5 Essential Crypto Investing Strategies
Before investing into crypto, you need to have a plan. Pick a strategy, stick to your plan, and enjoy your short-term or long-term gains.
If you’re new to crypto, you may be asking yourself, “What is my crypto investing strategy?” This is already a great starting point, because you’re not thinking of going in blind and clueless.
In this guide, we’ll be talking about five crypto investing strategies that may suit a diverse personality and risk profiles of various investors. But first, let’s get a disclaimer out of the way:
Some of these investing strategies are used in traditional financial markets, and may not be 100% relevant for the crypto market. Furthermore, these investing strategies have been useful on assets that performed well in the past. Past performance does not guarantee future results. This guide will not advise you on which asset to trade and when to do so.
Great, let’s dive into it, shall we?
The big decisions of investing
Let’s first start with the big three decisions when investing into anything:
- Asset, which asset(s) to invest or trade
- Volume, how much of the asset(s) to buy
- Timing, when to buy and sell the asset(s)
Different investing strategies will involve some level of control over these decision factors.
You may hear the terms active investing and passive investing. In the former, you are constantly monitoring the market, and making decisions on all three factors. This is also akin to short-term or medium-term trading.
On the other hand, with passive investing, you are letting go of constant control on all these factors. Simply, you’ve done your research and believe in a certain asset. You commit to investing a certain volume (quantity) of the asset. You also commit to buying the asset regardless of market conditions, ignoring the timing factor.
Strategy #1: Buy and hold
The easiest way to invest in crypto is passive investing. But just because it is “passive”, does not mean it would be less profitable than active investing.
Active investing involves monitoring the market, and keeping tabs on economic news, technology updates, and distilling the noise on social media. If you’re short on time, it’s best not to choose active investing.
How can passive crypto investing be profitable? First, you need to do a lot of research into a particular crypto and answer the following questions:
- How will this crypto solve real-world problems today and in the future?
- Who are the core developers of this project?
- How will this project improve over time? Does it follow a roadmap?
- If you are a business or software developer wanting to use the technology that is backing the crypto asset, how will you adapt it to solve business problems?
- How does it compare against competing technologies and projects?
If you can come up with really good answers for all of these questions, you can be more confident in investing into the crypto project. You’ll be undeterred by its short-term volatility, and look forward to seeing it become a success in the future.
Then your only strategy is to buy once and hold them for a long time.
The next thing you want to do is determine how much money you want to invest in that asset. It may be tempting to invest most or all your savings into that particular asset as promising as you think it is.
But keep in mind that any single asset can lose most or all of its value. There’s a saying that you shouldn’t carry all your eggs in one basket.
Key takeaways: With Buy and Hold, the pressure is on choosing a promising crypto to invest in, and the appropriate volume of money to invest. Since you’ll be holding the asset for a long time, timing is not a big concern.
Strategy #2: Buy, hold, diversify
Some investors like to dabble into multiple assets, and even including the less familiar cryptos. The latter cryptos are more volatile than, say, Bitcoin and Ethereum, because of their smaller market capitalisation (aka “market cap”).
Generally speaking, more volatile and small cap cryptos are more risky to hold. This means you should spread your investments into a diverse range of cryptos to minimise the risk of total loss.
In this strategy, you are not betting on the performance of a single crypto. Instead, you are betting on the performance of the general crypto market. Let’s say you are investing in 20 different cryptocurrencies. In the off chance that one or two projects fail, your investment is still safe with 18 other cryptos that maintain their value.
If you want a technical explanation on the advantages of crypto diversification, here’s an article for you — Diversifying Your Crypto Portfolio: A Case Study
Key takeaways: With Buy, Hold, Diversify, you let go of the pressure of choosing one promising crypto to invest in.
You may need to think about allocating your money appropriately into crypto based on their volatility. It’s generally better to put a larger chunk of your funds on less volatile cryptos
Since you’ll be holding the asset for a long time, timing is not a big concern.
Strategy #3: Dollar cost averaging (“Set & Forget”)
Dollar cost averaging (DCA) is the most optimal strategy when it comes to putting less pressure on all three investing decisions (remember: asset, volume, and timing).
Here’s the gist of it. Instead of investing all your investment funds at once, you invest at regular intervals. You buy crypto with the same dollar cost until you use up all your investment funds.
DCA can be particularly powerful if you are investing for the long term as it may help take out the price swings as you might get some at a higher price one week and a lower the next.
Over time, you end up buying at an average price (hence “Dollar Cost Averaging”). This means you will be in a profitable position if the market price is higher than the average buy price.
Here is an in-depth explanation behind Dollar Cost Averaging — Is Dollar Cost Averaging a Good Investment Strategy?
Key takeaways: With Dollar Cost Averaging, you don’t have to be too concerned about timing. Combining this with portfolio diversification, and you stop putting pressure on choosing the one best crypto asset to invest in.
DCA also puts less pressure on yourself as you can slowly ease into a larger and larger investment size. Since you won’t be putting down all your investment funds at once, you will maintain some cash in hand.
Strategy #4: Regular yield
In the world of crypto, there are various ways of earning a regular return or yield. There are primarily four ways to do this:
- Running a node
- Joining a mining pool
Trading is big business in the crypto space. Some traders need to borrow more capital to multiply their profits from a relatively small movement in price. You can offer to loan your crypto or stablecoins to these traders for a fixed interest rate. You get regular returns, traders get their capital at a fixed rate — everybody wins!
Staking is the act of depositing your crypto into a special “staking wallet”, with the aim of securing and decentralising the crypto network.
Different crypto networks have different requirements for staking. Some have a minimum number of staked crypto to be eligible for staking rewards, while others do not. On some networks, you need to delegate your crypto with a staking service so you can earn a share of staking rewards.
It’s important to note that on some platforms, “staking” achieves a different goal from securing the network, although in the end you would still earn crypto rewards.
Running a node
If you are more technically inclined you can get into running your own nodes in a blockchain network and then earning network rewards.
In simple terms networks pay node operators for their work in securing the network. You might have heard of mining? This is what is going on there.
This is sort of like staking, but you do all the hard work of setting up a node, and earn 100% of the network transaction fee revenue.
Joining a mining pool
Many crypto networks still rely on crypto mining machines for security. These machines can cost a hefty amount of money.
What crypto miners often do is to sell shares of profit. If you join a mining pool, you’d earn a share of the blockchain’s block reward. The bigger the mining pool, generally the more profitable the pool is.
Key takeaways: With the Regular Yield strategy, you don’t have to be too concerned about timing, as you will receive regular payments in crypto.
This doesn’t mean this strategy is devoid of risk. As you’ll be operating with cryptocurrency, they’re subject to the normal price volatility of crypto. Take a normal precaution when choosing what, when, and how much to invest, and for how long.
Side note: Mining pools generally allow payments in stablecoins, which means you’re not subject to price volatility.
Strategy #5: Active trading
When it comes to making money out of crypto, most people point out this strategy — active trading. It’s where you buy at a lower price and sell at a higher price, usually within a short space of time.
In the open market, prices move at least 2% on the daily. Active trading can be rewarding especially when you have a large enough capital (either owned or borrowed). Imagine a 2% return on a $10,000 investment!
Of course, such a high reward comes with high risk. The risk intensifies when you use borrowed money (in a procedure called “leveraged trading”). There will always be times when you will incur losses due to a random market movement against your position.
So, to minimise the losses, you need to invest an incredible amount of time to learn how to trade well. Because trading without strategy and emotional regulation is almost the same as gambling.
Key takeaways: With the Active Trading strategy, timing is half the work. You also need to determine the trading volume (amount to invest) such that you will not lose more than what you’re comfortable with.
Your choice of a crypto trading asset is not as important with this strategy, since you will not hold the crypto asset for the long term.
So, you’ve learned five different strategies to make money with crypto. You only need to choose one. In fact, if you’ve found another strategy that works for you beyond this list, go for it!
Remember, every investor is different and has a unique style of investing. What’s important is how you want to balance between being active and being passive. There’s also a balance between risk and reward.
With active trading strategies, you’re constantly thinking about timing the market to gain a maximum chance of profit. With dollar cost averaging, you can invest on autopilot.
Do your research, know yourself, then decide on a plan. Enjoy!
Further reading: Explore more investment topics in our learning Hub.
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Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.
Last updated September 14, 2022