7 Best Cryptocurrency Investing Strategies

These strategies for crypto investing can put you ahead of the game.

Investors are trying to figure out ways to incorporate cryptocurrencies like Bitcoin and alternative coins into their portfolio of traditional investments. While the crypto market has been on the decline since the beginning of the year, some crypto assets have historically been high performers. Bitcoin from its inception has far outperformed the broader stock market, for example. However, Bitcoin and other cryptocurrencies are speculative assets that carry their own unique risks that investors must account for. When it comes down to it, just like any other investment, you should have a strategy to fall back on when considering digital assets, just as you do with stocks and bonds. Here are fundamental investing strategies to keep in mind while managing your crypto investments.

Choose the right mix of storage.

When managing your crypto, safe storage is at the top of the list. To keep your cryptocurrency safe, there are a couple of ways to store it. Digital assets are held in either hot or cold storage. Hot is what’s referred to as an online digital wallet, and cold is an offline wallet, typically stored on a hard drive. Experts say it’s best to store a majority of your cryptocurrency in a cold wallet to prevent hackers from gaining access. It’s convenient to have some crypto in a hot wallet, though, to move in and out of transactions quickly. A helpful guideline is to hold roughly 80% of long-term funds inside a cold wallet, says Yubo Ruan, CEO and founder of Parallel Finance, a decentralized lending and staking protocol on Polkadot. The hot wallet can be used for short-term moves.

Prioritize liquidity.

Liquidity is important when deciding how and what to invest in the crypto market. Bitcoin is the most liquid cryptocurrency in the market. Liquidity refers to how easily an asset can be converted to cash while maintaining its value. The concept of liquidity is important because it can determine whether traders can enter or exit a trade at the desired value. The crypto market moves fast, so traders need to be able to move in and out of positions quickly. This means there has to be both supply and demand for the cryptocurrency, so market participants can buy at the best price and secure a profit when they decide to sell. “You don’t want to buy an asset that maybe has great potential but it’s not being traded and it’s just stagnating, so you’re sitting on it and you’re at the mercy of the market,” says Tally Greenberg, head of business development at Allnodes, a crypto hosting provider. When measuring liquidity, it can be helpful to look at trading volume, or how much cryptocurrency has been bought and sold, as well as investors’ overall interest in the asset.

Harness volatility.

Crypto is known for its rallies, but it’s also notorious for its drops. Its volatility can be welcome for traders who capitalize on these price swings, but for long-term investors, crypto’s volatility can be difficult to manage. Since cryptocurrency is an emerging asset, there is still speculation and hype surrounding it that can often lead to heightened volatility. While large price movements are typically seen as a risk, daily volatility is normal for the crypto market and can be an opportunity to make profits. Volatility is actually good for trading cryptocurrency, Greenberg says, but before jumping in, it’s best to know your tolerance for risk as an investor. It’s also important to pay close attention to what’s happening in the market by following the news, blockchain updates and historical charts related to your trades, she says.

Invest what you can afford.

Just like with traditional investing, you should invest an amount in the crypto market that you can afford to lose. If you are not able to withstand the potential full loss of your crypto investment, that means you cannot afford the risk of investing in that cryptocurrency. Determining risk tolerance in the crypto market comes down to how much you earn and your current risk profile, Ruan says. “A person new to crypto should consider around 5% of their income to the crypto market, a crypto enthusiast should look for around 10% of their income allocated to crypto, and a DeFi expert or trader should probably consider 20% or more to crypto,” he says.

Take your gains often.

Experts say crypto market participants should take gains frequently. When it’s time to take profits, crypto investors are often faced with the dilemma that a cryptocurrency’s price could sink or soar, but it’s best to have a reliable strategy for profit-taking. “A lot of people just buy and hold for an indefinite amount of time, and they’re at the mercy of news, memes, celebrity tweets,” Greenberg adds. Establish a clear reason and goals for trading crypto in the first place, and define your entry and exit points for trades.

Diversify.

Putting all your eggs in one basket is not a sound strategy in the world of crypto. A better strategy to minimize risk in crypto investing is to have your crypto portfolio invested in a variety of coins and crypto projects. Greenberg says it’s important to diversify across different digital assets associated with cryptocurrency and blockchain, including the internet of things, non-fungible tokens and DeFi projects. You can even diversify by using different cryptocurrency exchanges, she says, because exchanges don’t always have the same assets. Diversification allows crypto investors to allocate to both relatively stable and speculative assets.

Use dollar-cost averaging.

Dollar-cost averaging is a strategy that involves investing a fixed amount of money on a consistent basis rather than piling in all at once. This way, investors can capitalize on market swings, because it’s impossible to predict how crypto assets will perform in the future given the asset’s volatility, experts say. By taking a dollar-cost-averaging approach, you’re investing the same amount during both bull and bear markets. Buying when the crypto market is down gives investors the chance to accumulate it at a cheaper value, and using dollar-cost averaging can keep responses to hype in check. “Dollar-cost averaging also removes emotion from your new positions in the market,” Ruan says, and it can keep your long-term investment strategy on track.

7 crypto investing strategies to maximize profits:

— Choose the right mix of storage.

— Prioritize liquidity.

— Harness volatility.

— Invest what you can afford.

— Take your gains often.

— Diversify.

— Use dollar-cost averaging.

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7 Best Cryptocurrency Investing Strategies originally appeared on usnews.com

Update 06/07/22: This story was published at an earlier date and has been updated with new information.

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