Three Ways to Not Blow Yourself Up in Crypto

By Michael Salvatore, Editor, TradeSmith Daily

I first bought crypto in 2016. I started with bitcoin (BTC) and ether (ETH) at prices of roughly $500 and $10.

If I had done nothing else but what I originally did, which was buy those assets and put them in a digital wallet, the value of my investment would’ve gone up by 250x.

That’s an extraordinary return in just nine years. A thousand bucks into a quarter million. It’s a once-in-a-lifetime kind of thing.

But of course, that’s not what I did.

And while I’m perfectly happy with my crypto portfolio today… It’s not at all a 250x return.

That’s because I made mistakes along the way, just like countless others have… and maybe you have.

I bought other cryptos that turned out to be duds.

I sold my best positions when it seemed like they’d gone up a lot. (Really, they were just getting started.)

I trusted institutions with my assets, and those institutions lost those assets.

I tried chasing new trends that didn’t bear fruit, and it cost me not only in terms of loss, but in opportunity and stress.

In the nine years I’ve been involved in crypto, I’ve spent a lot of time and energy gaining and losing hundreds of thousands of dollars’ worth of unrealized gains.

In short, I’ve been through the ringer. I’ve blown myself up on several occasions.

What’s worse… I blew myself up because I did too much.

If I’d done nothing, I’d be much better off.

Why do I tell you this?

Because right now, we’re likely entering the second half of the current crypto cycle, based on bitcoin’s halving.

(The halving is when the amount of BTC rewarded to miners is reduced by half.)

The chart below shows the price of bitcoin in blue with its halving dates, along with the total crypto market cap in red:

It’s been 287 days since the fourth bitcoin halving. That’s at right about the midpoint of the length of time of the past two cycles.

And while the biggest money has already been made from those who were buying during the bear market, the profit potential ahead is still substantial.

I think we’ll see a $200,000 bitcoin in 2025, and that it will remain dominant throughout the year.

But crypto cycles do a funny thing to people. As the market rises and opportunities explode in value right before your eyes, it’s very easy to get swept up in all this madness and make similar mistakes to the ones I’ve made.

So I want to share a few things I’ve learned that should help you keep your head and your profits where they belong.

Here are three core principles to not blowing yourself up in crypto over the next 12 months…

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Easy to Learn, Hard to Remember

What I’ll tell you today is easy to understand, but devilishly hard to remember in the heat of crypto mania.

Let’s start with some advice you’ve definitely heard before, probably believe, but may have never used.

Often, the best investment strategy is to forget your password to your trading account and not log in for 15 years.

As the late, great Charlie Munger put it, the money is in the waiting.

Humans aren’t psychologically conditioned for waiting. We have what some call “low time preference,” or a need for instant gratification.

We’re happy to trade in and out of assets because we’re taking action. That puts us in control and makes us feel like we’re accomplishing something worthwhile… even if the result is typically less than ideal.

Take my experience in crypto. A mere six months after buying ETH for $10, blissfully unaware of what lay ahead, I sold half my position at… drumroll… $30.

At the time, I was a genius. I tripled my money.

Looking back today, it’s clear that was more than a bit shortsighted.

To be fair, crypto was and to some extent still is a highly volatile, brand-new trend. Especially in those early days, there was no telling where it would go and if it would last.

But those higher-risk days are behind us. We have institutions launching ETFs, companies and even countries adding bitcoin to their balance sheet, and a total market cap of more than $3 trillion in the space.

Crypto isn’t going away. In fact, it’s likely to just get bigger.

So if you’re going to take part in crypto, you have to think about the long game and not over-trade. Everything you’ve read so far should make it clear this is my best piece of advice.

And when you think about the long game, you start to prefer assets that are more time- and battle-tested. The ones with the highest market caps, and the ones least polluted by short-term thinking.

Of course, I’m talking about bitcoin here. Bitcoin is the top dog, making up two-thirds of the entire space, for a reason. Once you understand the simplicity of its foundational principles, you realize why it carries that premium.

I could go on for pages about why bitcoin should be by far the largest holding in your crypto portfolio, but today is more about managing your risk than it is evangelizing you.

My bigger point here is that you should be careful with the short-lived trends in crypto that hardly ever survive after the cycle ends. Or at the very least, understand that they’re for trading and not for long-term holding.

Crypto has an unfortunate tendency to attract less-than-credible actors who want to quickly raise funds by launching new cryptocurrencies and advertising them heavily, promising the world all along the way.

This is where the fanciful ideas of decentralized finance (DeFi), non-fungible tokens (NFTs), and initial coin offerings (ICOs) all came from. And you can be certain that none of those areas of the market are making new highs right now as bitcoin is.

There are tens of thousands of cryptocurrencies out there, and new ones are launching all the time. The vast majority of them are worth under $1 million.

The promise of buying an asset at such a relatively microscopic market cap and watching it turn into a multibillion-dollar success is enticing. But the odds of it happening are less than microscopic – they’re subatomic.

Just take a look at this chart comparing the market cap of bitcoin (blue line) and all cryptocurrencies not in the top 10 (purple line). The latter has not only failed to make new highs, it’s miles behind bitcoin… and the gap is widening:

This gets down to two other core principles I have about crypto.

1. Unless you’re going to dedicate yourself entirely to this space, you shouldn’t stray far from the top 10 cryptocurrencies by market cap.
2. If you decide to stray anyway, make sure to take profits and losses quickly. Don’t ride the high-risk side of this market into a bear market. Because most of those losers will never come back.

Finally, before I sign off, there’s an incredibly important factor to crypto that doesn’t apply to traditional investing.

Crypto is the Wild West. What I mean by that is, there’s little to no regulatory regime that will protect you when things go south. You need to undertake a higher level of security if you’re going to participate in this trend.

There are hackers that can easily steal your assets through deception and phishing. There are ways to make simple fat-fingered mistakes that can result in catastrophic losses.

And what’s worse, you may choose to trust a custodian that can fall victim to the same failures you would yourself.

Confession time: I had a considerable amount of crypto parked in another hot 2021 trend, “cryptobanks.” These companies propose they hold your crypto, make low-risk trades with it, and give you some yield in return.

When the market turned south in 2022, the cryptobanks blew up, and I became an unsecured creditor.

I probably won’t ever be made whole from this experience. But what it taught me was worth far more than what I lost.

These days, I trust no one but myself. I keep my long-term assets in an offline wallet, and everything else I keep in a multifactor-authenticated trading account with a wholly unique password in a reputable crypto broker.

I also accept the low likelihood that the latter assets may go poof at any moment, but I still want to be able to trade them.

If all this sounds too complicated for you, I highly suggest looking into the new bitcoin- and ether-backed ETFs as a way to play this trend.

But if you’re going to seriously get into crypto, or already are and weren’t aware of these principles, I hope my advice is helpful.

The year ahead holds huge promise for the crypto space. It’s rife with opportunities both for the long term and the short term.

Your goal as an investor, as it always is, is to come out the other side wealthier than before. Keeping this advice in mind will help you get there.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily