According to Coinmarketcap, there are almost 1,000 cryptocurrencies (more or less) alive and kicking today. If you decide to enter this market as a trader, this number alone can be overwhelming. Add to that the fact that every cryptocurrency out there has its own unique set of features, its own minting mechanism and its own system and you get stuck pretty fast.
On top of these technical aspects, there are also a lot of contextual situations that must be dealt with, many of them coming from the lack of regulation in the cryptocurrency area. Any news can drive the market up and down pretty quickly and if you have open positions, without stop loss or take profit markers, then you are in for a quick but bitter disappointment. Big whales, almost always anonymous, can swing the market as well, and their anonymity makes the strategy even more difficult: you never know who and when and how is going to start a pump (or a dump).
But even in this wild world, there are a few paths that can be followed, with a consistent set of results. Whether your cryptocurrency assets are in the top 20 or you focus on newcomers only, you can find your way out of this jungle, even with a bit of profit.
In this article MinerGate is going to focus on two main approaches: hold and spend (a.k.a. invest).
This strategy banks on the fact that asset appreciation will be constant. You basically open small positions and add to them constantly without diminishing your stake.
The maturation of such investments is measured in years. Here are some of the benefits:
- The cryptocurrency market is still in its infancy and there is a lot of room to grow, so if you’re patient enough, you can see ROIs as high as 10x. For instance, on February 01, 2015, Bitcoin was $212. Now, just 2 and a half years after, it’s quoted at over $4000, which means almost 20x appreciation. That kind of profit is very hard to generate in such a short amount of time with any other investment vehicle.
- Many cryptocurrencies have a staking/minting option, which means the more you hold, the more you generate. So if you focus on holding, maybe you should also identify tokens with a staking/minting algorithm too. Examples: Gridcoin, Slimcoin or, soon, Ethereum, when they will introduce Casper.
- The impact of small price variations on a big stake is very, very significant. That’s something that must be very well internalized. If price rises with 2%, and if your portfolio is 1000 coins, it means you will get 20 coins, but if your portfolio is 100,000 coins, it means you get 2000 coins! That means you can take advantage even of small market variations with a higher stake (that’s obviously true in any scenario, but it’s a good incentive to hold, in our case).
And some of the drawbacks:
- It takes a lot of discipline and mental fortitude to stay still and resist market swings.
- You accumulate a lot of assets, but your liquid capital isn’t growing.
Spend / a.k.a. Invest cryptocurrency
This strategy banks on the market fluctuations and tries to make the most from its swings. The maturation of such investments is measured in months, weeks or even days. Forex traders who are coming to cryptocurrency trading will be very comfortable doing what’s called “scalping” in Forex: small, but numerous transactions. Here are some of the benefits of spending:
- Cryptocurrencies are very volatile, which means the market has always up and down swings. With enough patience and discipline, and with a bit of luck (as always) one can take advantage of those spikes. Buy the bottoms, sell the highs, buy the news, sell the rumor, you know the drill.
- If you are oriented towards spending, or re-investing your capital, you will be naturally inclined towards a diversified portfolio. As you will see below, in the general consideration section, a diversified portfolio is safer than a monolithic one.
- If there is a toxic asset in your portfolio, the habit of spending fast may spare you the sorrow of carrying it along (like in the case of holding, when you bought something worthless, but you still keep it, hoping it will turn around someday).
And some of the drawbacks as well:
- You may get caught in the whirlwind of news and market swings and lose medium or long term opportunities.
- You have a lot of liquid capital, but your assets are very volatile.
No matter which strategy you pick, remember to take profits. Money, in whatever form it comes, is useful only in interaction, in movement. Keeping it under the mattress may increase its value in time, but that doesn’t mean you should wait forever.
Adjust the strategy to the following custom aspects:
- Separate the capital from the assets – capital is a liquid value, that can be moved freely at any moment, and asset is defined as needing a maturation time, it’s usually blocked and can’t be spend freely, but it will carry an added value when it’s liquid again.
- Amount of capital – only invest what you can afford to lose, financial investments especially cryptocurrency investments is a high risk activity.
- Maturation – set a realistic goal for that, whether is hold or spend.
- Portfolio distribution – don’t put all your eggs in a single basket, always have at least 4-5 assets that you can build on.
As you can see, there is no bullet proof strategy, something that will guarantee profits. Instead, there are a few principles that can be followed and a few general rules that must be repeated. The rest is really up to your personal preferences, the amount of time you want to dedicate to this and the amount of available capital.
Disclaimer: the material in this article represent the personal opinion of the author and it doesn’t represent trading advice. Please make your own due diligence when trading and only trade what you can afford to lose.