Cryptocurrency Investment Strategies Every Investor Should Learn
Cryptocurrency investment is quickly becoming one of the most sought after ventures of our time.
Much like the rise of global internet, experts are foreseeing a world that will rely on blockchain technology to solve various organizational and security issues that have been plaguing our society for centuries.
Investing in the crypto market is also extremely profitable if Bitcoin&8217;s success is anything to go by.
But you can also lose a lot of green in a flash if you take the wrong approach.
That&8217;s why nothing beats having an investment plan and sticking to it in this highly volatile market.
Let&8217;s check out a few basics first for the sake of new investors in the cryptocurrency space.
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What Is a Cryptocurrency?
Cryptocurrencies or alt coins are a form of virtual currency with many applications that use cryptography &8211; an advanced encrypting technique &8211; to keep transactions secure on the blockchain network.
Bitcoin, which has increased in value by over 1500% in the last couple of months, is a good example of a cryptocurrency.
Following the mass adoption of Bitcoin as an investment, more people are starting to shift focus to other coins as well.
This is a great way to diversify your cryptocurrency investment portfolio and minimize risk.
As the blockchain starts to heat up, here are some alternatives to Bitcoin which have had impressive runs as well:
2017 was a big year for Litecoin as it skyrocketed alongside many of its crypto peers.
This coin was introduced back in 2013 as a silver bullet to many of Bitcoin&8217;s problems.
What makes Litecoin so unique is its ability to use the blockchain technology more efficiently than Bitcoin.
This makes transactions using the coin lightning fast and super secure.
A relatively new coin but one that&8217;s poised for even more dynamic growth in the coming months.
Since being launched in 2015, Ethereum has surged over 1000% and is now listed on coinmarketcap as the second most valuable alt coin.
Here are 3 reasons why this cryptocurrency investment is worth closer scrutiny.
- Compared to Bitcoin and other coins, Ethereum has more applications and unrivaled precision in solving complex problems.
- Dozens of Fortune 500 companies are backing Ethereum and collaborating to further its technology. Some of these blue-chip companies &8211; known for only taking calculated risks &8211; include Microsoft, Intel, and BP. Their ultimate goal? to incorporate the Ethereum network technology into their businesses.
- Financial institutions are also starting to incorporate Ethereum into their business models.
This one seems undervalued because there hasn&8217;t been much awareness surrounding it.
But it&8217;s backed by strong infrastructure, many future applications we can rely on, and an interesting business model that&8217;s rivaling Ethereum.
Ripple and its technology network, XRP, is a revolutionary way of sending and receiving money regardless of your location or where you bank.
It&8217;s a real game changer in how we conduct business across borders.
Disclaimer: The listed coins above are for informational purposes only and shouldn&8217;t be taken as financial advice.
It&8217;s advisable to carry out your own thorough research before settling on a particular coin as an investment.
Cryptocurrency Investment Step by Step:
Step 1: Before Pulling the Trigger, Have a Solid Plan in Place
The easiest way to lose money on your cryptocurrency investment is to randomly expose yourself to the market and buying when the price is at an all-time high.
It may sound like a cliche but always aim to buy low and sell high.
Some of the most profitable investment strategies are based on this simple principle.
But you&8217;ll be surprised that over 90% of investors in the financial markets do the exact opposite.
The logic behind it? No one wants to buy into a cheap market.
It&8217;s only when a market is hot and rising that it grabs everyone&8217;s attention.
I think it all comes down to how well tuned your trading psychology and emotional intelligence is.
And, more importantly, which living strategy you choose to follow.
Take the case of Bitcoin for example.
Back in 2013 when Bitcoin was ranging below $1000, many investors didn&8217;t consider it a worthwhile investment.
Fast forward 4 years later, and everyone now wants to board a train that&8217;s already left the station.
Forget about Bitcoin for a second.
Right now your aim should be owning a low-risk cryptocurrency investment which earns you consistent profits in the long run.
So it&8217;s more prudent to pick a smaller coin.
Choose something that&8217;s dirt cheap right now &8211; like Bitcoin was back in 2010 &8211; and you should expect a good ROI.
Here&8217;s a checklist you can use if you&8217;re having trouble getting your crypto investment plan off the ground.
a. Risk vs. Reward
Proper risk management is one of the most important yet least understood elements to profitable cryptocurrency investment.
Sometimes you might think that you&8217;ve found a kick-ass buy set up but history reminds us nothing is ever guaranteed when investing in risky digital assets.
Every trader, even the more experienced ones, can&8217;t completely avoid taking a hit from time to time.
The only effective solution that guarantees you won&8217;t blow up your investment is to strictly follow your risk management strategy.
This is, especially, true if you&8217;re using margin to buy dips. (I&8217;ll cover more about buying dips in the next section)
The beauty of margin trading is using the leverage advanced to you to help boost your earnings.
But margin trading &8211; which is basically using borrowed funds &8211; should be approached with caution.
It&8217;s a good example of a double-edged sword.
Because if you&8217;re not careful with how you leverage your investment, it can all go horribly wrong.
And nothing is as horrifying as waking up to a margin call when price crashes against you.
A risk: reward ratio of 1:3 is a good place to start.
This simply means that you make $3 every time you&8217;re right and you lose $1 when you get it wrong.
b. Identifying Entry Points
Successful investing in crypto has many things in common with most other financial markets.
It&8217;s a waiting game most of the time.
If you sit back and watch any of the coin charts, volatility is certainly a good sign and might present an even better buying opportunity.
A good entry point will help you squeeze in some more profit from your investment and limit its drawdown.
An unwritten rule that most experienced traders are using to profitably manage cryptocurrency investments is only buying the dip and working their way into a portfolio over time.
When prices go down, they buy more and are usually fully invested in a coin within a couple of months.
Take the case of Bitcoin, for example.
On its way up, Bitcoin had to endure hit after hit in the wake of negative publicity from governments, banks, and the effects of technology updates.
But every time it rode right through the punches before hitting new highs.
In hindsight, all these dips were perfect buying opportunities.
The most notable Bitcoin crash was after the massive 2013 China bubble.
Price fell from a record high of $1242 to $480 in the US when China&8217;s largest exchange ordered a block on new deposits.
But after consolidating for a couple of months at those levels, Bitcoin has been on a bull run ever since.
To sum it up, never sell the dip as counter-intuitive as it may sound.
And for a less risky buy entry, it&8217;s advisable to stay out of the market for at least 48 hours after price tanks.
c. Mapping Out Your Profit Targets
Anyone who&8217;s ever lived through a &8220;bubble&8221; knows why taking profits consistently as an investment grows is important.
Though the crypto train is nowhere near being considered a &8220;bubble&8221;, the principle still applies.
A conservative recommendation is to liquidate a slice of your cryptocurrency investment with every 100% gain it makes.
Eventually, you&8217;ll have to scale out of your cryptocurrency investment completely.
When in a bull market, your game play is to hold your coins until you feel the bulls are now exhausted.
One of the most liberating things you can do as an investor in crypto is learning to give up the chase for that last or first eighth change in price in a quest for more gains.
Step 2: Stop Overtrading Your Cryptocurrency Investment
One mistake to avoid as a new investor in crypto is the allure of chasing and trying to profit from every move.
In reality, you only need 1 or 2 big trades a year to make a significant amount of money.
A good example of this is STRAT/BTC which has been on a strong uptrend for a couple of months now.
In October 2016, STRAT/BTC was accumulating at 6 cents per coin.
At the time, this was only a $3 million valuation.
Within 6-9 months price had soared to $10 per coin which was an incredible gain of over 1000%.
A prior investment of $1000 would now be worth over $100000.
As a percentage gain, this is very impressive and shows you don&8217;t have to day trade your investment to make a career&8217;s worth of money.
Why Overtrading is Risky for your Cryptocurrency Investment
If you try to trade every move the market makes, you&8217;ll only end up burning money on commissions and fees and slippage &8211; which is the bid/ask spread.
That&8217;s one of the reasons why I never day trade my cryptocurrency investment or advise anyone to do so.
Typically, swing trading the market yields more consistent profits.
These are bigger moves that can offer at least 15-30% ROI.
Step 3: Trying to Pick Tops in a Market is a Bad Idea
This applies to both sides of the spectrum.
Some investors/traders often try to short (sell) against a strong trend anticipating a reversal.
Others get out too early and leave money on the table after a slight pullback even when they&8217;re on the right side of the trend.
The main problem with trying to pick a top in any market is how easy it is to get run over and lose money if the market moves against you.
This is, especially, true if you&8217;re actively trading your crpyptocurrency investment as opposed to buying and holding your coins in an online wallet.
The best approach for cashing out a crypto investment is to scale out of your long positions gradually at pre-defined price points.
Step 4: Managing Your Cryptocurrency Investment
Just like we can&8217;t pick tops in any market, you never know for certain when the market will roll over or if you short when it will bounce.
Let&8217;s say you buy Ethereum or any other alt coin and you&8217;re trying to find an exit point and lock in some profit.
You want to manage your investment in such a way that you&8217;re going to be okay with any kind of price action.
Because let&8217;s face it, we can&8217;t control the outcome of any market.
And if you try to force your will on a market, you&8217;ll only get more out of sync with it.
I&8217;ll use the STRAT/BTC example from earlier to illustrate how managing your cryptocurrency investment well can translate to more profit for you.
When STRAT/BTC finally started exploding upwards in March 2017, I decided to close out a big chunk of my position with a 900-1000% gain.
Because if the market had crashed before I&8217;d taken some profit, I&8217;d still be kicking myself in the foot for letting all those gains fizzle out.
Step 5: Don&8217;t Chase the Hype
If you&8217;re not very green in the financial markets, you&8217;ve probably heard the phrase &8220;the trend is your friend&8221; before.
Having such a sentiment before getting into any market is a subtle sign of herd mentality.
Herd mentality or mass-generated hype creates an environment where participants in a market simply follow the buying pattern of the majority.
Sometimes you&8217;ll even find there&8217;s no sensible reason behind such moves.
Herd mentality in cryptocurrency investment is currently being driven by the fear of missing out (FOMO), greed, and a bit of excitement.
Investors who missed out on Bitcoin are now busy looking for the next alt coin that will replicate Bitcoin&8217;s success.
And that&8217;s why you should treat ICOs with extra caution.
New alt coins are flooding the market every other week in an effort to raise funds and attract new investors.
Some of the cryptocurrency projects behind these new coins actually look promising and profitable in the long haul.
But most of them are a bad buy and won&8217;t be worth much once the market starts to correct.
Quick Give Away
As you navigate through the cryptocurrency space applying the above strategies and learning the ropes, these key lessons will also come in handy:
a. Nothing Beats Doing Your Own Research.
Like any other investment, it&8217;s best to start your cryptocurrency investment with a fact-finding mission.
This will help you to form an unbiased sentiment about the alt coin you&8217;d like to invest in.
In summary, here&8217;s what you&8217;re looking to discover from your research:
- Are people mining the coin?
If techies behind the coin are willing to invest in mining hardware, this is a good sign that&8217;s it&8217;s generating interest and a vote of confidence to its growth.
- If more businesses are willing to use the coin in their operations, the better it is for its future potential growth.
- Look at how much effort the development team is putting in in terms of innovation and improvements and that their track record is squeaky clean.
We look at this metric because some coins are no longer being maintained by the pre-launch development team.
This is a bit retrogressive to the coin&8217;s future growth plans.
- Make sure there are no loopholes which hackers or scammers can manipulate.
Once investors start losing trust in an alt coin, it will quickly become worthless.
b. Get Familiar with the Different Cryptocurrency Exchanges or Wallets
How frequently you plan to trade your crypto investment and how much money you&8217;re willing to invest will often dictate which exchange or online wallet you end up settling on.
As the blockchain technology becomes more mainstream, chances are we&8217;ll also start seeing new and more advanced platforms popping up.
c. Create Rapport with Peers
Cryptocurrencies have a tendency to experience exponential growth when there&8217;s a strong community backing them.
Find a strong online community like cryptocompare where you can discuss recent developments in the crypto space and how to make the most out of your investment.
You might be surprised by the number of crypto-enthusiasts out there sharing your views and looking for like-minded investors to connect with.
Hopefully, the strategies we&8217;ve covered here will help you navigate through all the &8220;noise&8221; and promise surrounding cryptocurrency investment.
Also, be on the lookout for those self-proclaimed experts in crypto and pesky scammers as well.
These are just guys trying to leverage the excitement we&8217;re seeing in an attempt to profit.
That pretty much sums it up.
Feel free to share with us your thoughts, future predictions, and questions about cryptocurrency investment in the comment box below.