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:
- Investment starts when you enter the market.
- It continues while you hold your cryptoasset.
- It ends when you sell your cryptoasset.
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.
1. Enter the crypto market
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?
Long-Term Holders Benefit from DCA Strategy
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.
- You will spend no extra time learning about the irrational market actions.
- You will most likely buy just before a dump at some point, but it will be a small amount. In effect, it will psychologically prepare you for the swings on cryptocurrency markets which would otherwise be quite stressful.
Here is a super quick rundown of what you need to do.
- Decide on an amount to set aside a small amount from each of your paychecks. It should be quite a small amount, really only so much you can miss every month.
- Get verified on a cryptocurrency exchange with a fiat onramp. If you’re concerned, use p2p markets like LocalEthereum (LocalBitcoins has some warning signs as of late).
- If you can ship fiat to the exchange without submitting a request each time, set up a permanent order from your bank account. This way you won’t waver.
- As soon as the money arrives to your exchange account, buy as much crypto as you can for that amount. On bigger exchanges, this can also be automated.
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.
Actual Entry Timing Strategies for Crypto?
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.
- An established cryptocurrency tends to form ranges. They can signal a top, but unless there’s been a prolonged bull market for a good while, typically a range will be a good place to enter.
- A small-cap altcoin usually runs up on extremely good news, a rumour or a speculation. In this case there will be no range to start with.
- Altcoins that have PoW halving events, notably Litecoin, have predictable patterns around these events.
If you are looking for a reliable crypto charting app, go try a free TradingView account.
2. Get a Crypto Storage or Income from Interest
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.
Your Personal Crypto Custody
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.
Lending Cryptocurrencies through a Trading Platform
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.
- You are leaving your cryptoasset on a third-party platform.
- The security of your money there is out of your control.
- Since 2016, there have been several high-profile digital exchange hacks every year.
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.
Your Cryptocurrency Cold Storage Options
Holding your crypto in a carefully maintained wallet is the safest option to keep your investment secure.
It is never completely safe:
- One option is to homelab your own cold storage, which is risky and requires expertise.
- Another option is to go with commercial hardware wallets which are a black box and provably have vulnerabilities.
- Any piece of hardware can have a backdoor that passes unnoticed for years.
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.
- If you trade or lend some part of your holdings and need to make transactions often, you can opt for a web-wallet. This is a wallet solution hosted on a web server, the least secure solution of them all. A reasonable secure and time proven wallet is the blockchain.com one.
- Mobile wallets are generally more secure than web wallets. At the same time they are easy to enough use on the daily, and as they are on your phone, it is easy to keep them updated.
- Hardware wallets are the most secure option to hold cryptocurrencies that is at the same time also practical for the occasions you want to make a transaction. The Ledger wallet products are currently leading the market.
- Paper wallet is the oldest and least hackable type of cold storage. It is literally a physical piece of paper, which makes it immune to most threats other than physical rot or similar damage, but it is not practical to use them for regular transactions.
3. Maintenance Work: Stay Informed and Reevaluate
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.
- Set aside a certain amount of time each week to go through the official subreddits, where the important news get posted.
- Subscribe to Google alerts for any personality names, businesses or technology terms that are relevant to your investment. You don’t actually need to click these, just get them weekly and skim the headlines.
- Set up blockchain as your interest in Google News, this will put the headlines from Coindesk and other big outlets on your home tab.
Stay informed, but always strive to make decisions with a cool head.
What to focus on when skimming the news headlines
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:
- Monero or Bitcoin are examples of cryptocurrencies that get practically used by the public as well as businesses and investors. Regulatory news can spur a speculation, but P2P volumes or network and mining data can serve as fundamentals.
- Ethereum is a platform for development of decentralized applications, which itself is a very practical use case. However, nearly all of its dApps other than blockchain games are built as speculatory proof-of-concepts.
- Cryptocurrencies like Ripple or EOS are designed to serve business needs. Even if the actual digital asset is not equivalent to a company stock, as long as they are in an experimental stage, the strategy and actions of the business that develops the asset is what matters.
- Other tokens and small-cap altcoins are projects that promise all sorts of things and that’s about it really. Some of them might become hugely successful in the future, some of them will fail, some will stick around for years in a sort of middle-class.
Case in Point: Investing in Ripple
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.
- Ripple, or Ripple Labs, is a US-based fintech company that aims at disrupting the cross-border payment system that is currently ruled mainly by the VISA and MasterCard giants.
- The asset that can be invested in is in fact called XRP and it is independent on Ripple Labs.
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.
Plan the reevaluation of your cryptoasset portfolio
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:
- Looking at the actual numbers will help you stay real and ultimately make good decisions. This is about money, not about feels.
- If you plan these sessions ahead, as a part of your crypto investment strategy, chances are you will not be swayed by abrupt market movements.
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:
- Does it still have value to keep holding the asset? Did the value of your investment grow so much that it becomes too risky to still have that much value tied in that asset? Did you find other investment opportunity where you could use the money better?
- Do you believe the asset you’re holding is still undervalued? Would it have value to invest more money into it?
- Do you think it is time to take some profits or to cut the loss? Do you exit fully? Do you take out the initial investment? Are you planning to buy back?
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.
4. Market Exit: Selling Your Stash or Rebalancing?
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.
- Rebalancing does not mean to even out the value distribution between your assets, it is rather changing the distribution to fit better your risk preference.
- As the crypto landscape changes, your target balance between assets may change.
- You can do calendar rebalancing, each time to reevaluate your investment. You can also rebalance with abrupt market movements.
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.
- There are investors who take some profits each time the price action of their cryptoasset shoots up in a very short period of time. They might buy back later, but other than that they just leave their invested money intact for five to ten years. S* ome long-term investors do not touch their cryptoasset holdings at all and are not set off when their investment goes through drawdowns. The philosophy behind it is that in some ten years, they will either have fat savings ready or the value of their asset will be so negligible they might as well forget about it.
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.