrency investing, you should know a few basic terms. Otherwise, you’ll be lost in a sea of jargon.

Here are a few common terms you’ll encounter in cryptocurrency trading:

  • Altcoins: “alternative coins”, all cryptocurrency except Bitcoin
  • Bitcoin: the original cryptocurrency, a digital token that can be sent from one user to another and has no connection to physical currency
  • Blockchain: the technology behind all cryptocurrency exchanges, an immutable public record used to verify digital transactions
  • Cryptography: the act of writing or deciphering code
  • Mining: a proof-of-work system where miners solve complex math problems to validate each cryptocurrency transaction, in exchange for receiving cryptocurrency
  • Nodes: an internet-connected computer which runs an application specific to the cryptocurrency ecosystem it wishes to participate in
  • Private key: a password of sorts which gives cryptocurrency holders access to their wallets
  • Wallets: what you use to “hold” your cryptocurrency (i.e. the public and private keys allowing you to write in blockchain)

All of these terms interact with each other in various ways.

For example, blockchain is made up of a decentralized network of nodes. This, along with blockchain’s security measures built into the blocks, are what make blockchain theoretically unhackable (in practice, there are always creative ways to subvert blockchain).

How is Cryptocurrency Created?

When regular currency finds its way into the market, this is usually through a few avenues. In the US, this includes:

  • The Federal Reserve
  • The Internal Revenue Service
  • Stimulus spending
  • Government contracts
  • Subsidies

But remember, cryptocurrency is not like regular currency. It isn’t based in US dollars, or Egyptian pounds, or Chinese renminbi, or Brazilian reals. It has no connection to physical currency.

Cryptocurrency is released into the economy through mining, which is when miners solve complex math problems in exchange for coins. The real question is how cryptocurrency becomes legitimate currency, since it isn’t tied to the currency of any government.

Basically, the creation and legitimacy of cryptocurrency depends on three things:

  1. A community of people who believe in the coin and network in question and mine it
  2. A code to create and encrypt the software and blockchain network that the individual cryptocurrency will operate on
  3. The confidence of merchants in the value of the currency and their subsequent willingness to do business with it

In this regard, it’s like any other currency, minus the second step. Fortunately, the second step is easier than you think–most coins are based on open source Github code.

Cryptocurrency Types

Bitcoin was the first cryptocurrency to prove the validity of the system, but there are all sorts of cryptocurrencies available. Different currencies provide different benefits over others, depending on what you’re looking for.

You can invest in any coin you’d like, but if you don’t know much about cryptocurrency and want to protect yourself against scams, its best to start with established coins. Five of the main types of coins (besides bitcoin) include:

  1. Litecoin
  2. Ethereum
  3. Dogecoin
  4. Ripple
  5. Zcash

If you need somewhere to start, stick with Bitcoin, Ripple, Ethereum, and Litecoin.

Bitcoin is the obvious choice–it’s the most established coin on the market. But there are benefits to other coins, like Ripple, which is backed by traditional institutions like Bank of America and Santander.

Before You Invest…

Now, before you pick a coin and dive off the deep end, there are a few things you should have in order first.

Safeguard Your Coins

First, you should be able to safeguard your coin before you invest in any of them.

To do this, you’ll need a wallet to store your coins in (much like you would store your cash and debit card in a leather wallet in your pocket).

The difference, of course, is that this wallet is digital. Also, it isn’t “storing coins” so to speak. Actually, cryptocurrencies don’t get stored in any one place–all that exists is a record of the transaction on the blockchain.

A cryptocurrency wallet stores your public and private keys. These allow you to access blockchain to do things like monitor your balance or conduct transactions. When someone completes a transaction in cryptocurrency, all they’re really doing is signing off ownership of the relevant public and private keys to your wallet’s address.

If the public and private keys match the transaction record, your wallet balance increases and the seller’s balance decreases.

Setting Up a Cryptocurrency Wallet

You have a couple options when it comes to a cryptocurrency wallet:

  • A hardware wallet
  • A soft wallet
  • An online wallet
  • A mobile wallet
  • Keeping your currency on the exchange
  • A cold wallet

Let’s say you want to set up a hardware wallet. These are the most secure option, although they aren’t particularly liquid and exchanging coins takes some time.

First, purchase a hardware wallet. You can find one on Amazon.

Then, plug it into an internet-connected computer and follow the setup instructions. Choose a PIN code, and make sure it’s memorable, because if you guess wrong too many times, the hardware will reset.

From there, make sure to backup your recovery phrase (a mnemonic you can use to recover your device if you forget your PIN).

Et voila: you’re ready to go.

Hot vs. Cold Wallets

Before you buy a wallet and set it up, though, you should understand the difference between a hot wallet and a cold wallet.

There are a few key differences, but the easiest way to remember it is that a hot wallet is like a checking account while a cold wallet is like a savings account. A hot wallet is connected to the Internet; cold wallets are not.

For this reason, it’s much easier to move cryptocurrency to and from a hot wallet than a cold one. However, cold wallets are more secure, since a hacker cannot get to them through the Internet.

Know Your Basics First

You should also know the basic rules of investing and how investing works before you decide to dive headlong into cryptocurrency. While cryptocurrency is not based on real currency and operates differently, certain investment principles still apply.

For example, you should know the balance of risk vs. return. While the returns are higher than, say, real estate, the risks associated with cryptocurrency are also higher. You should also know how to recognize and assess the risk of an investment.

Investing in a new coin with the hope that it will achieve the same success as bitcoin is an example of high risk and (potentially) high return. Conversely, a more mature coin like bitcoin has a far lower risk, but it also has a lower rate of return.

Active vs. Passive Investing

You should also know whether you plan to invest actively or passively before you begin.

Active investing requires you to take on the role of a portfolio manager. If you want to see results, it won’t happen unless you dedicate time to investing. This involves a level of deep analysis to know when to pivot in or out of an asset (if you’re going by gut feeling or blind luck, you’re going to run out of money).

Passive investing involves a buy-and-hold mentality, rather than buying and selling to turn a profit on the waves of the market. You don’t need to manage your own portfolio, you just have to buy a few assets and wait for them to grow. It’s more cost-effective than active investing and is better suited to risk-averse investors.

Certain people are suited to different kinds of investment. Some people relish active investing, while others feel more secure investing passively. It’s best to know where you fall on the spectrum before you get yourself in a mess.

Where to Invest in Cryptocurrency

You should also know where to invest in cryptocurrency. Your options will change depending on whether you’re an active investor or a passive one.

There are several different options, but we’ve included a few of the most popular.

Exchanges

Cryptocurrency exchanges are by far the most popular investment platform for cryptocurrency, especially for active investors. Fortunately, they’re also the most straightforward investment option.

There are two basic types of exchanges:

  1. Fiat to crypto
  2. Crypto to crypto

Fiat to crypto exchanges are when you buy cryptocurrency in exchange for Fiat money, while crypto to crypto exchanges are when you purchase cryptocurrency with other cryptocurrency.

Either way, using an exchange is relatively simple.

First, you open an account with that particular exchange. You then verify your identity (required under Anti-Money-Laundering laws in most jurisdictions).

Once your identity is verified, you fund your account with whatever paper currency you use–US dollars, Canadian dollars, Russian rubles, etc. Some exchanges don’t require you to fund your account and instead allow you to trade directly with other users.

Whatever type of exchange you use, go for an exchange that’s physically close to you, as this makes it easier for you to legally recoup your money if something bad happens. Failing that, stick with an exchange in a stable country with a good legal system.

Bitcoin ATMs

Bitcoin ATMs, like regular ATMs, are an easy way for you to access your coins anywhere.

They aren’t as common as regular ATMs by any stretch of the imagination, but there are about 4,200 cryptocurrency ATMs in 76 countries around the world. They’re most common in the United States, Canada, and the United Kingdom.

That said, the regulatory framework around these ATMs is a bit tricky, since cryptocurrency isn’t associated with any centralized currency, bank, or lender. So be sure to do your homework on the regulations in your jurisdiction before you start using bitcoin ATMs with reckless abandon.

Bitcoin Futures

If you lean more toward passive investing, you may like bitcoin futures.

Futures are an agreement to buy or sell an asset at a specific future date at a predetermined price. Once the contract is entered, both parties buy and sell with each other based on the agreed-upon terms, irrespective of how the market is performing at the time.

You take one of two positions: long or short. If you take a long position, you agree to buy an asset at a predetermined price on a predetermined date when the futures contract expires. When you take a short position, you agree to sell an asset at a predetermined price on a predetermined date.

Bitcoin futures allow investors to speculate on the price of bitcoin without actually having to purchase it. Basically, you’re betting on what that bitcoin will be worth in the future. This is good news for those worried about bitcoin’s lack of regulation, and it allows you to still trade bitcoin in areas where bitcoin is banned.

How to Invest in Cryptocurrency

With all of that in mind, let’s take a closer look at how to actually invest in cryptocurrency.

For the sake of simplicity, we’re going to walk you through how to invest in cryptocurrency on an exchange, since most cryptocurrency investment occurs there. We’re also going to assume that you’re an active investor, as this requires a bit more dedication and awareness of investing (and thus demands a steeper learning curve than passive investing).

We’re also going to assume that you followed our earlier directions and you’ve already chosen your exchange of choice. Open your exchange and prepare yourself.

Look for High Volatility and High Liquidity

You’re on your exchange, and there’s cryptocurrency waiting to change hands. How do you know which ones to snatch?

There are two factors which determine whether a coin is worth buying:

  1. Volatility
  2. Liquidity

Specifically, you want to invest in coins with high volatility and high liquidity.

Volatility is a statistical measure of the dispersion of returns for a given asset. Basically, how much windfall is the asset (in this case, cryptocurrency) going to offer you? As a rule, higher volatility generally means higher returns.

Liquidity refers to the ease with which a given asset can be bought or sold on the market. In plain English: how easy is it to convert that asset into cash.

It should make sense why you want currencies with high volatility and high liquidity–they’re easy to buy and sell and they offer higher returns when you buy and sell them.

The most liquid coin out there is bitcoin, so you’ll always know you’re safe investing in it if you’re looking to sell. If you prefer altcoins, look for coins with good liquidity and volatility.

If you don’t know what to look for, keep your eyes on the market capitalization of the top coins on the market. Volatility has an easy indicator–sudden changes. Keep in mind, however, that prices can go down just as fast as they went up.

Money Flow Index Indicator

From there, you’re going to need the Money Flow Index (MFI), which is an oscillator using price and volume to measure buying and selling pressure. Money flow is positive when the typical price rises, creating buying pressure, while money flow is negative when the typical price drops, creating selling pressure.

In this case, you’ll use it to measure whether institutions are buying or selling cryptocurrency.

To use it, start by setting it to three periods and change the default buying level from 80 to 100 and the default selling level from 20 to 0.  This will make it easier to navigate in the next step.

Wait for 100

From here, you’re looking for an MFI reading of 100.

Basically, this means that the big players have rolled in and are buying this particular cryptocurrency. They can’t erase their tracks, so you’ll see their activity shake out in the market (and in your MFI reading).

Now, keep in mind that technical readings aren’t foolproof, so we’re going to add a few more conditions after your MFI reading says 100.

Buy If…

You buy when the cryptocurrency meets the right conditions.

First, make sure that the price holds up during the first and second MFI 100 reading. If it drops during the first two readings, you’re going to have a down day.

If it does hold, you’re waiting for the third MFI reading of 100. It doesn’t have to be the exact time it reads 100 again–you can simply pick the next one if needed.

You will, however, need your candlestick for when you get the MFI reading of 100. Specifically, you need a bullish candle, for example if the closing price was greater than the opening price (which means buying pressure).

There are two principles to know about bullish candles:

  1. Bullish reversal patterns should form in a downward trend–otherwise, it’s a continuation pattern, not a bullish pattern
  2. Bullish patterns usually require bullish confirmation, which means that it must be followed by an upside high price move (a long hollow candlestick or a gap up) accompanied by high trading volume

There are many inventive descriptions of candlestick patterns, but all it really means is that you’re affirming buying vs. selling pressure.

If the candle is bullish, look for one with small wicks. That’s when you buy.

General Tips

If you can make sense of that process in your head, you’re ready to start refining it into a proper science.

Hide Your Stop/Loss

For starters, you need to hide your stop/loss below the low of the day. A break below your stop loss will signal a change in market sentiment, which means it’s time to high tail it out of the trade.

This has to do with your exit strategy. You can be as loose or strict as you please, however you’re comfortable setting your margins, but as a rule, try to take profits within the first hour after the trade was initiated. Otherwise, you’ll have a much lower success rate.

Know What Type of Investing Suits You

We’ve spent an awful lot of time talking about active trading.

However, it’s vital that you choose a type of investing that suits you. Ignore what has the highest potential returns and find a form of investing that you can stick with.

Put it this way. Let’s say there’s a high risk currency with a high potential reward–if it works out. And let’s say you’re a risk-averse investor.

In that case, you may never see the reward pan out for that currency simply because you’re unwilling to take the risk that you might lose out. You’ll never see any real rewards for investing and you’ll spend more time frustrated than anything else.

Stick with a form of investing that feels comfortable, otherwise you won’t ever do it.

Be Ok With Calculated Risks

Real talk: cryptocurrency is volatile. Extremely volatile. Way more volatile than most other investment assets.

You can be a risk-averse cryptocurrency investor, but in order to make any actual money, you have to be alright with taking calculated risks.

Also, calculated risk translates into responsible investing. Regulation around cryptocurrency is wobbly at best, so you should never risk more money than you can afford and you should make your peace with the fact that you may not be able to liquidate your cryptocurrency assets.

Making Sense of Cryptocurrency Investing

Figuring out how to invest in cryptocurrency is a lot like learning how to invest in anything else.

There’s a lot of jargon, it’s really confusing at first, and you’re probably going to be lost in the beginning. But if you’re dedicated, you’ll get the hang of it. If you’re really dedicated, you could see real profits.

For more tips on how to make the most of your investments, check out our blog for more useful posts, like these five cryptocurrency myths to dodge.

About Crypto Ryan 30 Articles
Hi, I'm Ryan. I started investing in cryptocurrency in early 2015. Naturally, I want everyone to have the chance to learn about the crypto world so I created this blog! I hope my articles help you understand blockchain and cryptocurrency. Cheers!

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