If you aren't financially and emotionally prepared, success will be hard.
Solana (SOL -2.31%) is one of the most exciting cryptocurrencies this year, not least because the chain is the de facto home of meme coin investing. But that doesn't mean every investor is ready to dive into making a purchase of the coin, even if they're already holding somewhat less thrilling but more established options like Bitcoin or Ethereum.
Jumping in before you've covered the essentials is a surefire way to jeopardize the value of your portfolio. Let's go over three easy things you should do before investing in Solana to make sure that you're moving forward in a responsible fashion.
1. Diversify your main portfolio with a mix of safe and less-safe investments
Solana is a relatively new cryptocurrency, having launched in 2020. At the moment it looks like it'll continue to gain traction and enough adoption to remain relevant. But if it fails to do that, you don't want your entire portfolio going down in flames, so you'll need to diversify.
Your diversification scheme should include assets like blue chip stocks, index funds, and perhaps even bonds, as well as some cash. Your portfolio could also include a few riskier plays like biotech stocks, or stock options.
If you haven't built a foundation for your portfolio's success, the returns you make will be very difficult to retain for long enough to actually accomplish your financial goals and improve your life. So diversify, diversify, diversify, and when that's done -- and it could take years to do correctly -- you will be ready to move on to investing in riskier opportunities like Solana.
2. Develop an investing plan
Every time you invest, you should have a plan, and Solana and other cryptocurrencies are no exception.
Your plan should articulate:
- Your goals for the investment
- Your investing thesis, describing why the coin is worth buying instead of something safer (or something riskier)
- A reasonable set of price targets for when to take profits or cut losses
- A timeline describing how long you would prefer to hold the coin
- A summary of the biggest risks the investment will face
- Anything else you feel you would want to prepare for in advance
If you don't make a plan before investing, your plan essentially becomes hoping for the price to go up. Hope isn't a plan, though, and it's far too fickle of an emotion to rely on to guide your actions when the going gets rough anyways.
Don't dream about making millions from making a purchase of a cryptocurrency. Create a roadmap that plots how buying a particular asset will get your portfolio to where you want it to go.
3. Brace yourself for volatility and know the two most common patterns of major drawdowns
Despite being quite a bit more stable in comparison to smaller cryptocurrencies, in comparison to traditional investments like stocks, and even to larger cryptocurrencies like Bitcoin, Solana is indeed fairly volatile, and daily price movements on the scale of 5% are common.
If you aren't prepared for how it will feel when you look at your account and see that the value of your investment has fallen by at least that amount in a relatively small period, you aren't ready to invest in Solana.
There are a couple of scenarios that tend to test even the most experienced crypto investors that are likely to occur with Solana as well, so you will need to brace yourself for them too.
As questionable as the utility of technical analysis (TA) is for investors who intend to hold their cryptocurrencies for the long haul, as you should, it does provide some helpful reassurance that will probably come in handy when the price of your coin is down 30% -- or even 80% -- without any specific reason or trend that is readily discernible as a cause.
In short, for a fairly large cryptocurrency like Solana, the TA idea is that a decline of 30% over several weeks is not something to be overly concerned with so long as there has not been a major negative catalyst event, as it is more likely to be a (brief) period of market consolidation than an enduring collapse. In other words: Near-term recovery is likely.
The 80% drawdown is a different and more difficult story, and it can take many months to unfold.
In this case, the expectation is that a recovery will only occur in the long term, if it happens at all. The aggressive move would be to back up the truck and buy a lot more and then wait patiently for the recovery, but most investors will lack the conviction to do so after a large decline.
Instead, force yourself to buy just a tiny bit more, and then log out and check back in a few months or even a year -- and be ready to do it again if the situation hasn't improved.
The idea is to demonstrate your agency in your portfolio's success, even when things are dire, so that you can at least retain some semblance of a feeling of control over the outcome. That in turn can be very helpful psychologically, and even quite profitable too.
It's fine to give up on buying more if it isn't working, but resist the idea of selling at a loss. If the price eventually recovers, your small purchases at the bottom will lead to big returns -- and if it doesn't, you won't lose much more.
Alex Carchidi has positions in Bitcoin, Ethereum, and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Solana. The Motley Fool has a disclosure policy.
