On balance, the cryptocurrency market has empirically proven itself to be a profitable investment space, with important similarities and differences to other investment avenues. This much is clearly evident looking at Bitcoin or Ether price charts over the past few years. As such, the strategies employed to balance risk and reward when investing in tokens have some significant points of overlap with those used in traditional finance.
Crypto Investment Strategies
Given the tendency of most cryptocurrencies to undergo significant price cycles over the course of days, most strategies must take the possibility of significant price cycles into account, along with the various reasons that a person might have in investing in a given token.
Buy and Hold
Buying and holding a token is possibly the simplest investment strategy to deploy while simultaneously requiring the largest amount of research, patience and risk tolerance. As the name implies, this strategy involves buying a token early on in its life and cashing out for profits somewhere down the line once the token has matured. Success depends on the investor being in early and right about the utility of a token, but the potential profits are high.
You should set a sell point for investments to counteract hubris and behavioral greed. Buying and holding crypto works in a manner similar to the traditional stock market. Staking and other DeFi yield generation protocols offer a way to generate yields and incentivize long-term holding; buying and holding a significant amount of a token can also generate passive income through staking.
Dollar Cost Averaging (DCA)
Dollar cost averaging (DCA) is broadly similar to buying and holding, although it sacrifices some of the potential reward for a lower overall risk by making multiple small purchases in a token over a long period of time. In principle, this strategy means that price cycles get averaged out over time. Using this strategy means that you’d still need to pick a token with a long-term value proposition that you feel confident in. DCA is a common enough long-term strategy for relatively risky stock positions as well. As DCA involves multiple smaller purchases made over time, staking yields are less attractive than with buying and holding a token, though they can still be done. Coinbase has a feature that lets you automatically DCA into investments with recurring purchases, which is a nice feature for those who want to consistently invest into crypto over long periods of time.
Elliott Wave Theory
Elliott Wave Theory describes recurring, fractal wave patterns in price movements. In essence, this theory and most other advanced, non-automated investment strategies aim to forecast and identify bottoms in price cycles to time price movements. In essence, this strategy, along with most other theoretical strategies, is aimed around timing the market optimally so as to be able to buy low and sell high. Staking is essentially useless with these types of strategies, since they are so short term that the lockup period associated with staking only hurts the strategy’s responsiveness. To avoid catching a perpetually falling knife, due diligence on tokens is hugely important.
Choosing Cryptocurrencies to Invest In
Due diligence on tokens matters irrespective of the buying strategy that you employ, especially in a time where random projects rise and fall every day. Some of these projects end up being scams or rugpulls aimed at lining founders’ pockets, with an especially egregious example being October 2021’s Squid Game token.
Every investor has their own list of red and green flags as well as their own hierarchy of importance in terms of findings from due diligence. Here are some of the most common ones.
Price history and market cap go hand in hand, offering an empirical, quantitative look at a token’s stability over time and a relatively accessible perspective into the sorts of real world events that drive a token’s price up or down, as well as how interrelated a token’s price is to another token, such as Bitcoin or Ether.
A slightly more complex place to do analysis is by looking into the technology behind a token. For instance, examining the speed, costs and other assets on the blockchain that it runs on as well as the consensus mechanism, governance and similar metrics offer a robust narrative for the value of a token that might not be accessible to investors only looking at more surface level bits of information.
Paying attention to social media buzz can be a good idea, both to gauge for genuine interest and to look for any shill activity in relation to a project as green and red flags respectively. The majority of the red flags associated with scam projects can be sniffed out by looking at social media sentiments, especially with celebrities who haven’t substantively interacted with the cryptocurrency space in the past. Crypto influencers on YouTube and other social media platforms have also been known to take significant deals to promote projects, which is something to be cognizant of as an investor.
Is Crypto a Good Long-Term Investment?
It seems as though crypto in some form is here to stay, shown by institutional investment in the space and widespread governmental desire to regulate the space, along with crypto’s role on multiple sides of recent events, such as the Ukraine conflict and the Canadian Trucker Blockade. These factors will likely carry over to future events, so investments in the blue chips of crypto (namely Bitcoin and Ethereum) broadly seem like smart plays. Almost everything else in the space isn’t fully guaranteed to exist in the long term.
get started securely through eToro’s website
Disclosure: eToro USA LLC; Investments are subject to market risk, including the possible loss of principal.
1 Minute Review
eToro, headquartered in Cyprus, England and Israel, has provided forex products and other CFD derivatives to retail clients since 2007. A major eToro plus is its social trading operations, including OpenBook, which allows new clients to copy trade the platform’s best performers. Its social trading features are top notch, but eToro loses points for its lack of tradable currency pairs and underwhelming research and customer service features
- U.S. based cryptocurrency traders
- Investors looking to CopyTrade other traders
- Simple user interface
- Several major cryptocurrencies and altcoins
- Expansive network of social trading features
- Large client base for new traders to imitate
- Only 29 coins available
1 Minute Review
Gemini is a cryptocurrency exchange and custodian that offers investors access to over 100 coins and tokens. Founded in the US, Gemini is expanding globally, in particular into Europe and Asia. Offerings include both major cryptocurrency projects like Bitcoin and Ethereum, and smaller altcoins like Orchid and 0x.
Gemini is 1 of the only brokers with multiple platform options based on skill level. New investors will love the streamlined interface of Gemini’s mobile and web apps, while advanced investors might appreciate all the tools that come with ActiveTrader.
In addition to a host of platform choices, Gemini users also have access to insured hot wallets to store tokens without worrying about digital asset theft. Learn more about what Gemini can do for you in our review.
- New investors looking for a simple mobile and web app
- Day traders looking to use technical analysis tools
- Users looking for a 1-stop-shop to buy, sell and store all of their cryptos
- Easy and quick signups — can get started in as little as a 5 minutes
- Multitude of platforms to accommodate traders of all skill levels
- Hot wallets include insurance to protect your from theft and hacking attempts
- Charges both a commission and a convenience fee for users buying and selling through the desktop or mobile app
Should Everyone Invest In Crypto?
The cryptocurrency space has shown itself to be volatile in many aspects with unforeseen price movers, so nobody should invest money that they’re not prepared to lose into crypto. In this sense, it’s difficult to assert that everyone should invest in crypto. The existence of asset-backed tokens like PAX Gold along with robust stablecoin savings protocols make the case that you can find an investment in the cryptocurrency space to cover various risk-reward tolerances. In this sense, everybody should do a little research and spend some time learning about the cryptocurrency space to see if anything that currently exists suits them. Based on interest and the amount of money set aside for investments, dipping your toes in crypto might be the best way to learn about the intricacies of the space.