Cryptocurrency has increasingly attracted investors for over a decade. Since its inception, trillions of dollars have been plowed into it. The decentralized nature of cryptocurrency caused it to be very volatile and subject to large swings. However, the huge growth of the industry made it very appealing; more and more people see it as a viable and very rewarding investment. After all, the value of the most popular cryptocurrencies saw an immense evolution over the past decade; those who were fortunate enough to invest early and hold on to their assets for years must have been pleased by what they earned.
However, as with all investments, especially those in unpredictable markets, it comes with many risks. The approach to investing in cryptocurrency should be carefully planned. Some look for a quick way to get rich and end up panicking whenever a sudden crash occurs. This leads to rash, emotional decisions that are usually wrong. That is precisely why it is very important to see the bigger picture and opt for a meticulously thought-out investment strategy.
To help you achieve that, this article will provide you with valuable insights into how to approach cryptocurrency investments to gain in the long run.
Why Invest in the Long-Term?
Bitcoin rose from 0$ in 2009, to 0.09$ in 2010, and to 29.680$ in May 2022. Ethereum rose from under 1$ in 2015 to 1812$ in May 2022. Many other cryptocurrencies drastically increased in value over the years, despite the occasional crashes. Even though many currencies did not make it, it stands to reason that many people believe cryptocurrency to be a viable long-term investment.
Crypto’s performance evolution throughout the years does favor the long-term option. Let us take Bitcoin as an example and 5 years as a timeframe. If you bought Bitcoin, at any time since its inception, you would have an annual return of 27% at the very least; that assumes you bought Bitcoin at the worst possible time. With better timing, the percentage could be miles higher.
The main thing that discourages people from investing in cryptocurrency and pushes others to panic and sell all they have is the sharp decrease in value that occurs from time to time. The current pullback in cryptocurrencies is one of these cases. While no one can tell for certain what the future will reveal, the decline in prices has proven to be a great time to buy and often brought soaring returns in the next months or years. This led many experts to think that the current decline is but history repeating itself.
It should come as no surprise that the crypto market is an extremely volatile one. How the market behaves can be highly unpredictable even to the most knowledgeable among us. This makes trading on a daily basis as you would do with regular stocks a total headache. Analyzing the market every day and understanding the market behavior is a very demanding task and can be a full-time job in itself. Opting for the long game, especially for those who lack the depth and level of analysis that some experts have, is much more manageable; it requires less effort and is potentially very rewarding when carefully planned.
What Are the Risks?
Investment and risk are intricately linked. Particularly in volatile markets such as cryptocurrency, the investment risk is significant, more so than with other assets, but so is the potential for high rewards. There is no objective criterion for how the market will behave at any given time; it’s all speculation and prediction, mostly. The unexpected changes are frequent, and that makes it hard to know for sure whether you made or will make a good investment.
Besides market volatility, digital currencies are subject to security threats such as hacking. Cryptocurrencies make use of cutting-edge technologies that are constantly improved and developed, and that makes them prone to errors. Where you choose to store your digital assets is very critical as well. Without the right methods to store your assets, much can be lost.
While cryptocurrencies have been mostly unregulated throughout their history, new regulations are beginning to take place, despite the lack of international coordination. This creates room for speculation as to what the government’s attitude towards cryptocurrencies will be. Many experts believe that current regulations are actually positive and ensure more stability. However, the possibility of government regulation changes over time makes long-term investments quite risky.
What To Do with Your Assets?
Security is a big concern when it comes to storing your crypto assets. Online platforms are subject to hacking, although many of them can be relatively secure. It is widely accepted that offline storing is the safest way to hold your bitcoin, especially when you do not intend to invest it anytime soon. Hardware wallets make sure your private keys stay offline, making them immune to cyber threats and inaccessible to anyone but you.
Another option is to store cryptocurrency in a custodial wallet, meaning that a third party will hold it for you. While it is not as secure as having your own wallet, choosing a reliable third party with excellent security measures can ensure your crypto is safe. It will also make transactions and investments much easier.
Transactions and Investments
Thanks to the quasi-universal adoption of Bitcoin and other cryptocurrencies, many investment options became available, such as trust funds, exchanges, brokerages, and management companies. With crypto transactions being irreversible, these services can be quite helpful to make sure your investment is well managed. Opting for a regulated Bitcoin investment is a convenient way to keep your assets safe. The important thing to consider is the security standards of these types of platforms.
Why Have an Investment Strategy?
The cryptocurrency market is already unpredictable enough. Investing without defining a clear strategy is a terrible move and can lead to a huge loss. Strategies are important in that it helps you make informed decisions and not steer away from your goals and objectives. Having a strategy significantly reduces the risk that inevitably comes with crypto investment.
In addition, the occasional abrupt changes in crypto value pave the way for psychological biases that can affect market behavior. For instance, when prices plummet, tons of people panic and rush to sell their crypto assets in fear of a potential collapse. While some ‘fearful’ people manage to get away with a hefty profit, others lose some of what they came in with and are better off holding on to their assets.
Another important aspect of having a strategy is that it allows you to define how much risk you are willing to take. This will directly affect your investment decisions, notably buying, holding, and selling. A carefully planned investment strategy will allow you to take into account all the relevant factors and secure your wealth as much as possible.
What Strategy to Opt For?
Depending on your objectives, long-term investment in cryptocurrency may be approached in a variety of ways. Below are some of the common techniques that have proved effective in many cases.
HODL (Hold and Buy)
The most common long-term investment approach is by far the simplest and easiest to manage. All it takes is to buy a cryptocurrency, hold on to it, and just wait. This has proven to be effective in the long run. Chances are, you will want to wield your profit at some point in the future. The trick is to figure out the right moment to do that, that is, when the crypto value is peaking. In many cases, buying and holding are accompanied by other investment strategies that aim to secure a steady amount of annual return.
Dollar Value Averaging
Instead of figuring out the perfect timing to buy and sell, you can periodically invest a fixed amount of money in cryptocurrencies. It is another simple and effective strategy to invest in volatile markets. The key advantage is that you don’t have to bother with analyzing the market and crypto charts. Rather, you ensure that you’re regularly gaining assets. It will limit the potential reward that comes with investing at the right moment, but it will also minimize the risks. It is an exclusively long-term strategy, since it entails regular investment. The rewards can be very promising when the cryptocurrency value increases over time.
As opposed to dollar averaging, this strategy entails investing your predetermined capital, all at once, at one particular moment in time. The obvious risk would be buying at a peak, which can lead to a quick loss. However, since you are playing the long game, it may well pay off eventually. People who opt for this approach usually have a higher tolerance for risks; the potential rewards, as well as the risks, are higher than dollar-cost averaging.
This is another simple strategy yet one that requires you to regularly follow the cryptocurrency trends. We’ve mentioned how a sharp decline in value causes many people to panic and sell their assets. Contrarian investment suggests that going against the general sentiment and buying at that specific time will be rewarding, as cryptocurrency will recover its value. Similarly, it can be a bad idea to buy assets when the market is thriving and the value is significantly increasing. Instead, this will be a convenient moment to sell. Contrarian investments can be highly rewarding even on a short-term basis, especially if assets were acquired at a low point. They do, however, present the risk of prices plummeting further. That would lead to an immediate loss which may take quite some time to recover from. Despite the risks, this is one of the most effective strategies for a first-timer looking for the perfect moment to kickstart their investment plan.
With cryptocurrency being adopted into many financial institutions, you can choose to invest in exchange-traded funds, without the need to actually own any assets. You will instead be investing in companies that deal with the blockchain technology which is behind cryptocurrencies such as Bitcoin, Ethereum, and others. It is quite similar to buying stocks, except that you will be investing in a highly volatile technological industry; that naturally is quite risky but has a potential of high reward.
How to Choose the Best Strategy?
The answer to this question can never be definitive. To figure out the strategy that best fits your investment goals and the market situation, there are many factors that need to be considered.
Set Your Objectives
Before going through with your investment, you are likely to have formed an idea of what you want to achieve. Your objectives can range from planning a wonderful vacation next summer to saving enough money for your golden years. The goals and timeframe you set will influence every investment decision you make: when to buy, when to sell, and how much budget you are willing to allocate, among other things.
Define Your Risk Tolerance
Due to the many risks that come with this type of investment, you will have to carefully assess how much risk you are willing to take. It is a general rule that the higher the risk is, the higher the reward. This is particularly true when it comes to volatile markets such as cryptocurrency. Some strategies are more suitable for lower risk tolerance, while others encourage taking significant risks for a chance to earn the highest rewards.
Degree of Involvement
Some investors are more active than others. For instance, you may want to frequently invest in cryptocurrency whenever you see an opportunity. This requires you to pay attention to the market behavior and choose the right moment to buy more assets. Alternatively, you may want to invest, forget all about it, and then sell when the value drastically increases. How much you are willing to be involved will play a key role in your choice of strategy.
Cryptocurrency brought significant changes to the financial world and is constantly growing in influence. If carried out well, long-term investment in cryptocurrency can pay off remarkably well. It comes with a fair share of risks and challenges that need to be assessed before making a decision. Tackling such an unpredictable market requires an elaborate plan that incorporates the points we have mentioned. With that in mind, playing for the long haul with an adequate strategy can maximize your returns and help you get the most out of your investment.