You are probably here because you have a strong feeling that something is not quite right with the current financial system. To hedge for any future disruption in traditional markets, you decided it would be wiser to jump into the cryptocurrency lifeboat. If this is the case, it might be even wiser not to jump headfirst, but gradually secure your place by investing in steps, based on a good investment strategy.
If you are reading this hoping to find a magical way of getting rich quickly from crypto, I will have to clarify that this is not what this article is about. The strategies described here are meant for a longer time frame, meaning years, and not days or weeks. In my view, a certain level of discipline and patience is required from a crypto noob to become a successful investor.
Are you still here so far? Good. Let’s go on.
In this article, I will talk about how to create your own personalized crypto investment method and will also describe four of the most powerful investing strategies.
Before moving on, you should know that every investment, including cryptocurrency investments, should always follow a plan. Ideally, this plan should be written down before any amount is invested.
Creating an investment plan
Your investment plan should contain at least the following information:
The target amount – this is the total amount of money you wish to have at the end of your investment. It’s totally up to you to decide how much it would be.
The duration – this is the time interval from the moment you start to invest up to when you cash out your investment funds. In the example below, I used a 30-year investment duration.
The investment portfolio composition – this should contain the cryptocurrencies that will compose your investment portfolio and their percentage of your total portfolio.
As a quick note here, for your crypto investment portfolio, try to pick only cryptocurrencies that are well established, that you have thoroughly researched and which you believe will pass the test of time. Try not to go overboard selecting too many – anywhere between 3 to 15 coins are more than enough. Then assign to each of the coins you selected a percentage of your total portfolio.
A good balance would be, for example, a minimum of 30% Bitcoin that will be held in a Ledger wallet, and the rest up to 100% assigned to cryptocurrencies that will be used for staking (like Ethereum, Elrond, Algorand, Cardano).
The investment method(s) – this includes answers to questions like when will you buy, is this the best price to get in, how often will you add to your investment, what will you want to do with your cryptocurrency investment (hold in a wallet, hold it on an exchange, use it for staking, loan it), and when to exit or sell. Again, think of the answers that apply to you and write them down.
That is the basic template for creating your own crypto investment strategy as a beginner. Of course, various different strategies can be created from this. The idea is to have all the information written down before starting out and sticking to your plan along the way.
Reasons to invest
Besides the “lifeboat” argument made in the introduction, there are two big reasons why I think investing in cryptocurrency in the long term will be a net positive:
1. Compounding returns from staking crypto
As mentioned above, it is always a very good idea to have in your portfolio cryptocurrencies that allow staking. These currently have various yearly staking returns, ranging from 5% to 20% and even higher.
In the example below, I used a compound calculator to show how compounding crypto staking profits works. From an average 7% yearly return from staking, if one starts with an initial $5000 investment and adds $200 monthly, after 30 years the investment amount will grow to $339,429. To showcase how important compounding is for long-term investing, if you remove the 7% interest and add up the same initial 5k and monthly $200 for 30 years, you will only net $77,000. Quite a big difference. This is why it’s highly recommended to take advantage of the interest rates from staking your crypto.
2. Future price of crypto
If you look back at Bitcoin price predictions on social media from 4-5 years ago, you notice that most of them were not that far off the actual price today. Of course, you will not be able to predict the price of your crypto portfolio after 10, 20, or 30 years. But you could still make an educated guess. For the example above, if we use a more down-to-earth scenario, a 3x price increase would be reasonable enough (or even conservative for some). Factoring in this price increase, the $339,429 amount gained from staking would be worth around $1,018,200. Not bad!
Types of investment strategies
There are different types of investment strategies from traditional finance that can be used in crypto as well. Based on the time required for investing there are:
- active strategies– involve active portfolio management, such as buying every month a certain amount.
- passive strategies – require little or no management, like buying and storing in a wallet for a number of years.
Based on the duration of the investment, there are:
- long term strategies
- short term strategies
And also, depending on one’s risk tolerance, there are:
- high risk strategies
- low risk strategies
For a complete picture of investing strategies, check out The Economist’s “Guide to Investment Strategy: How to Understand Markets, Risk, Rewards and Behaviour”.
In order to choose or create the best possible investment strategy suitable for you, you have to know your risk profile. You also need to be aware of your level of discipline and how much time you can dedicate to investing.
For example, someone who has a higher risk tolerance would want to see a profit as soon as possible. Such a person can dedicate a few hours per day to invest. They may want to use an active, higher-risk short-term strategy. Such a strategy could be identifying undervalued cryptocurrencies on Kucoin and placing long-term sell orders at a minimum of 2x the entry price.
On the other hand, there are also people with lower risk tolerance, with less time on their hands, and focused more on building an early retirement safety net. They would prefer a more passive, longer-term investment strategy, with a low-risk portfolio. It’s all about finding the right balance based on your personality and preferences.
Best crypto investment strategies for beginners
1. Dollar cost averaging
This strategy is focused on the long term, and it consists of buying cryptocurrencies at certain intervals (like every month) with a fixed amount of cash This strategy is very simple to implement, and once you have your wallets and portfolio set up, it requires very little effort and time. This is a proven way of reducing the impact of volatility on your investment, and it has the advantage that you don’t have to try and time the market. It does require a bit of discipline at the beginning, but for me, this remains the main way of investing in cryptocurrency and will be so for the future.
2. Buy dips
Since crypto markets are well known for high volatility, they present great opportunities for investors who prefer an even more active involvement. This strategy is very similar to dollar-cost averaging, except that instead of buying every month, one would buy only when there is a large dip in price (for example, -20% in a single day). Because it requires more focus on the price action, this strategy is recommended for investors who have enough time and patience. Dips can occur at irregular time intervals, and more often than not, price dips further after buying. This is why with this strategy it is also important to have a fixed budget in place. For example, for the next 30 days, only $100 will be used to buy dips on a certain coin. If the price of that coin keeps going lower, then wait for next month / next $100).
3. Buy and hold
As a beginner, you may find that this is probably the simplest form of investing in cryptocurrency. It implies buying a more significant amount, sending it to your wallet, securing it by backing up the wallet and storing your private keys in a safe place, and returning to it after a number of years. Bonus points for including staking coins as well. This strategy has cons as well, the main one being that the entry price might not be ideal at the time of purchase. However, if your portfolio consists of quality cryptocurrencies, in the long run, this aspect might not matter that much.
Maybe active involvement with cryptocurrency is not for you. Or maybe setting up an account on an exchange, installing a wallet, or securing your keys sounds too complicated and time-consuming. No worries. There is also the option of investing in crypto via regulated investment funds, such as Grayscale (symbol: GBTC). These funds consist of portfolios of top-quality cryptocurrencies managed by traditional fund managers. By investing in such funds, in exchange for administration commissions, you gain exposure to the crypto markets without any hassle.
Finding out which strategy is best for you is a matter of knowing yourself and your risk profile. I would recommend starting out with dollar-cost averaging, as it is the most balanced way of investing in crypto. That does not mean, of course, that you can’t combine various elements from each strategy into one of your own. The most important part is to have a plan and follow it.
If you haven’t signed up for an exchange yet, check out my guide on how to select the best cryptocurrency exchange for beginners.