Top 4 Crypto Investing Strategies
It is not an understatement, when seasoned investors and traders in the crypto market say that cryptocurrencies are volatile. As a matter of fact, cryptocurrencies are the most volatile asset class the world of finance has ever seen. To top it off, it doesn’t help that differences in base protocol of a cryptocurrency also affect its growth. This type of inter-asset dependence is unprecedented.
When investing in cryptocurrencies, just like any other asset, it is given that there is no alternative to hands on research (DYOR). But then, if there is no precedent to strategies of investing, how does one ensure a stable income?
The Difference in Perception – Crypto vs. Traditional Assets
Cryptocurrency represent a totally new form of investing mechanism. The high volatility of the market scares both long term traditional investors and new entrants. Many have tried to find patterns and correlations, but given its nascent origins, the task seems unachievable.
When it comes to traditional financial assets like Stocks, Bonds, Debt Instruments etc., the market has developed dozens of strategies to make the best buck out of one’s investment. Billionaire Warren Buffet is an avid proponent of the Value Investing Strategy. While Peter Lynch is known to be a Growth Investor. As there are centuries of data to develop on, finding profitable strategies is not that hard.
Although still nascent, investors and traders have a lot they can carry over into the crypto market. Yes, it is volatile, but having an investment strategy will act like a safety net. It is like having an instruction booklet guiding you through the investment process. It will help you discard many potential investments that may perform poorly overtime or that are not right for the investment goals you are looking to achieve.
Here is our top 4 crypto investing strategies.
Risk Preference Approach
Finding out the risk preference of the investor is more important than any other component. If an investor’s risk preference is low and does not wish to get into a market with unstable and volatile returns, the crypto market is not what they are looking for. Dozens of Financial Institutions have termed the crypto market to be a highly risky venture, and seasoned traders in the market would agree. The returns of the market are unpredictable, to say the least, and not for the light hearted. Once the risk preference is determined, the investor can look for highly liquid and undervalued tokens the show great potential. Although the risk is high, the potential reward of exponential increase is high as well.
One way to balance risk and reward in an investment portfolio is to diversify the assets. Traditionally, Portfolio Diversification has been known to be a most simple and effective strategy. This strategy has many complex iterations, but at its root is the simple idea of spreading the portfolio across several assets. Users can invest in various types of tokens, such as remittance tokens, utility tokens, security tokens and so on. It is a reasonable hedging mechanism. Diversification can help mitigate the risk and volatility in a portfolio. Although diversification does not ensure a profit or guarantee against loss, it is a stable and trust worthy approach, if done right.
Long Term Approach
Long Term Approach is an investment strategy that focuses on capital appreciation. In this strategy, an investor selects a few risky, but highly undervalued tokens that show great long-term potential. Long Term Investing has traditionally been one of the best strategies as it does not involve periodical and time-staking effort to keep looking at the market. Investors just need to make sure they form a basket of crypto assets that represent huge market potential. In the crypto market, Bitcoin is still considered the king of long-term investment, but there are dozens that still seem lucrative for investment.
Profit In, Cash Out
Short Term traders prefer the Profit in and Cash out approach. It is quite a simple strategy where just one aim is in mind – take in profit and move on. Profit In approach requires traders to not get into favoritism and market bias. The Traders should generally refrain from getting into any asset that will have them waiting. If one finds a short-term window where a reasonable profit can be made, they should get in and get out as soon as they reach their set goal. The trader should not wait to see if the asset goes up or down or keeps rising. If a profit is made, no matter how small, it is considered a good trade.
Setting up your investment strategy is like buying a new car. Before one looks at the different models, they need to figure out what style suits the best. And just like cars, there are many styles to choose from when creating an investment strategy. When choosing the right investing strategy, there are questions that need to be answered first. What is your investment horizon? What returns are you seeking to achieve? What amount of risk are you able to tolerant? What are the funds in this investment to be used for?
The main expectation is that as the years pass, the data grows and patterns in the crypto market are more easily identifiable. Although it does not fully represent traditional assets, using the market tested strategies from other instruments can come in handy.
With more data, it will be easier to understand if traditional strategies can be brought forward or new ones need to be developed.