Question No. 3:
How Much Should I Invest?
by Ian King
This is a great question, so I’m glad we get to talk about it.
I think investors can get caught up in the excitement of cryptos. It’s understandable with all the quick gains sitting out there.
For example: I invested in bitcoin for the first time in 2013. Now, I didn’t buy it at the low $14, but I did buy it around that time.
And if you held through the years, every $1,000 invested around then was worth roughly $1.2 million in early 2018.
That’s a massive rise, particularly in such a short amount of time. So investors clearly see the potential of turning their stakes into huge gains as the crypto market takes off further and the technology becomes part of our daily lives.
Better yet, crypto could potentially serve as an uncorrelated asset and gain value when the stock and bond markets decline. So there are more ways to make money here than many people might expect.
Investor excitement is completely warranted.
But I can’t stress this enough: Don’t let that excitement cause you to put your entire investment portfolio into the market.
This is my big rule: Only risk what you are willing to lose. My rule of thumb is if you aren’t willing to lose 2% to 5% of your assets in the stock market, then don’t invest more than 2% to 5% in crypto. If you can tolerate a larger loss, then increase the position size.
But I don’t recommend allocating larger than 5% to 10% of your total equity to this market. Then, out of your crypto portfolio, allocate about 10% to each crypto trade.
For larger investors, this might mean $5,000 to $10,000 allocated to cryptos. With $500 to $1,000 going toward each position. For smaller investors, this might mean about $2,000 allocated to cryptos, with about $200 going into each trade.
The Key to Success: Managing Risk
Volatility is huge as we discussed yesterday, and this market is still developing. So there are risks. I won’t sugarcoat it.
That’s why I urge caution with your allocation amounts.
Over the course of my 20 years in the markets, I’ve learned that position sizing is one of the key determinants of success or failure.
If you risk too much, crypto volatility will shake you out. That’s how you can become one of the investors I mentioned yesterday who jumps out of the market during volatile moments — missing out on returns.
Unfortunately, I see this mistake too often and wrote about it recently for Banyan Hill. (See my article about my friend Jordan who lost money trading bitcoin last year.)
So I stress this often.
Here’s are some other crypto tips: The goal is to transform tiny crypto allocations into massive windfalls. To do this, a good crypto strategy will manage a diversified portfolio of crypto assets that will rebalance as positions reach your price targets.
As the portfolio grows, you should remember to take profits and keep your total allocation close to what you started with. It’s a mistake to let your crypto portfolio become a large part of your total assets.
Because cryptos will not rise forever (although they are in a long-term trend). All good things eventually come to an end. So you’ll be thankful you booked profits along the way.
After all, a 1,000% gain might come at the expense of losing 40% or 50% on another position, as volatility cuts both ways. But if you keep your position sizes small and take gains off the table, you’ll be able to stomach the inevitable losses.
That’s how you stay in the game.
On that note, my system selects about three to four crypto picks a month. By taking gains off the table, users ensure they have capital available for the next trade.
I’ll give you a hint about how I decide when to preserve capital.
My trading system takes volatility into account when setting exit prices and stop-loss prices. To do this, it uses Average True Range (ATR) — a technical indicator — that tells me the likely range that the price will swing in a given time period.
I use this indicator to set realistic stops, exits and trailing stops. Because if you’re not taking into account crypto volatility, you’re likely to see your stop losses hit too soon or cut your winners short.
I don’t want that for you. So my system sets us up to cut losses before they get too big, while collecting our winners.
Recap of My Crypto Trading Tips
So here’s a recap of my tips for today:
- It’s all about position size! Allocate about 2% to 5% of your investable assets to cryptocurrencies. Don’t allocate more than 10%. This market has great potential, but we don’t want to risk what we aren’t willing to lose. You can then allocate 10% of your crypto funds to each position.
- Diversify: A good crypto strategy will manage a diversified portfolio of crypto assets that will rebalance as positions reach our price targets.
- Take gains off the table: As the portfolio grows, you should remember to take profits and keep your total allocation close to what you started with.
To learn more, be sure to visit www.cryptoprofitsummit.com daily to see pre-webinar previews and posts.
Creator, Crypto Profit Strategy