July 3, 2020

An Introduction to Investing Fundamentals

We have outlined 6 foundational tips which are all worth considering. There is no single strategy that works best, however, having a breadth of knowledge in the area can always assist in sharpening decision making.
5 min

Investing Fundamentals

With Bitcoin mostly hovering in price over the last few weeks we wanted to detail some simple, fundamental investing and trading points. In this newsletter we have outlined 6 foundational tips which are all worth considering. There is no single strategy that works best, however, having a breadth of knowledge in the area can always assist in sharpening decision making.

1. Keeping up to date

It is a must for any investor to seek information from multiple data sources before making any investment decision.
Understanding the current market climate, future potential catalysts and market trends will allow investors to take a more holistic approach to how they view their investments.
There are many sources such as forums, news sites and even project telegram groups where you can ask the hard and fast questions directly to the team.
Given the nascency of the Cryptocurrency space, it is important to avoid depending on a singular information source.

2. Borrowing to invest is high risk

The risks in borrowing to invest are:

Bigger losses: Borrowing to invest ultimately increases the amount you will lose if your investments fall in value. In such a scenario you would need to repay the loan and interest regardless of how your investment goes.

Capital risk: The value of your investment can go down. If you must sell the investment quickly it may not cover the loan balance, this can give an disproportionate risk/reward ratio.

We do not recommend that anyone borrows capital to invest in high-risk markets, only invest what you can afford to lose.

3. No risk management strategy

Nobody can control the direction or the volatility of an assets price, the best investors often focus on risk and not return. A good return can come if you are managing your risk properly.

Establish a maximum loss plan: This will allow you to exit a position when they do not go in your favor. It can be extremely hard to come back from a draw-down.

  • It takes an 11% gain to recover a 10% loss.  Not a problem.
  • It takes a 25% gain to recover a 20% loss.  Harder.
  • It takes a 43% gain to recover a 30% loss.  Problem.
  • It takes a 67% gain to recover a 40% loss. Big problem.
  • It takes a 100% gain to recover a 50% loss. Devastating.
  • It takes a 300% gain to recover a 75% loss.  Catastrophic.

4. Overtrading

Overtrading is the excessive buying or selling of financial instruments. You may have far too many open positions or are using a disproportionate amount of capital on a single trade. Some causes of overtrading are:

Fear: Investor/trader may buy/sell often and erratically to make up for a previous loss.

Excitement: Opening a position without any consultation or analysis when the market is moving quickly.

Greed: After seeing a great return on investment, holding an asset longer than necessary or deploying more capital to hopefully make more profit.

The best way to avoid overtrading is to have a comprehensive trading plan and risk management strategy in place.

5. When is the right time to buy?

Many investors sit on the sidelines for far too long and are missing crucial market opportunities. Some want to enter at the perfect price or are waiting for the right amount of capital to become available.

Those who have a strategy can deploy capital far more effectively than those who do not, regardless of the capital at hand.
Employing simple strategies such as ‘dollar cost averaging’ where you deploy a portion of your capital on a consistent basis regardless of the price. This will allow your mind to take a longer-term view when it comes to your investments and removes the emotional aspect of buying.

6. Falling in love

Many investors fall into the trap of becoming emotionally attached to their investments. Whether it is because they have made a large profit or they love the company a little too much, it could cloud your judgement when it comes to making profitable decisions. Having a deeper understanding of your financial goals and objectives will allow you to make much more rational and impactful decisions. It is always useful to ask yourself, “am I emotionally attached to this investment? Will this attachment make me hold it too long despite market conditions?”