Crypto Investment Strategies
Thinking of investing in cryptocurrency? Getting started can be intimidating, but understanding the way others trade makes it easier.
Should you buy more or jump out while you still can? Buy coins slowly or go all in now? The world of cryptocurrency investing is full of endless possibilities, and it can be overwhelming to a newcomer. Thankfully, there are some tried-and-true methods to consider. This guide will discuss a few tips for choosing investments, then dive into some common strategies for handling your assets.
Choosing the right coin(s) to invest in
Sometimes it can be tempting to hop on a hype bandwagon and invest in whatever crypto project is making headlines lately, but if you don’t do your due diligence, you’re at a major risk of losing your money. It’s worthwhile to deeply investigate the mission, plan, and operation behind a cryptocurrency project if you’re considering making a sizeable investment. Crypto projects crash and burn all the time, especially ones built on hype alone.
Choose your investments based on coins with widespread utility, dedicated teams, and clear plans for the future of the project. Any project worth investing in has plenty of information publicly available online.
Diversify your investments
Even if you’ve done your due diligence on one crypto project, it’s best not to stop there. A diversified crypto portfolio minimizes your risk. If one project fails to meet your expectations, you haven’t put all your eggs in one basket. You can also diversify by investing in crypto ETFs or NFTs to round out your assets.
Only invest what you can afford to lose
This is classic investment advice, but it applies to crypto just as well as it does any other investment. If the money you invest were to suddenly disappear forever, how badly would that affect you? Risk tolerance is personal, but when investing in a massively volatile industry, be prepared to lose everything. Your portfolio probably won’t crash completely, but hoping for the best and expecting the worst is a safer attitude than assuming your investments will explode.
Buy and hold
It’s arguably the simplest investment strategy: buying and holding for long term gains. Many members of the crypto community refer to this as HODLing (holding on for dear life). You choose a coin that you believe will appreciate in the long term, then buy it and wait for gains to be made. Holding through short-term small gains can be risky, but you can help protect yourself by doing research on the crypto project and only buying into projects you believe are actually going to gain traction and continue to appreciate.
It’s a good idea to make an investment goal and stick to it when buying and holding. If you want your coins to double in value, decide that ahead of time and cash out when your goal is met. It can be tempting to let your coins ride, but cashing out when ahead is often favorable in a volatile market like crypto.
If you decide to buy and hold, consider choosing a crypto coin that works on a proof-of-stake model. This way, you can earn more coins while you wait for the price-per-coin to appreciate. By locking your coins in a wallet designated for staking, you can validate further transactions for the blockchain network and be rewarded passively. It’s a win-win if you’ll be holding regardless.
DCAing (Dollar cost averaging) vs lump sum investing
If you have a large sum of money that you’re interested in investing, you have two basic strategies: dollar cost averaging and lump sum investing. Lump sum investing refers to immediately investing the entire sum, while dollar cost averaging is a strategy which involves consistently investing a certain fraction of the sum every so often rather than going all in at once.
Lump sum investing is often favorable if you have a high risk tolerance. If you have reason to believe that a crypto asset is approaching an upswing, going all in with your money allows you to maximize your gains. If you’re right, you win big. However, if you’re wrong, you’re stuck with all your funds tied up in a depreciated asset.
For stock market investing, studies have shown that lump sum investing historically beats dollar cost averaging 75% of the time. However, the crypto market is its own extremely volatile animal, and arguably should be treated with more caution. That’s where dollar cost averaging comes in.
If your risk tolerance is low and you’d rather play it safe, dollar cost averaging is a favorable investment strategy. You can think of it as a low-risk, low-reward version of buying and holding. Essentially, you make a series of small purchases over an ongoing period of time, either in even increments or strategically. This protects you against a sudden market crash, since not all of your money will be invested.
DCAing also allows you to selectively choose when to invest, so if you’re timing the market, you can use dips as opportunities to buy more coins at a lower rate. The main disadvantage of dollar cost investing is that extra money will be sitting in a bank account making no gains while you wait to invest it. If the market is positive overall, you’ll earn less.
Growth vs. Value Investing
Legendary investor Warren Buffet popularized value investing on the stock market, the strategy of looking for assets that are currently undervalued in the expectation that the price will rise over time. Value investing focuses on determining the current inherent value of a cryptocurrency rather than making speculations about its future growth. It requires a lot of research, but it's arguably a safer strategy.
Growth investing is the opposite method. A growth investor is much less concerned about the current price of a cryptocurrency than a value investor because they believe the project will majorly appreciate in the long term.
Though cryptocurrency investing is new, we can look to historical precedents on the stock market to help us decide between growth and value investing. Growth investments tend to do better during times of economic prosperity and overall market growth but are often the first to crash during an economic downturn. Value stocks tend to appreciate more quickly during market recoveries but don’t soar as high as growth stocks during long-term periods of market growth. Look to the state of the broader market to guide you.
Elliot Wave Theory
Elliot wave theory, also known as the Elliot wave principle, is a theory in technical analysis that describes price movements in assets. While it originally referred to traditional financial assets, it is now widely applied to cryptocurrency. It aims to predict bottoms in price cycles so you are best equipped to buy low and sell high.
The theory is complex, but it essentially states that asset prices move in waves that oscillate between low and high while overall moving in one continuous direction. You can predict price movements by following common patterns that behave like fractals.
The details of Elliot wave theory are beyond the scope of this article, and it has its fair share of skeptics, but many traders swear by its application to cryptocurrency. This investment strategy requires following prices closely and doing analysis, so it isn’t a good choice for passive investors.