Key Learning on Investing in Crypto:
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Importance of Investment Amount:
- Before investing in cryptocurrency, it's crucial to decide not only which assets to buy but also how much to invest based on one's financial capacity.
- Assessing one's financial situation avoids the risk of overexposure and helps maintain a long-term investment strategy rather than a short-term gamble.
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Developing a Financial Strategy:
- You should approach personal investing with the same caution and diligence as a company prepares its budget, focusing on maintaining a balance between income and expenses and ensuring liquidity for sustainability and growth.
- A personal financial assessment is more complex than it seems; it should evaluate types of income, expenses, and associated risks to understand the personal tolerance to risk.
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Calculating Cash Flow:
- Create a personal balance sheet that includes current savings, periodic income (e.g., salary, rents), variable income (e.g., bonuses, sales), fixed expenses (e.g., taxes, debts), variable expenses (e.g., dining out, vacations), and potential unforeseen expenses.
- Savings should be split between a liquid cushion for living expenses and the remaining capital for investment.
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Determining Risk Tolerance:
- Risk tolerance is shaped by the stability and predictability of income and expenses.
- High-risk financial situations (e.g., unstable employment, high expenses) require a larger cushion and a conservative investment approach.
- Low-risk scenarios (stable income, controlled expenses) allow for a smaller cushion and potentially a higher investment in riskier assets like cryptocurrency.
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Understanding Investment:
- True investment requires a long-term view that considers the snowball effect of compounding.
- Investment is not just diversifying but also actively managing your portfolio with a clear understanding of the timeline and goals.
- Gaining experience with the market over time is critical; each bear and bull market offers lessons for improving future strategies.
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Allocating Crypto Investment:
- Cryptocurrency investment should be based on personal risk assessment and financial situation.
- Examples of allocation based on risk tolerance:
- Low risk: 0-5% in crypto (Bitcoin or Ethereum only), primarily held in a wallet for security.
- Medium risk: 5-15% in a mix of Bitcoin, Ethereum, a few well-researched altcoins, some in staking or yield platforms.
- High risk: 15-30% or more in a diverse range of cryptocurrencies and yield-generating platforms.
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Factors Increasing Portfolio Risk:
- Percentage of portfolio in crypto and altcoins, especially if locked up.
- Percentage of other volatile asset classes like stocks.
- Use of yield platforms, both DeFi and CeFi, introduces additional layers of risk.
- Keeping liquid assets in the portfolio can serve as a buffer to mitigate risk.
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Concrete Portfolio Examples:
- Portfolios with different levels of risk were presented as examples, with variations in asset spread (cryptos, stocks, liquid cash) and considerations on exposure to yield-generating platforms.
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Risk Self-Assessment Exercise:
- Assigning a personal risk score to various income and expense categories can guide investment decisions and risk exposure.
Final Pointers:
- Prioritize financial stability and a clear understanding of your own risk tolerance.
- Be mindful that excessive exposure to an asset class as volatile as crypto can have significant financial consequences.
- Control over your portfolio is essential; it includes understanding its composition and how it aligns with your financial situation and investment goals.