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What is the Threshold Method?
The Threshold Method is a simple investing method that helps investors understand the level at which a price currently is. It is important to be aware of which price you are investing at because it will determine your rate of return once the asset begins to move in your favor. Essentially, many think percentage gain is all that matters in crypto due to fractional investing. However, that can be very deceiving. Two assets at two different price points can both have the same percentage gain, however one may achieve their percentage gain with less effort than the other. This is where threshold investing comes in.
Think of an 18-wheeler truck traveling up a hill while carrying heavy equipment on its flatbed. It takes a lot of power to move from point A to point B. Now imagine a small sedan going up that same hill. Although the truck may move slower, it will still reach its destination; however, it will take more effort to achieve the same goal.
Example: If an asset such as Bitcoin is $50,000 and you decided to invest $1,000 into it, Bitcoin would have to grow to $100,000 in order for you to make 100% return on your money. This is an example of how Bitcoin is priced beyond a certain threshold. A threshold price point determines how much effort it would take to grow your money at a reasonable rate. If you invest in Bitcoin at $50k, you will need Bitcoin to increase by $50k in order to make an additional $1k. So, if Bitcoin becomes $150k, your $1,000 would then become $3,000.
Another Example
Joe is interested in an asset priced at $0.01 (1 cent). He decides to invest $1,000. Every time the asset increases by 1 cent, Joe makes $1,000. If it moves 15 cents, he makes an additional $15k. An asset that is not fully matured has more growth potential.
It’s easier for an asset that has value to move from $1 to $2 or from $5 to $10. Your ability to buy entire coins at these price levels helps establish the rate of return.
Bitcoin was once 1 cent. If you invested $100 into Bitcoin at 1 cent, that would mean for every 1 cent increase in the future, you would make $100. If Bitcoin moved 60 cents, you would make $6,000. This is because you properly loaded on an asset within a threshold that mathematically makes sense.
How To Know If Price Is Within A Certain Threshold
Determining your threshold all comes down to your risk appetite, along with the available capital you plan to invest with. Everyone’s situation is different. This is what makes this method versatile. Someone may have more capital and will feel comfortable buying 20 full Bitcoins at $50k. For me, that is not ideal. I look for projects that have value and are priced at a level that will maximize my earning potential.
The less you invest, the less the return. Imagine someone investing $20 in XRP at 20 cents and that was all they invested for the life of the asset. That means every time XRP grows 20 cents, they will make $20. If XRP becomes $4, they will have $400. That is an impressive gain, however they missed out due to playing it too safe. So now they may decide to invest $1,000 at $4. Now they will make $1,000 every time XRP grows an additional $4. That is not a bad price, considering XRP could have a bright future. At one time, XRP was below 1 cent. Imagine the person who decided to invest $5,000 in XRP at that price. XRP growing from 20 cents to 30 cents would return them $50,000. Every time they see price rise by 1 cent, they make $5,000.
So, what do you want to be your future profit increment? That is how you determine your own threshold.
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