Cryptocurrency Investment Strategies – a How To Guide

investing in cryptocurrency

For quite some time, cryptocurrency investing was considered a reckless venture by a small group of dedicated investors. At this point, most people have heard about the gigantic profits it can generate, as well as notable shortfalls that some investors suffered from. 

A defining characteristic of the cryptocurrency is its high volatility. Therefore, any investors and traders should take into consideration all the risks and continuously adjust their strategies to stay on top. In this article, we will dive into different types of investment strategies to help you make the right decision.

Investment and Trading: What’s the Difference?

Investing and trading are two different methods of profiting from movements on financial markets, despite some resources telling you otherwise. While they have the same goal, these methods approach them differently. 

Here is how we can summarize the differences between investing and trading:

  • Period – Investing is long-term commitments. There are often cases when investors kept their assets for years and even decades. Trading occurs in much shorter time periods: daily, monthly, or quarterly time frames. They mostly take advantage of quick price fluctuations that investors usually ignore.
  • Frequency of transactions – As an extension to the previous distinction, traders are known to place many more orders. Since the short-term price changes cannot yield significant profits on their own, traders have to make up for this fact with higher trading volumes. Investors tend to engage in fewer trades.
  • Risks – No method of interacting with the cryptocurrency market is without any risks. However, trading is considered to be a high-risk/high-return approach. Just the fact that traders do more transactions means that they expose themselves to almost daily risks. In investing, profits accumulate very gradually. The risks are still there, but they are not as great.
  • Attitude – Trading requires more technical skills, and investing requires a deeper understanding of the market. In many ways, investors study the psychology of the market, and traders are more about numbers and charts.

Two Foundations of Crypto Investment Strategies: Fundamental Analysis vs. Technical Analysis

 Fundamental analysis  is based on how the asset price is impacted by the market moves and news within the company. These factors include financial statements from top management, profit margins, cryptocurrency news, political events, and even natural disasters. Based on these underlying forces, analysts can evaluate whether the asset is underpriced or overpriced.

 Technical analysis  utilizes price charts, resistance, and support, indicators, patterns, and trends from the past to predict future price movements. In other words, it gives market participants a comprehensive overview of the past performance statistics. Additionally, it studies the interaction of demand and supply forces, which are also believed to affect the price.

Key differences between the two approaches can be described in the following points:

  • Fundamental analysis considers more extended periods of asset history. In this context, fundamental analysis is more likely to be used for long-term trading. Technical analysis better suits short-term and swing traders.
  • Investors usually apply fundamental analysis, whereas traders prefer technical analysis. The first one informs investors on whether they should buy and hold the asset for a certain period of time, and the second one advises about quick profits.
  • Fundamental analysis recognized that the asset is not only affected by the past. The technical analysis normally doesn’t consider current events – rather, it studies how the asset behaved in the past.
  • Technical analysis is better at determining the right time to enter and exit the market, whereas fundamental analysis studies the intrinsic value of the currency.

How To Invest in Cryptocurrencies 101: Fundamental Investors Strategies

An interesting analogy when it comes to investing in cryptocurrency is that they are more like food diets. Certain approaches may accommodate one person and turn out to be entirely useless for another. So, as an investor, your goal is not to find the most profitable strategy, but the one you can stick to in the long run. 

If you see a strategy that is too good to be true, it is most likely an advertising trick. We will examine the most common strategies, one by one, without overlooking their drawbacks. The more informed you are about the good and the bad, the better results you will achieve.

Below are the 9 best ways to start investing in cryptoccurency.

1. Long-Term Investments (HODL)

HODL is a deliberate incorrect spelling of the word “hold”. The strategy focuses on holding crypto for long periods of time without cashing out. It is mostly used by beginner investors as it is easy-to-execute and straightforward. The notion behind the strategy is built on an overall hopeful sentiment about the cryptocurrency market.

There is no definitive answer on whether long-term investments are the right approach for investors. HODL brings investors profits in specific circumstances – when the market is going up. In this context, you will indeed be able to make money by simply holding on to your asset while it appreciates in value.

In all honesty, long-term investments are sometimes considered an unprofitable strategy. While it can be successfully used, it leaves no chance of profit when the trend reverses. By sticking to HODL-ing, you may miss out on various profitable opportunities that are provided by more complicated strategies.

 PROS 
  • Simple
  • Good during uptrends
 CONS 
  • Not nuanced enough
  • Awful in a downtrend
  • Significant potential losses

2. Average position and then HODL (or Smart Holding)

Creating an average position means purchasing the average price of a cryptocurrency extended over. Because of the crypto market’s volatility, buying the asset in small installments is an excellent choice for building long positions. Mainly, investors play it safe – without being too risky but also with less potential gains. 

You are free to decide the schedule for buying the asset – monthly, weekly, bi-weekly, daily, etc. There are two most common averaging strategies: dollar-cost averaging and value cost averaging. The first one implies investing equal dollar amounts of the crypto at regular intervals.  

With the second one, an investor contributes to their portfolio based on the percentage gain or loss made previously. It gives you the flexibility to choose whether you want to skip a particular month, aim to buy only on the dips, etc.

 PROS 
  • Affordable
  • Avoids spontaneous decisions
  • Fewer cases of bad timing
 CONS 
  • No regard to changing environment 
  • More fees
  • May result in lower returns

3. Trading: Buying Low and Selling High

The name of the strategy is self-explanatory – buy when you think the price of an asset has dropped low enough, and sell after it appreciates in value. The decision on what crypto to buy is based on historical values and current market conditions. Even though it may be hard to use this strategy consistently, it has achieved a decent level of popularity.

To safeguard their profits with this strategy, investors often set stop-losses. Some go even further and apply technical analysis and buy/sell based on support levels, moving averages, etc. Also, it is recommended that investors keep an eye on transaction fees and portfolio erosion.

However, it might be hard for investors to determine when the price gets too high or too low. Many investors have to find a balance between wanting to wait to increase profits and feeling content with existing ones. Experts recommend supplementing this strategy with other tools, such as moving averages and overall market sentiment.

 PROS 
  • Suits beginners and advanced investors
  • Capitalizes on market panic selling
  • Works for different markets including sideways
 CONS 
  • Requires research
  • Unpredictability of most assets
  • Psychological roadblocks in terms of when to buy/sell

4. Using a Trading Bot for Day Trading

Trading Bot for Day Trading

Automated software carries out the same activity as a human trader but with parameters written in the program. Most traders utilize already made trading bits, but some choose to put their programming skills to use and create one. While the first one is easier to implement, the second one gives you more control over the strategies.

Trading strategies integrated into trading bots tend to be simple and more structured. Since they have to be broken down into a series of activities, they can’t be overly complicated. Otherwise, the bit will be tough to configure, and it will result in trading mistakes.

Those who purchase pre-made strategies on trading platforms need to realize the risks. You can make considerable profits since the bot is quick to react to market changes, can trade 24/7, and has no emotions. At the same time, if your strategy is faulty, you can end up with a streak of losses.

 PROS 
  • Minimal maintenance
  • Less psychological pressure
  • Hundreds of markets and assets to monitor
 CONS 
  • Risks of automating consistent losses
  • Requires some programming skills 
  • Inability to verify creators

5. Using a Trading Bot to Invest

Automating the investing process is less common than trading. The reason is that trading bots are aimed at quick market analysis and order execution, which is not often the main objective in investing. However, allowing the bot to manage your portfolio with stop-losses and pick low-risk strategies can yield fruitful results. 

Different bots come with various features, and investors choose them depending on their strategy. Bear in mind that many features will not apply if, for example, you are looking to HODL your assets for the long-term.

While there are many advantages to automated investing, it may not be necessarily the best choice for everybody. Casual investors are not the primary audience for bots and might be better off without them. But if you plan to make consistent investments and want to maximize risk-adjusted returns, you can reap a lot of benefits from automated platforms.

 PROS 
  • Takes emotions out
  • Keeps investors disciplined
  • Supports multiple accounts
 CONS 
  • Not an entirely hands-off solution
  • Not the best choice for long-term investors
  • Risk of scammers

6. Currency and Exchange Arbitrage

Cryptocurrency exchanges vary in terms of liquidity, trading volume, and, subsequently, prices for certain assets. Market changes affect small and large currencies differently. Typically, bigger exchanges have lower rates. With arbitrage strategy, traders purchase assets there and sell them on the smaller exchanges. 

Often, there will also be a slot in time after large exchanges experience price changes, and before they happen at small exchanges. Since prices do not adjust at the same time, you can capitalize on these price differences. The strategy is straightforward but requires a lot of time and dedication. 

To maximize your profit opportunities, you need to increase the trading volume. The price changes are not always significant, so you need to make up for it by investing a decent amount of cryptocurrency. Lastly, investors have to look for transaction, deposit, and withdrawal fees, which can take a significant portion of their profits.

 PROS 
  • Instantaneous profits
  • Many exchanges and currencies to choose from
  • Takes advantage of volatility
 CONS 
  • Exchange fees
  • Capital requirements

7. ICO Investing (Initial Coin Offerings)

ICOs are a crowdfunding method where tech creators sell tokens that will later be replaced with altcoins after the company is up and running. The benefit is that tokens can be traded on exchanges and may significantly rise in value over time.

There are two main ICO investment strategies, which are essentially opposite approaches. The first one, flipping, implies purchasing the tokens and trading them almost immediately. If there is a good demand for the token and the company is hyped up, you can make good profits. However, if you initially make a small investment, the gains may not be huge.

Alternatively, investors can choose the holding method. The premise behind this tactic is that the investors find the company and its tech very promising and count on their future success. It will require some research. Before investing, you will need to figure out about their business model, the development team, total supply, and inflation, etc.

 PROS 
  • High potential return on the initial investment
  • High liquidity
  • Available to everyone
 CONS 
  • Extreme price fluctuations
  • No ownership
  • Risk of Ponzi schemes and scams

8. Managing Investor Funds

Investment portfolio management includes organizing and maintaining investments to hit specific targets. Depending on these goals, investors can choose different strategies, asset allocation, methods of risk management, etc.

One of the approaches is passive management. In this case, investors usually have a fixed asset allocation and don’t try to outperform the market conditions. Since it doesn’t involve active trading, the associated fees are rather low.

Active management, on the other hand, implies choosing investments to outperform some market benchmark. It involves higher fees, and some research suggests that it doesn’t generate consistent profits as advertised.

 PROS 
  • Not too complex
  • Diversified investments
  • Regular source of income
 CONS 
  • Entry and exit fees
  • Limited control of asset selection
  • Tax inefficiency 

9. Mining and Combining Any Strategies Above

The debate over which strategy is better is never-ending. At the end of the day, any portfolio manager and analyst would agree that you can achieve your investment goals in many different ways. There is no right answer what will undoubtedly bring you profits, so you have to become more adaptive and combine strategies if you feel they will work better that way.  

All strategies described above have unique sets of features, and investors can manipulate strengths and weaknesses to their advantage. For example, you can combine active and passive strategies. The first one is likely to be higher-yielding, and the second one should bring more consistent results. 

There are difficulties, however. Just like there are no perfect strategies, there is not a ‘correct’ way to combine strategies. And if you feel you have enough knowledge and resources, you can try your skills at mining or some other crypto activity that fits your style.

 PROS 
  • Takes the best from both worlds
  • Lowered fund expenses
  • Better risk management
 CONS 
  • Requires more market knowledge
  • Risks of incorrect combinations

Things to Consider Before You Create a Strategy to Invest in Cryptocurrency

Every successful investment has a well-written, measurable, and reproducible strategy. The trouble begins when investors jump from pre-made strategies to creating their own without much deliberation. Some of the main points you need to consider to design a strategy suitable for you are:

  • Your current financial situation – A thorough financial plan should be your first step. There are no guarantees that investments will yield great profits. So, what is your after-tax income vs. spending ration, and how much money can you comfortably allocate to investing?
  • Your risk tolerance and desirable return – Your risk management plan and future strategy should take into account the inherent risks of specific asset categories. How much of a risk are you willing to take for a higher potential of an investment return?
  •  The timeline you’re going to work with – A strategy for the long term, i.e., for decades, will be much different from the one designed for several years. Are you saving for retirements, or do you need a shorter and safer strategy?
  • Applicability to different market environments – Investors need to acknowledge that the market is not always going to be on their side. How would your strategy perform in different conditions, and do you know its strengths/weaknesses?
  • The measure of the effectiveness of your investment strategy – Strategies need to be re-visited and adjusted from time to time. Do you know how to evaluate whether the strategy matches your investment goals?

FAQ

It makes sense if you have some questions about investment strategies and the cryptocurrency market in general. Here are some common questions from crypto investors:

What do I need to start investing?

Cryptocurrency trading platforms, such as 3commas, provide plenty of guidance and assistance for investors who are just starting. These services help you manage your portfolio, pick the right strategies, and financial instruments to work with. Plus, they connect you to crypto exchanges. If you have questions and issues, check education resources for insights from pro investors.

How do I choose a cryptocurrency to invest in?

Any asset class on any financial market should be analyzed based on: intention behind the project, the strength of the team, and market value. Thorough research should reveal which cryptocurrency is worth investing in.

Are gains from cryptocurrency investments taxable?

The short answer is yes. Cryptocurrency gains are considered your income and taxed according to your local laws. Make sure to record your gains or losses since they are required for future reports.

How do virtual wallets work?

Virtual wallets enable users to receive, send, and store cryptocurrencies. It exists only electronically since there are no physical equivalents of crypto. It allows you to transfer your funds to another e-wallet, such as a credit card issued by the bank.

How do I protect my funds from hackers?

There are a few main rules that will keep your funds safe:

  • Always use two-factor authentication
  • Keep an eye on your transaction history
  • Distribute your profits across multiple wallets
  •  Use password generators
  •  Decrease your overall OS vulnerability

Is cryptocurrency investing worth it?

The cryptocurrency market is not expected to run its course any time soon. On the contrary, the momentum it has gained over the last several years drives it further and further. With the growing number of altcoins, there are always new assets to invest in. 

Main Takeaway: How to Invest in Cryptocurrencies?

Deciding on a cryptocurrency investment strategy and specific instruments is a complicated journey. It ultimately comes down to trial and error – when you immerse yourself into a new market, you will slowly learn what you are good at and what techniques you should avoid.

To minimize the impact of mistakes, figure out your specific investment objectives, risk tolerance, available funds, and particular preferences. Then you will be able to see clearly which strategy fits you better. It might be something from this list, or you may come across an even better one for your goals. 

If you are still unsure of what strategy to use, the 3Commas trading platform is the perfect way to start your cryptocurrency journey. Offered functionality enables any investment and trading technique – from automated bots to customizable strategies. Whether you are a beginner or a professional trader, you will find a strategy that fits your skill and expertise. Happy investing! 

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