One of the primary objectives of investing - besides making profits - is to protect yourself from the volatility of the cryptocurrency market, while investing the least amount of time.
Investing and Trading are two different approaches to wealth creation in the cryptocurrency market. The former considers profitability as a long-term objective, whilst the latter has a shorter lifespan.
Investing has a long-term outlook and determines a portfolio based on your risk and timeline expectations to create wealth in the future. You may either invest in floating tokens or newly introduced ones via ICOs / tokensales.
Trading is more about seeking quick opportunities by opening positions with a short lifespan. As the cryptocurrency prices move swiftly, trading can create or dismantle wealth at a faster pace than investing.
In general, investing is more about analysing fundamentals, whereas trading is about investigating market behaviours.
Overall, do not stick to one strategy: keep a balanced portfolio of investing and trading.
Pouring money into the cryptocurrency market does not necessarily mean always _owning_ cryptocurrencies or assets.
Own a small proportion of your portfolio in fiat, it will reduce exposition to price volatility.
In the event of a market crash, you might want to start buying more cryptocurrencies at a lower price.
Consider it as an emergency reserve, which varies based on the state of the market, your risk aversion, and trading operations.
Most traders have more losing trades than winning trades, but manage to have a profitable portfolio.
Losing trades should incur a minimal loss whilst winning trades should get a high return on investment.
You can bet on the price going up by opening a long position or that on the price going down by opening a short position.
Before entering a position, it is essential to understand when to close it in both scenarios, profit or loss. As such, set your targets either from a time or price perspective - and stick to them.
A smart way to set-up your positions is to automate your exit depending on market fluctuations.
Most of the exchanges offer Stop Loss and Take Profit trade operations on their platforms.
In some cases, i.e. swing trading or position trading, you may want to let your positions run without a target as long as you are making gains.
“Cut your losses short and let your winners run.”
There are two different units of account: crypto to fiat and crypto to crypto.
Newcomers might get confused with moving from fiat priced assets to Bitcoin or Ethereum priced assets. At first, keep it simple and avoid switching from fiat to crypto units: you might lose track of your performance in the process.
When investing in the crypto/crypto unit of account, the primary goal is to grow faster than Bitcoin or Ethereum does in fiat.
Arbitrage is an investment strategy that involves the purchase and the sale of an asset in different markets and exchanges to take advantage of the price variation of the same asset.
It is not uncommon to see a steep variation of prices in the same assets.
For instance, consider the following triangular arbitrage opportunity:
With 1,000 EUR, you can buy a Bitcoin, trade it for 10 Example coin and sell them off for 110 EUR until the market readjusts.
Arbitrage trading can be very profitable if well operated, however, before stepping in, don’t forget to take into account trading and transaction fees (both exchange and network).
Still, we advise you to arbitrage only on an extremely short-term basis. Otherwise, you might overexpose your portfolio to steep price variations.
A long-term triangular arbitrage position means taking an uncontrolled risk.
An increasing amount of tokens have been introduced on top of smart contract development blockchains (Ethereum, Waves).
Rather than trading them against Bitcoin, stick to currencies that are intrinsically connected. Trading an Ethereum blockchain against Bitcoin might overcomplicate your analysis.
For instance, let’s have a look at the decentralised predictive market applications: Augur and Gnosis. Both of them are built on top of Ethereum; therefore they have nothing to do with Bitcoin.
It would be logical to trade them against Ether and not Bitcoin.
Trading against Bitcoin creates vulnerabilities to your portfolio whenever there are sharp price swings.
News traders try to predict how markets behave after a news release. Making investment decisions based on announcements can become troublesome, as many cryptocurrency-focused media outlets have an agenda to promote projects.
For instance, Bitcoin guru Roger Ver owns Bitcoin.com while the Digital Currency Group, a fund that has a stake in ZCash and CoinBase to name a few, also has a stake in CoinDesk.
Many mainstream media houses engage in FUD misinformation around Bitcoin and the cryptocurrency market, defining it as a Ponzi or a bubble.
Stay aware of what’s happening as it might give you a hedge against the market, but be sure to diversify your sources and indicators as following:
Nothing like price charts to build forecasts and analysis.
Keep in mind that past performance does not guarantee future results: a bullish trend can quickly shift into a bearish one!
The famous saying “Buy the rumour, sell the news” is quite self-explanatory. When news is released, markets have already moved in accordance with the news.
You should follow cryptocurrency media houses (Tropyc, CoinTelegraph, CoinDesk to name a few), financial news (Reuters, Bloomberg, FT) as well as mainstream media (NYT, Forbes) and cross-check information from these different sources.
Keep an eye out for official press releases from projects. Staying aware and reactive might help you take advantage of information and make profitable trades.
Various indicators can help to shape analysis and to make better investment decisions.
Cryptocurrency traders utilise various indicators including moving averages, RSI and Ichimoku clouds to predict future price movements.
Technical analysis is unfortunately outside of the scope of this article (although we intend to add a guide series soon).
We identified three different investment strategies for the cryptocurrency market that can help mitigate the underlying risks of the market.
“Hodl” or hold refers to the act of storing and accumulating cryptocurrencies without the intent to sell them against fiat.
Hold On for Dear Life came from an iconic Bitcointalk post full of grammar mistakes.
It is a low-stress strategy where investors have a long-term mindset without the necessity to check portfolio performance regularly.
If you “hodl” be sure to store your tokens in a cold wallet.
If investment and trading are not your things, periodic investments might just be the perfect strategy for you.
A planned and periodic investment strategy can automate the purchase of cryptocurrencies and assets.
It consists of purchasing periodically the same crypto asset with the same amount of money.
For instance, you may purchase $50 worth of Bitcoin and $50 worth of Ether every Saturday morning when you wake up!
Such strategy can get you into the crypto game without undertaking any thorough analysis.
The main benefit is that, in the long term and depending on your timeline, your investment is not affected by short-term price swings.
Value Cost Averaging (VCA) strategies are a safe way to invest in cryptocurrencies whilst staying protected against dramatic price variations.
This method works on slow and steady investments with minimal involvement from the investor.
With VCA, investors can protect themselves from market fluctuations and low diversification while reducing monitoring time.
So how does it work?
First, start by planning the fundamentals of your future investments:
For instance, you may want to invest $2,000 on a monthly basis and over a period of 10 months in the following markets:
If you select one of each, after 10 months, you’ll invest a maximum of 250 EUR per token at 25 EUR per token per month.
In this example, the average value of each token should increase by 25 EUR per month. It can happen by:
In other words, regardless of the price of one token, you have to invest 25 EUR the first month, 50 EUR the second month, 75 EUR the third month and so on, until reaching 250 EUR the tenth month (25 EUR per month over ten months).
1. Month 1
Invest 25 EUR in “ExampleCoin” at a price of 1 EUR = 1 ExampleCoin
2. Month 2
Depending on the price of ExampleCoin and following VCA strategy you will either buy or sell ExampleCoin.
My 25 EUR investment went down to 12.5 EUR.
I need to spend an extra 12.5 EUR to get back to my month 1 target and 25 EUR for month 2 target.
In this scenario, I’ll spend 37.5 EUR.
My 25 EUR investment became a 50 EUR investment.
I will not buy anymore ExampleCoins because I reached my target for month 2.
In this scenario, I’ll spend 0 EUR.
My 25 EUR investment became a 100 EUR investment.
Because I reached my target for month 4 on month 2, I’ll have to sell 50 EUR worth of ExampleCoin.
In this scenario, I’ll sell 50 EUR worth of ExampleCoins.
Cryptocurrencies and digital tokens might just change the world, or at least have a lasting impact on our economy. However, many of them will underperform their expectations as they face harsh competition - just like any other business or start-up.
Still, if you play smart, chances are your portfolio can do well against fiat.