2021 was a rollercoaster of a year for the crypto industry, as several popular coins staged steep downtrends and hit even higher highs. This showed investors the profit potential contained within this highly volatile market, propelling it to one of the most popular asset classes. However, investing in crypto is not for the faint of heart, and it does take a certain level of expertise to profit from these digital assets. That being said, here are some strategies that crypto investors have been using to stay ahead of the markets.
Buying fractional coins
Most traditional markets have barriers to entry, especially for retail traders, as one cannot buy a fraction of a stock, a foreign currency, or a commodity. If the same were applied to crypto, one would have to raise at least $68,000 to buy one Bitcoin at its all-time high price, or $4,800 for Ethereum at its ATH. Luckily, crypto markets allow for fractional purchases, which means you can invest with any amount and receive the equivalent amount of crypto your investment affords. This way, you can even spread your funds and purchase different tokens to avoid risking all your capital on one coin.
Capitalizing on volatility
Volatility, though a double-edged sword, can actually be an asset if you use it to your advantage. If every token’s price only went up, it would lock out a lot of investors who didn’t get in on its ground floor. However, by their very nature, crypto prices tend to fluctuate wildly. This means that if you can time when the market is down, your capital can afford you a greater amount of cryptocurrency. You can then wait for the upswings and sell at a profit. You can also use this volatility characteristic to invest in different crypto assets at different times.
Dollar-cost averaging (DCA)
The aforementioned volatility characteristic introduces a lot of risk in crypto investing. Oftentimes investors buy into a coin thinking they’re buying the dip, only for the coin’s price to plummet further. Through dollar-cost averaging, one can offset some of this risk. DCA involves buying a small amount of cryptocurrency at regular intervals, regardless of the market conditions. This way, you don’t have to rely on timing the markets, and you accumulate profits over time if the general price trajectory of your chosen coin is upwards. However, the trade-off is you tend to miss out on some of the profits you would have obtained had you invested earlier.
Lump-sum investing
This is the polar opposite of DCA. Rather than investing a fraction of your capital over time, lump-sum investing entails injecting the entirety of your capital into a coin at once. Though this relies heavily on timing the market, historically, time in the market has proven to be better than timing the market. When you invest in a crypto token early enough, it starts accumulating profits as the coin’s price grows over time. However, you run the risk of losing a significant chunk of your investment if the market dips drastically shortly after investing.
The HODL strategy
This is the crypto version of Warren Buffet’s investment style. The value investor identifies companies with long-term growth potential, then invests in them for the long haul. Similarly, crypto investors can identify a coin with significant growth potential and buy and hold the coin for months or even years. In crypto circles, this is colloquially known as holding on for dear life, or HODL in short. However, this strategy is not for the faint of heart, as HODLers have to brave the frequent market downturns.
Profit-taking
This is a strategy that involves selling off a percentage of your crypto holdings when the market is up. This way, you hold your profits in fiat, then wait for the market to dip. You can then use the fiat you obtained to buy more of the coin at a lower price, increasing your position without using new money. This is a great way to grow your portfolio if you don’t have much capital to start with.
Elliot wave theory
This is a strategy that uses fractal wave patterns to identify repetitive market behavior and, consequently, predict future price action. It does so by studying investor sentiment, which is reflected on the price charts. Though it may seem complex to the novice investor, its main aim is to time the market so as to buy low and sell high.
Diversify
In crypto, as in all investing, diversifying your portfolio is one of the smartest moves you can make. No matter the profit potential of any coin, putting all your eggs in one basket is never a sound strategy. Therefore, to minimize risk, you should spread out your capital across different coins and crypto projects. These could range from DeFi projects, non-fungible tokens, the coins themselves, or any one of the variety of blockchain products in existence.
Risk only what you can afford to lose
This is probably the most important piece of advice for all crypto investors. Investing in digital assets is a highly risky venture, and it could entail losing most of, if not all, of your capital. Therefore, you should only invest what you can afford to lose. After all, you wouldn’t want to risk the clothes on your back, would you?
In a nutshell
Cryptocurrencies have become quite the buzzword lately, and they are even rivaling mainstream finance in terms of adoption. Many investors are looking to get in on this wave, but it is not as easy as it would seem. It requires technical knowledge of the markets and a deep understanding of the coins themselves. However, with any of the strategies we’ve discussed above, one can make significant profits from investing in these digital assets.
