Crypto Investing – Risk Management & Technical Analysis? (Financial Horse)

High level view – Technology and regulatory perspective

From a high level perspective, I am very bullish on blockchain technology, and the potential this has to change the world.

The way I like to think of it, is that this is the internet in 1999. Yes – the internet went on to change the world, but it took another 10 or 20 years to really do so. And a lot of the companies that did very well in share price in 1999, didn’t survive till then.

Crypto and blockchain is in that kind of position now in my view.

I think the next wave of change in this decade will come from decentralization, as the world moves away from centralized platforms (like FAANG) towards decentralized platforms (like Ethereum, Decentralised Finance (DeFi) etc).

And blockchain technology is likely to be one of the major technologies underpinning this move.

If you need to build a zero trust decentralized system today, blockchain is probably one of the first technologies you’ll look at.

So DeFi built on the Ethereum blockchain is probably just the start, and the real killer apps will only be built in the coming years. The guy who builds the crypto version of Google could still be in Stanford now.

Blockchain and crypto may one day come to replace the global financial system, and it definitely holds a lot of promise, but we need to be realistic about timelines.

Centralised finance still has a key role, at least in the short term. And any viable blockchain / DeFi based solution needs to closely integrate with existing financial systems.

High level view – Investment perspective

From an investment perspective, I don’t deny that Bitcoin, Ethereum, and all the altcoins have done very well in the past few months.

Based on the previous cycle (2018), the “mania” usually goes from Bitcoin - Ethereum - Alt coins.

We’re now at the point in the cycle where even alt coins like Dogecoin have rallied massively in price.

Which indicates we may be getting close to the later stages of this cycle.

Some may argue that this cycle is different because crypto has gained much more widespread acceptance.

And I actually agree with that. In 2018 everyone thought of this as a bubble, but this time around, I see a lot more mainstream support and acceptance for Bitcoin as an asset class.

Which actually is really interesting, and means that Bitcoin does have the potential to eventually become a widely accepted asset class like an alternative to gold.

Crypto – A call option on the future?

Ray Dalio thinks of Bitcoin as a call option on the future, and I think that’s a fantastic way to see it.

You basically put this money in, and if crypto takes off the call option makes you a lot of money.

If it goes nowhere, then you lose all the money you put in the call option.

Risk Management is key

That said, there is a real chance that this is all just a bubble, so risk management is key.

Play it like you would a small cap stock that is going parabolic.

Lock in profits on the way up, and don’t get too greedy.

How to invest in Bitcoin, Ethereum, and Cypto?

I've covered how to buy crypto in an earlier article – so do check that out: https://financialhorse.com/complete-guide-how-to-buy-bitcoin-in-singapore-2021/

Long story short – Coinhako if you’re buying small amounts and don’t want too much hassle, Binance/Gemini if you’re buying big amounts.

Some general views on the 3 types of coins:

Bitcoin

Bitcoin is basically the gold of the crypto space.

Designed as a store of value, it’s the oldest crypto, which gives it a special status.

The problem with Bitcoin is that because it was the first, it relies on older technology, which limits its functionality and transactions per second.

You use it like digital gold – you buy it, keep it, and then exchange it for other stuff. But going forward, its limited functionality will probably mean it can’t do anything more than be a store of value.

Ethereum

Ethereum is the second largest in the crypto space. The silver if you like.

Ethereum is Crypto 2.0, it embeds the concept of smart contracts into crypto (Crypto 1.0 is bitcoin which is a pure store of value).

So you can build a whole bunch of apps or DeFi onto the Ethereum blockchain, and they will automatically execute when certain conditions are fulfilled.

A big problem with both Bitcoin and Ethereum is that they were not designed for the widespread popularity they have today.

Ethereum was designed in 2013, the their transaction speed today is significantly slower than centralized platforms like Visa or Alipay. This is a big limitation that affects scalability.

Ethereum 2.0 is moving to a proof of stake model which will address a lot of these issues, so perhaps that could clear it up going forward.

Personally I’m actually quite bullish on Ethereum.

Alt Coins

And then we have Alt Coins.

There’s a whole bunch of them, everything from Vechain to THOR to Cardano etc.

Each one has their own white paper and problem they want to solve, and their own fans. Really hard to tell which one will take off 5 to 10 years from now.

Related Reading: Five Cryptocurrencies You Should Know About! (other than Bitcoin and Ethereum)

How to allocate between the 3?

As always – this goes back to risk appetite.

This space is so new that everything is still in flux, so nothing is set in stone here.

Some typical allocations will be Bitcoin (50%), Ethereum (30%), Alt coins (20%).

But frankly, go with whatever works for you.

If you want something “safe”, maybe go with Bitcoin, but it’s also strange to call Bitcoin safe since none of these things have intrinsic value.

Really up to personal risk appetite here.

Technical Analysis for Crypto

A reader reached out with this question:

Hi FH, This question may be a side tracked for you. Having followed your articles and Patreon for sometime, I understand that you are very grounded on fundamental analysis. But as I venture into understanding more about investing in cryto, I realize there is a heavy element of technical analysis work involve I question the validity of technical analysis

Was wondering what are your thoughts in this area ? And do you combine some aspect of technical analysis with your fundamentals ?

Great question – and this was a big one I struggled with when I first started investing in stocks as well.

Over the years, the conclusion that I came to is that technical analysis does work to a certain extent, but it’s best to blend it with a broader understanding of macro risks and fundamental analysis.

Why technical analysis works I still have no clue. Some theories I have are that it works because everyone in the market is looking at the same signals, or that technical analysis rides on underlying human psychology (eg. humans tend to sell at psychological price points that we bought at).

Don’t know why, but it works. Especially for very momentum / sentiment driven markets like crypto.

There are a lot of crypto funds out there making 100% returns from all the volatility. Which just goes to show that money can be made in markets like that.

But frankly, it’s not that easy to get a systematic edge in markets from technical analysis alone. There are a lot of signals out there, many of which are monitored by many other traders. You will need to do your homework to find the one that works for you.

For me personally, I find best to pair it with macro and fundamental analysis. And this works for me because I rarely make short term or intraday trades. Most of my moves are designed to last months or years.

Let me know your thoughts!

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