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Cryptocurrency Investment Strategies – a How To Guide
Cryptocurrency trading has – until recently – been considered a reckless venture by a small group of dedicated investors. Now, 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 cryptocurrency is its high volatility. Therefore, investors and traders should consider all the risks and continuously adjust their strategies to reflect the demands of the market. In this article, we will dive into different types of investment strategies to help traders make the right decision.
- Investment and Trading: What’s the Difference?
- Two Foundations of Crypto Investment Strategies: Fundamental Analysis vs. Technical Analysis
- How To Invest in Cryptocurrencies 101: Fundamental Investors Strategies
- 1. Long-Term Investments (HODL)
- 2. Average position and then HODL (or Smart Holding)
- 3. Trading: Buying Low and Selling High
- 4. Using a Trading Bot for Day Trading
- 5. Using a Trading Bot to Invest
- 6. Currency and Exchange Arbitrage
- 7. ICO Investing (Initial Coin Offerings)
- 8. Managing Investor Funds
- 9. Mining and Combining Any Strategies Above
- Things to Consider Before You Create a Strategy to Invest in Cryptocurrency
- Main Takeaway: How to Invest in Cryptocurrencies?
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Investment and Trading: What’s the Difference?
Investing and trading are two different methods of profiting from movements on the financial markets. Whilst both have the same goal, each method uses a different approach.
- Period of time – Some investors profit from long-term commitments and keep their assets for years – even decades. Trading, on the other hand, happens over a much shorter time period: daily, monthly, or quarterly to take advantage of rapid price fluctuations – which long-term investors typically ignore.
- Transaction frequency – Traders are known to place many orders since short-term price changes cannot yield significant profits on their own. Traders must then make up for this fact by higher trading volumes.
- Risks – No method of interacting with the cryptocurrency market comes without risk due to the multitude of transactions. However, trading is considered a high-risk/high-return approach. When long-term investing, profits accumulate gradually – but there are still risks – just not as significant over a shorter period of time.
- Attitude – Trading requires technical skills, whereas investing requires a deeper understanding of the market. In many ways, investors study the psychology of the market, whereas traders are more focussed on the 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 how 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 an 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
Similar to food diets, certain trading approaches may accommodate one person and not the other. As an investor, the goal is to find an asset that will provide significant profits in the long run – not to find the most profitable strategy. Often, if you see a strategy that seems too good to be true, it is most likely due to clever advertising. Below are the 9 best ways to start investing in cryptocurrency.
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 straightforward and easy to execute. The notion behind the strategy is built on an overall hopeful sentiment about the cryptocurrency market.
There is no definitive answer as to whether long-term investments are the right approach for investors. HODL brings investors profits in specific circumstances, like 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.
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 opportunities from more complicated strategies
Good during uptrends
Not nuanced enough
Awful in a downtrend
Significant potential losses
2. Average position and then HODL (or Smart Holding)
Creating an average position involves purchasing the average price of a cryptocurrency. Due to the crypto market’s volatility, buying the asset in small installments is a wise choice for building long positions. Investors prefer to play it safe so they potentially earn less gains.
Users 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 which implies investing equal dollar amounts of the crypto at regular intervals. Value cost averaging involves an investor contributing to their portfolio based on the percentage gain or loss made previously. It gives investors the flexibility to choose whether they want to skip a particular month or aim to buy only on the dips, for example.
Avoids spontaneous decisions
Fewer cases of bad timing
No regard to changing environment
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 can be difficult 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, apply technical analysis, buy/sell based on support levels, and other factors. It is also recommended that investors stay up-to-date on transaction fees and portfolio erosion. However, determining when the price goes too high or too low is difficult, so investors must 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.
Suits beginners and advanced investors
Capitalizes on market panic selling
Works for different markets including sideways
Unpredictability of most assets
Psychological roadblocks in terms of when to buy/sell
4. Using a 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 bots, whereas others elect to program their own to have more control over their strategies.
Trading strategies integrated into trading bots tend to be simple and structured as they have to be broken down into a series of activities and can’t be overly complicated. Those who purchase pre-made strategies on trading platforms need to be aware of the risks; whilst considerable profits can be made from the bot’s quick reactions to market changes, 24/7 trading, and has no emotions, it does require a faultless strategy. If not, traders will experience a streak of losses.
Less psychological pressure
Hundreds of markets and assets to monitor
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 because trading bots are aimed at quick market analysis and order execution – not the main objective of investing. However, allowing the bots to manage portfolios with stop-losses and a low-risk strategy can yield fruitful results. Different bots come with various features, which investors choose depending on their strategy. Bear in mind that many features will not apply when looking to HODL assets for the long-term.
While there are many advantages to automated investing, it may not be the best choice for everybody. Casual investors are not the primary audience for bots and may experience more success without them. However, if traders plan to make consistent investments and want to maximize risk-adjusted returns, automated platforms are the best tool to deploy.
Takes emotions out
Keeps investors disciplined
Supports multiple accounts
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 prices for certain assets. Market changes affect small and large currencies differently. Typically, bigger exchanges have lower rates, and with an arbitrage strategy, traders can purchase assets and sell them on the smaller exchanges. Since prices do not adjust at the same time, traders can capitalize on price differences, but whilst the strategy is straightforward, it does require significant time and dedication.
To maximize profit opportunities, traders need to increase trading volume. The price changes are not always significant, so to make up for it, traders should invest higher amounts of cryptocurrency. Investors must be mindful of transaction, deposit, and withdrawal fees, which can take a significant portion of their profits.
Many exchanges and currencies to choose from
Takes advantage of volatility
7. ICO Investing (Initial Coin Offerings)
ICOs are a crowdfunding method where tech creators sell tokens that will later be replaced with altcoins once 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; flipping – which involves purchasing tokens and trading them immediately, and holding – where investors find a company and its tech promising and profit from their future success. Flipping requires demand for both the token and the company, but big gains require big investments. Holding requires research, a deep understanding of the business model, development team, total supply, and inflation.
High potential return on the initial investment
Available to everyone
Extreme price fluctuations
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, and methods of risk management.
Passive management requires investors to have a fixed asset allocation and don’t attempt to outperform the market conditions. As this method does not involve active trading, the associated fees are low. Active management, on the other hand, implies choosing investments to outperform market benchmarks. It involves higher fees, and some research suggests that it doesn’t generate consistent profits as advertised.
Not too complex
Regular source of income
Entry and exit fees
Limited control of asset selection
9. Mining and Combining Any Strategies Above
The debate over which strategy is best is never-ending. Ultimately, any portfolio manager and analyst would agree that traders can achieve their investment goals in different ways. There is no right answer to what will undoubtedly generate profits, so traders must be adaptive and combine strategies.
All strategies mentioned above have a unique set of features that investors can manipulate to strengthen and weaken their advantage. For example, by combining active and passive strategies to either yield high or sustain more consistent results. There is no perfect combination, either. Traders should evaluate which strategy they have enough knowledge of, access to resources, and which skill set they have to utilize.
Takes the best from both worlds
Lowered fund expenses
Better risk management
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. Issues arise when investors jump from premade strategies to creating their own without much deliberation. Some key points to consider when designing a suitable strategy:
- Current financial situation – A thorough financial plan should be step number one. There are no guarantees that investments will yield great profits so traders must decipher their after-tax income vs. spending ratio, and how much money can be comfortably allocated to investing.
- Risk tolerance and desirable return – A risk management plan and future strategy should account for the inherent risks of a specific asset category. How much of a risk are traders willing to take for a higher potential of an investment return?
- The timeline – A strategy for the long term, i.e., for decades, will be different to a short-term one. Traders must consider what they are saving for (retirements/property, etc) and decide if they need a shorter, 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?
- Measuring the effectiveness of your investment strategy – Strategies need to be re-visited and adjusted from time to time. How does a trader evaluate whether the strategy matches their investment goals?
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:
Cryptocurrency trading platforms, such as 3commas, provide guidance and assistance for investors who are just starting. These services help manage portfolios, select the right strategy, and financial instruments to work with. They also connect traders to crypto exchanges.
Any asset class on any financial market should be analyzed based on: intention behind the project, the strength of the team, and the market value. Thorough research should reveal which cryptocurrency is worth investing in.
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.
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.
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
The cryptocurrency market is not expected to run its course any time soon – especially with the trajectory of the momentum it has gained over the last several years. With the growing number of altcoins, there are always new assets to invest, as well.
Main Takeaway: How to Invest in Cryptocurrencies?
Deciding on a cryptocurrency investment strategy can feel complicated. Ultimately, it comes down to trial and error and when immersing yourself into a new market, you will slowly learn what you are good at and what techniques to 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 suits you best. 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. Offering functionality for any investment and trading technique – from automated bots to customizable strategies – 3Commas is catered to both beginners and professional traders. There is a strategy to suit all skill levels and expertise. Happy investing!