How To Choose Which Cryptocurrencies To Buy

If you’ve reached the decision that you want to buy cryptocurrencies for investment exposure to the sector, some big questions still remain unanswered. The first is which cryptocurrencies you will choose to invest in? The second is what portfolio weighting will you give to the different cryptocurrencies you buy? Will you simply split your earmarked budget evenly between them or put more money into some and less into others?

And thirdly, which will influence the answer that you will arrive to with regards the first two questions so perhaps should be the first question addressed, what is your investment strategy? Is it a long term buy and hold investment strategy, a shorter term speculative investment or perhaps a mixture of the two? Will you set fixed investment targets such as selling when your profit or loss hits a certain level or remain flexible and make buy and sell decisions as you go based on your current view of the market?

Let’s take a look at some of the considerations you should have in mind when choosing which cryptocurrencies to invest in. For the sake of structure, we’ll break the considerations down into long and short term cryptocurrency investment strategies.

Choosing Cryptocurrencies For A Long Term Investment Strategy

If you have a long term investment strategy, you should approach your choice of the cryptocurrencies you will build your portfolio from in a way that has similarities to how you would choose tradition stocks to invest in. It’s not exactly the same because cryptocurrencies are not traditional businesses that sell products and services and have fixed and variable overheads and margins.

However, what is similar is how you should assess the fundamentals of current and future supply and demand trends. Like stocks, the value of cryptocurrencies rise and fall with fluctuations in demand. The drivers of that demand are, however, different. For a stock, demand for the company’s products and services is influenced by a number of catalysts. These include the quality of the product or service, its price point in comparison to the perceived value of what it offers and comparable alternatives, turnover, profit margins, market share and the future outlook for the company within the context of its market.

When choosing cryptocurrencies to invest in for the long term you should also be focusing on the market fundamentals for long term demand growth. Since you have decided to invest in cryptocurrencies you have obviously already come to the conclusion that you think the sector has a future. Or at least it has enough of a chance at a future to justify the risk.

Consider carefully, and research the thoughts of others, what you believe to be preconditions for a cryptocurrency to have a successful part of that future. Is it the use case of the cryptocurrency? You may think only fiat alternative cryptos such as Bitcoin and Litecoin have a future and utility tokens associated with blockchain platforms such as Ethereum or Ripple don’t. Or the opposite. Or you may think both have a future on the assumption of them representing particular qualities.

These could be current market position and traction, or qualities you believe will see growth in these as the market develops further. That could be based on the technical qualities of a particular cryptocurrency’s blockchain compared to competitors. If you are considering utility cryptocurrencies, what do you think will be the future demand for the category of blockchain solution they are native to? And how does that blockchain platform compare to competitors in terms of current market share and the technical or business factors that you expect to influence that in the future?

Choosing Cryptocurrencies For A Short Term Investment Strategy

If you prefer to approach investing in cryptocurrencies with a short term outlook your criteria on which to choose will be very different. You are not particularly interested in the long term prospects of either the wider cryptocurrency market or the particular cryptocurrencies. You are looking for those you expect to see a surge in demand for over the next several hours, days weeks and up to a few months.

Those time frames are what financial market traders work with and their approach is based on trading technical price indicators. One advantage to trading cryptocurrencies is that the market is still immature and small enough to mean it is, to a certain extent, possible to ‘trade the news’ also.

Technical analysis is based on predicting future price movements based on historical price patterns repeating over time. ‘Crowd psychology’. There are many different technical analysis indicators, formulas and combinations and trading technical analysis will mean putting in plenty of effort to learn those. But if you are prepared to do so the approach can offer some valuable insights into how the price of different cryptocurrencies might move in the short term based on the recent history of their price movement.

One important point to mention is that many traders believe that the cryptocurrency market is not yet liquid enough for technical analysis to be as valuable as it is for larger financial markets such as forex and stock markets.

We mentioned ‘trading the news’ earlier. This would involve choosing cryptocurrencies to buy based on any big news stories breaking that might affect market sentiment. In bigger, more mature financial markets, by the time you hear about significant news it will almost always already be too late. Professionals have access to immediate market newswires like Bloomberg terminals and may even hear of significant events through contacts before they are published anywhere. However, the cryptocurrency market is not yet quite so developed and almost all investors are inexperienced amateurs.  So cryptocurrency prices do still often react positively or negatively in the hours and sometimes even days after a major news story breaks. If you get in early you could be able to take advantage of that.

Steven King
We’re a new age Broker providing clients access to the Global Financial Markets by using only Crypto Currencies.