Cryptocurrencies have emerged as one of the most popular assets to invest in, in recent times. While some have doubted whether these digital assets are decent investments, others have approached it with a more curious and open mind. If you’re a beginner looking to invest in these assets, you’ve come to the right place. Why invest in cryptocurrency? We’re sure you know the reasons. In this article, we’ll share with you three strategies you can consider when learning how to invest in them.
What are cryptocurrencies and how do they work?
A cryptocurrency is a type of digital currency that can be used as a means of transaction, or as a store of value. Some types of cryptocurrencies may even serve as a token to allow you to access certain applications. At the end of the day though, all of this makes use of an online ledger and cryptography to ensure that transactions are secure and tamper-proof.
That said, much of the mainstream interest in cryptocurrencies is the result of its potential to help investors win massive gains. It is common to hear of assets pumping from anywhere between 4 to 40 times their original value.
Some examples that you may have heard on the new include Bitcoin, Ethereum and Doge, amongst others.
Investment and trading: what’s the difference?
You might have heard these terms thrown around interchangeably, given that they similarly involve transacting with cryptocurrencies for profits. However, these are in fact two very different methods.
On one hand, investment is more of a long term activity, that helps the investor acquire larger gains over an extended period of time. The key strategy in this case, is to simply buy and hold a currency (which we’ll talk about more below), and to only cash out much later. Alternatively, investors may simply buy a cryptocurrency because they have faith in the fundamentals of the project.
On the other hand, trading tends to operate on a shorter time horizon. By analyzing the market along shorter time spans, traders attempt to observe the rise and fall of markets. With these observations, they then choose when to enter and exit trading positions to take smaller but more frequent profits.
We’ll focus more on how to invest in cryptocurrency in this article, but it is nonetheless good to know the differences between the two.
Strategy One: Buy and Hold
If you’ve ever come across the word ‘HODL’ while reading about cryptocurrencies, this is what it means. This is one of the main passive investment strategies that many use, as they invest in these digital assets. To buy and hold simply means to choose an asset of your choices and invest it in. You will only take profits after a longer time period – usually a few years.
This strategy is useful as it helps investors avoid losses that may arise from the short term market corrections and volatility of cryptocurrencies. Generally speaking, the value of cryptocurrencies has mostly risen over the years. Buying and holding allows you to ignore these short term losses to realize the long term increases in value of these crypto assets.
Buying and holding also gives you a greater peace of mind to carry on with your day-to-day life, instead of watching the charts all day. If you have cash to spare and don’t mind waiting for some time for all of this to happen, this is a decent strategy for you.
Strategy Two: Dollar Cost Averaging
For individuals who want a little more action in their cryptocurrency investing strategy, you may also consider using the Dollar Cost Averaging strategy. This allows you to constantly inject new capital into your portfolio, and allows you to compound your gains over a long period of time.
As the name suggests, all you have to do is to inject a predetermined amount of funds at a predetermined period each month. This should happen regardless of what the value of the cryptocurrency is. We know that the value of these assets can be volatile. The idea behind Dollar Cost Averaging is to help you distribute the losses and gains you might make over the months, while continuing to allow you to compound the amount of assets you have.
While some individuals are a stickler for the rules they’ve set for themselves, others also choose to mix things up by giving themselves a discretionary amount of funds to play with, together with their strategy. Whichever way you choose to go, Dollar Cost Averaging is a good strategy if you’re a beginner.
Strategy Three: Diversified Portfolio Allocation
One key principle of investing is to always distribute your risk, especially in cryptocurrency investing. While some individuals disagree and believe that you should bet with more conviction and aggression, others may choose to be a little more conservative. Whatever your views are, it is nonetheless good to learn about this strategy.
Having a diversified portfolio allocation means to simply have a larger range of different crypto assets in your portfolio. Most individuals purchase bigger and more famous currencies, such as Bitcoin and Ethereum. However, there are more assets beyond these coins, that might even have a higher potential for gains. For instance, many investors also look into and buy ‘alt coins’. These are smaller and lesser known cryptocurrencies that show potential for such growth.
Things to consider before you create a strategy to invest in cryptocurrency
Whatever strategy you choose, there are two important things to remember.
Firstly, don’t invest more than what you can afford to lose in a crypto investment. While investing in these currencies hold immense potential for profits, you must also remember that these assets are far more volatile than other asset classes. This means that there is also a potential for loss. In the event that this unfortunately happens, you don’t want to find yourself with a serious lack of funds for your daily expenses.
Second, always do your own research. Don’t simply buy a coin because it is hyped – make sure you know what you’re buying and whether it truly has the potential for long term growth.
Whatever it is, we’re glad that you’ve gotten started on your journey to investing in cryptocurrency. As you learn more about the space, you’ll also get to know more about other ways to grow your assets, such as crypto loans, and staking. The future is here, and it’s time to be a part of it.