Getting to know investment strategies in cryptocurrency

Buying and selling cryptocurrencies can be a lucrative business for any investor, but you won’t get very far if you don’t take the right steps before you begin. Putting together your own investment strategy is critical, as is properly researching the cryptocurrencies you’re interested in, being aware of cryptocurrency scams, and knowing how to minimize your risk.

In this AAG Academy guide, we’ll cover all of this and more to ensure that you’re ready to start investing in cryptocurrency for the first time.

What is a cryptocurrency investment strategy?

A cryptocurrency investment strategy is essentially a blueprint or plan that you can use to guide you through your investment journey. Ideally, your strategy is decided before you start investing in coins and tokens, and it outlines what kind of investments you plan to make, whether they will be short- or long-term, and how much profit you might like to earn.

Of course, a profit is never guaranteed, so your strategy may also dictate how much money you are prepared to lose on an investment. Some investors will decide that if an asset they own falls to a certain value, they will sell at a loss and move on, rather than waiting for the price to rise again at the risk of losing even more of their cash.

Part of your strategy should include putting together a budget and a financial plan to work out how much you can afford to invest, and what your short- and long-term goals are. A budget is critical since investing more than you can afford can leave you in trouble. We have an AAG Academy guide dedicated to this topic if you would like to learn more.

Once you’re aware of how much you can safely invest, it’s time to choose the right investment strategy. Here are some common strategies used by cryptocurrency investors today:

Buy and hold
The “buy and hold” strategy, which many investors refer to as the “HODL” (hold on for dear life) strategy, is a method of investing that consists of putting money into a certain asset and then holding onto it for a prolonged period of time — such as several years. This is one of the simpler strategies after deciding what to invest in, you don’t have to do much else.

The idea is that over time, the value of your investment will rise and when it is time to sell, you will have earned a sizable profit. Early Bitcoin investors will attest that this strategy works, though it obviously depends on what you invest in and how well it performs over time.

Dollar cost averaging
Dollar cost averaging (DCA) is somewhat similar to the buy and hold strategy, but it takes it one step further. Rather than investing a certain amount of cash and then forgetting about it until you’re ready to sell, the DCA strategy involves continuous investment of the same sum of money on a regular basis — usually every week of every month.

For instance, you might decide that you have $200 to invest every month. With DCA, you would put that sum into the same cryptocurrency every month, regardless of its price. The idea is that over time, as the value of the cryptocurrency fluctuates, you will end up getting more for your money and will have a considerable profit to show for it in the end.

Earning a yield
If you want to put your cryptocurrency to work while you’re holding onto it in an effort to generate even more, you may be interested in yield farming. This involves lending or staking your coins and tokens to generate interest and other rewards. We have guides dedicated to both yield farming and cryptocurrency staking if you’re interested in learning more.

Setting profit and loss limits
You may decide that, due to the volatile nature of cryptocurrencies, you want to play it safe and set yourself some limits when it comes to investing. These may be imposed on your profits, your losses, or simply the length of your investments.

For instance, if you invest $500 into a certain cryptocurrency and you don’t want to lose more than $400, you may choose to cut your losses if the value of your investment falls to $400. Alternatively, you may set a limit on your profits. If you are happy with a profit of 30%, you may sell your investment when it reaches that price, rather than risking the possibility of a fall.

You can then look at investing your profit into other cryptocurrencies in an effort to keep growing it, but bear in mind that this kind of investment strategy requires quite a bit of spare time and may not be ideal if you don’t have a lot of that.

Invest small and diversify your portfolio to reduce risk

If one of your most important investment goals is to minimize your risk, there are a couple of simple steps you can take. The first is to invest small amounts of spare cash into the projects you’re interested in, at least initially. This will ensure that if the project fails or sees a decline in value for other reasons, you won’t have lost too much of your hard-earned cash.

Another great tip is to diversify your portfolio, which essentially means investing in multiple cryptocurrencies rather than putting all of your money into one. The more projects you invest in, the more you reduce your chance of losing everything if one project sees a sharp decline in value. And that’s always possible given that cryptocurrencies are so volatile.

Important crypto investment terms

Before you start investing in cryptocurrencies, it’s a good idea to familiarize yourself with some of the most common terms that are used. This will be particularly useful when you’re researching potential investments, since other investors, researchers, and analysts may use important words or phrases that you haven’t heard before if you’re a newcomer.

We published a terrific beginner’s guide to common cryptocurrency terms on the AAG Medium blog, but here are a few specific to investing that you should be aware of:

• All-time high (ATH): The highest value reached by an asset in its history.

• All-time low (ATL): The lowest value reached by an asset in its history.

• Bear market: A negative trend in market prices. The term is usually used to describe a period of prolonged price decreases.

• Bull market: A positive trend in market prices. The term is usually used to describe a period of prolonged price increases.

• DeFi: An abbreviation of “decentralized finance.” The term is used to describe peer-to-peer financial services that allow users to borrow and lend cryptocurrency.

• Dip: A term used to describe a period of price decreases.

• Market capitalization (cap): A cryptocurrency’s market capitalization (cap) is its total value. It is calculated by multiplying the number of available coins or tokens by the current market price for each token.

• Portfolio: A collection of multiple investment assets.

• Volatility: How quickly and by how much the price of a cryptocurrency can change.

• Volume: The total amount of cryptocurrency trading during a certain time period, such as 24 hours or one week.

• Yield: A return on an investment, usually measured as a percentage.

Researching your crypto market

One of the most important steps any investor can take before they put money into a new cryptocurrency is to carry out the appropriate research. You may see other investors using the initialism “DYOR.” This stands for “do your own research,” and it essentially means that every individual should carry out their own due diligence on something before investing in it.

Google is your best friend when it comes to researching cryptocurrency projects, but you’ll want to try to avoid fan communities — though these can be helpful at times — and seek out more reliable sources of information. There are a whole host of trusted websites that report on cryptocurrency news, such as CoinDesk, CoinTelegraph, and Decrypt.

In addition to researching the latest goings on for the cryptocurrencies you’re interested in, you should also look at the cryptocurrency’s official website, where you should be able to find out more information about things like how the project operates, its goals and objectives, and its tokenomics. You should also find out about the team behind the project if there is one.

This is particularly important if you’re investing in newer, smaller projects that are yet to prove themselves. Be sure that the project has been independently audited, which ensures that a third-party has examined the project’s code and other aspects of it to ensure that it operates as promised and that its creators aren’t trying to hide any nasty surprises.

Watch out for crypto scams

Projects that have not been independently audited may have been set up to scam unsuspecting investors. These look like genuine projects on the surface, and the creators will often make ambitious claims about what they hope to achieve. However, after attracting lots of investment, the creators then disappear with all the cash, leaving investors empty handed.

This is referred to as a “rug pull,” and it is sadly still common within the cryptocurrency industry. If you carry out the right research, however, rug pulls can be easily avoided. If you cannot find an independent audit into a cryptocurrency project, or its creators do not reveal their identity, there is a very high chance that the project is not a genuine one.

Another scam you should look out for is what’s referred to as the “pump and dump.” This is when a certain number of project “supporters” convince others to invest into the project — usually by making outlandish claims and spreading hype — to raise the price of the token significantly. They then sell their own tokens at a profit, causing the price to plummet.

This type of scam can be avoided by looking for suspicious activity in token prices. If you see a certain cryptocurrency is experiencing a sharp rise in price for no apparent reason, this could indicate a pump and dump is happening. If it has experienced a sharp decline in price, the pump and dump may have already happened.

For more information on cryptocurrency scams and how to avoid them, be sure to read our dedicated guide.

Practice investing before doing it for real

Did you know that you can practice investing without having to spend a penny? If you’re looking to gain some experience before putting your own cash on the line, there are free online tools you can use that simulate the investment process with virtual money. You can practice buying and selling different assets, reading price charts, and more.

Investopedia has a terrific Stock Market Simulator that’s great for beginners, and Wall Street Survivor offers another that lets you buy and sell cryptocurrency as well as stocks and other assets. You can also find similar tools and even stock market games by searching for them on Google, in the App Store, or on Google Play.

References

• Crypto investing strategies
• Things to consider before investing cryptocurrency
• How to research crypto
• When is the best time to invest