Crypto Investment Strategy: Step By Step Guide
Beginner Strategy . Published · By AltcoinTrading.NET
As the anonymous internet hive of crypto investors likes to put it, typically it is wiser to be the 0.01% of world’s population that own cryptocurrencies rather than trying to be the top 1% of traders who actually win at the markets.
In fact, a buy and hold strategy is much easier to grasp than any part of the quant craft or even some of the technical analysis wizardry.
Nevertheless, a plan that sounds straightforward on the paper does not make you immune to panic, FOMO, fear and straight up bad decisions that you take in the spur of the moment.
In markets as new and disruptive as cryptocurrencies are, you can be sure the emotional play will makes an appearance sooner or later. It will have you sit with your finger on your cold storage, in a state of mind not fit to make good and reasonable decisions.
There are altcoin trading strategies and there are “hodl” strategies
As we’ve outlined in this 101 on altcoin trading strategies, you will benefit from having at least rudiments of strategic steps to take in your mind, and that is even if you just plan to hold for the long run.
Investment is in fact a trade as well:
For a good crypto investor, none of these actions are arbitrary.
A clear investment strategy will prepare you in advance for any potential drawdowns - the periods of time when the value of your investment will be less than what you initially invested. If executed correctly, it will help you avoid mistakes like selling your crypto stash out of fear it will go to zero.
Let’s take a look at what all comes into play when you want to buy and hold a cryptocurrency the right way.
This is not a stock picking blog, so let’s say you’ve done your homework and found a cryptoasset you think has great potential. You want to hold it for the long run.
What’s a “long run” though?
Make it specific: Is that 6 months to you? Two years? Ten years? You will need to have some time horizon in mind. Only then you can divide that time period into smaller slices - typically a quarter, or a month.
At the end of each period, take a bit more time for a market research. Then sit down and reevaluate your investment with a clear head and up-to-date market information.
Once you have your time horizon, you can start actually worrying about buying crypto: How do you pick the time to enter the market?
If you want to be a long-term crypto holder with no interest in trading, dollar cost averaging, or DCA, will work to your advantage.
DCA strategy works by removing the problem of timing your crypto market entry.
Here is a super quick rundown of what you need to do.
If you find yourself worried and tempted to check the price around your DCA purchase, lower the amount you’re sending in. The point of DCA strategy is you don’t think about your buying activity at all.
DCA works very well on the long term horizons. After all, we have seen that with ETH, with BTC or with XRP: Surely Ripple investors who were cashing out at the 3 USD level were not sorry if they had entered the market at 0.45 USD instead of at the 0.35 USD level.
If you only want to hold a cryptocurrency for a season, that’s already a call that ventures more into swing trading.
Picking a right entry for shorter runs is a theme for a strategy article in itself. It will need some chart reading skills and a look at the state of the markets as well as on the type of the cryptoasset you’re interested in.
If you are looking for a reliable crypto charting app, go try a free TradingView account.
Investing in cryptocurrencies doesn’t end when you press the ‘buy’ button. More specifically, since with blockchain you are your own bank, investing in cryptocurrencies never ends with simply buying the digital asset and leaving it on the exchange.
If you think of digital asset exchanges as banks, in probably less than a year you will have learned a very expensive lesson.
First thing to take care of after investing in crypto is the custody of your asset: Where are you planning to store it?
A cryptoasset trading platform can of course hold your assets, but will not be insured for the events of hacking. And boy, do the hacks happen.
While it is the truth that poorly managed individual cryptocurrency storage can be hacked too, exchanges and web-hosted crypto wallets are a more valuable target for the attacker, because there is far more money concentrated in them.
The only case where it is reasonable to leave a digital asset on an exchange is when you take part in p2p lending.
On some crypto trading platforms, notably Bitfinex and Bitmex, you may choose to provide your coins to margin traders in exchange for interest. Be aware that the interest rates for altcoins are typically very modest though.
A meagre interest rate is not better than nothing: You should not see lending as a risk-free way to earn passive income.
Because of the threat of hacking, cryptocurrency lending is really just another form of investment. As such, lending requires a strategy.
The first question to ask yourself when you think about lending out your cryptocurrency is simply, is the interest high enough to justify the risk of leaving the cryptocurrency stash on an exchange?
There is a formula for the calculation of the crypto lending profits that can be found in our crypto lending strategy article; it is basically a calculation of profits earned from compound interest over 365 days.
If you run the calculation, you will find that a daily interest rate of 0.01% will only earn you some six to seven hundred dollars per year if you start with twenty thousand dollars worth. That’s six hundred for twenty thousand left at risk through the whole year!
A ... end amount before fees B ... cash profit after fees C ... percent return after fees principal $20,000 n = 365 days daily rates: 0.01%, 0.015%, 0.03%, 0.1%, 0.2%
Once again, even when it comes to anything perceived as risk-free income generation, be sure you are making an informed decision.
You can always decide to lend a small part of your crypto stash, or to lend only when the rates are good – just as a good crypto trader would not trade when he doesn’t see a good opportunity for a trade.
Holding your crypto in a carefully maintained wallet is the safest option to keep your investment secure.
It is never completely safe:
In other words, there is always a risk. Therefore it is not such a bad idea to divide your holdings into multiple places, if it’s a significant amount.
Once you have your crypto custody sorted, you can embark on the maintenance work that a good cryptocurrency investment requires.
As an investor, you should stay on top of the news about cryptocurrencies you have put your money in, as well as about the altcoin markets in general: When it comes to price valuations during a bull run, it might be the case that there is a huge gap between the leader and the second place. But overall, the market moves as a whole. If there is a single cryptocurrency shooting up to the moon but there is no other coin joining in running up for a few days, it will have been a short-term occurrence rather than a multiyear bull market.
More on intermarket analysis can be found within the market timing strategy article. To give you the gist, it will be enough to say that monitoring news about both bitcoin and altcoin markets is vital.
Unless you are a trading prodigy though, it will be a far healthier approach to not act on every gossip.
Stay informed, but always strive to make decisions with a cool head.
Reserving your attention for the news that actually should have consequence for your decisions will need a fair portion of judgement.
It is safe to say that any scaremongering, appeals to emotions and sensational news can usually be safely ignored. If you are investing for a shorter term or if you want to trade, it might work for you to ride a wave of speculation.
In this case, an honest look at what your cryptocurrency is offering will be needed:
Ripple is one of the top cryptocurrencies designed as a medium for cross-border payments.
The end game of Ripple is rather ambitious. If the vision on the Ripple fintech comes true, you should be able to facilitate a cross-border money transfer from one bank to another through the Ripple network.
An international wire transfer would cost next to nothing, complete almost instantly and you would not really notice any difference - the whole process would execute in the background.
The issue is that for this vision to come true, Ripple Labs, the creator of Ripple, would need to convince at least several major banking institutions to partner with this cryptocurrency fintech startup and implement their solution.
At the same time, as soon as a couple of banks would budge, being on the Ripple network would become a strong competitive advantage. Customers would gravitate towards the member institutions, eventually even the most conservative banks would be pushed to adopt a distributed ledger backend.
It is true that Ripple has managed to secure some high-profile partnerships: Moneygram, Americal Express, Accenture, Santander. But it is also true that the value proposition of Ripple is still very rich on “maybe, one day, if”.
XRP vs Ripple
In the crypto trading circles, Ripple is commonly used to describe the popular digital asset. That is not quite correct.
XRP is a digital asset that lives on the Ripple network, but as an asset it is independent.
Ripple Labs CEO Brad Garlinghouse puts it this way: If the Ripple company disappeared today, XRP would continue to function. That to me shows the asset is in fact decentralized.
Even though this fact supports a good degree of decentralization in the Ripple network, it is no secret that the value proposition of Ripple still relies very much on business-to-business relationships.
You will see that as a crypto investor, it will be important to take the current business agenda of Ripple Labs into account before you make a decision for your next move on the XRP markets.
In case you see yourself as more of a long-term XRP holder, it will be less crucial what Ripple Labs are doing at the moment.
Their longer term business direction will still matter, though.
PRO TIP: One good tip is to watch how a business reacts when a direct competitor emerges. After all, market competition is natural and can serve very well to push an emerging industry leader to faster and better innovation.
Reevaluation sessions are an important part of the maintenance work on your investment. They are exactly the moments where you decide what to do next.
It’s key to be regular about reevaluating:
Notice that goals of the likes as “I want to double my initial” have not been mentioned once in this article. You don’t need those - obviously you want to make money, but how much an asset will grow is not really your decision, is it? Instead of declaring it as a price target, make yourself prepared for the alternative that your money does actually double, and plan ahead for what to do once it happens before it happens.
Reevaluation is simply taking a look at the state of your asset’s market as well as crypto markets in general, at the major news that happened since your last reevaluation, and at the fiat value of your stash.
The only tools you really need is Reddit for the news and a portfolio tracking app like Blockfolio for fiat values. If you want to take into account money and investments you have outside of crypto, you will need a spreadsheet to calculate the total worth of your portfolio and the value distributed between individual assets.
Get this ready for each of your reevaluating sessions and answer the questions below:
It’s really simple as that.
Remember that reevaluation should happen regularly, even if you’re underwater. If you are planning to hold a cryptocurrency for a year or more, a good interval is to reevaluate every three months.
Valuations of cryptocurrencies swing a lot. What was initially a small investment might suddenly become 90% of your total net worth. Are you still happy to have this large a portion of your portfolio invested into a single asset? If not, you can opt for rebalancing.
At some point, the result of your reevaluation session will be selling all of your holdings and exiting the market. Your final decision should take into account several diverse aspects, and often it is not an easy call. Your risk appetite also comes into play here, and so does the timeframe of your investment.
In this article be have covered all the vital parts of a good cryptocurrency investment strategy, with an illustration of investing in XRP.
Once you have your mind set on an asset, a good crypto investment strategy starts with picking its time horizon, continues by staying informed while your asset is either safely stored or earns interest and ends with your informed decision to sell - fully or partially.
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Written by AltcoinTrading.NET