If you’ve never traded before or felt intimidated by the thought of crypto, you’re not alone. But crypto doesn’t have to be cryptic. We’d say it’s the most exciting time to get into trading, even if you’re “late” to the game or have zero expertise. Here, we’re going to provide general trading strategies and tips to help you stay sharp and move with ease. From day trading to joining liquidity pools, here are six things you should know before you plunge into the crypto world. And don’t worry if things sound like alphabet soup at first — we’ll spell everything out.
1. Long-term Investments for Slow and Steady Growth
All right, so what’s the most common long-term trading strategy? Well, it’s buying and holding specific coins with the expectation that they’ll increase in value over time. This approach requires discipline to avoid knee-jerk reactions to market volatility.
With this strategy, the most significant returns are generally earned if you can buy into new coins and tokens early, while they’re cheap. Successful cryptocurrencies can experience sizable increases in value over the long term, a prime example of which is Bitcoin’s rise from a value of six cents in 2010 to a high of $20,000 in December of 2017. While the value has since petered out to roughly $4,000 as of March 2019, many investors who bought and held Bitcoins in the preceding nine years enjoyed a considerable return on their investment.
Another long-term option is to participate in a liquidity pool. What’s that, you ask? Basically, these investments work by essentially “loaning” the pool management organization some of your cryptocurrency assets. The pool management organization uses your assets to invest with. In exchange, they provide a steady rate of return. While this is generally lower than what you would receive investing in the market directly, it can give risk-averse newbies a chance to make slow but consistent gains.
2. Short-term Investments for Quick (but Unpredictable) Growth
Day trading can be thrilling — the inherent volatility of crypto markets provides the potential for large returns. Buying or selling at the wrong time, however, can also lead to major losses. And who wants that?
To smartly (and effectively) participate in day trading, you’ll need to be on top of your game. Staying diligent and aware of relative values between cryptocurrencies, as well as reading up on how these values have spiked or dropped over time, isn’t a bad idea. Not to mention keeping up with news and investor sentiment, since this will allow you to pick up on possible market movements and make trade decisions accordingly.
3. Strike a Balance Between Long- and Short-term Investments
The most effective strategy will likely blend investments from both categories, allowing you to balance immediate gains with long-term goals. This way, you’re not keeping all your eggs in one basket. Even more important than picking an approach, you’ll want to be totally open to change. After all, you don’t know what’s going to happen in your life. Just like with conventional investing, changes in income, family status, and other life circumstances can affect how and how much you trade.
While there’s obviously no way to predict exactly how well your cryptocurrency investments are going to perform (that would be nice, right?), you can use the “rule of 72” to give yourself a baseline estimate of expected returns. By dividing an investment’s expected rate of return by 72 you can calculate how long it will take to double your money. So a 1% annual rate of return will take 72 years to duplicate, while a 10% return will double in a little over seven years. Why the “rule of 72” works is a marvel of mathematics — don’t worry if this is kind of going over your head or not clicking. With practice and familiarity in the market, you’ll begin to see all the nuances on your own. Let’s just say that the “rule of 72” is a handy tool for determining if the potential return on a particular investment fits with your long- or short-term aims.
4. Choose Your Investments Wisely
The crypto community can be full of snake oil, just like any other exciting industry. From speculation to total (pardon our language) B.S., misinformation you run into might hinder your ability to identify suitable investments. There’s nothing wrong with following crypto-related news and picking up on what’s trending (in fact, we encourage you to do that), but that’s only the first step in choosing good investments.
You can dodge or filter out many bad investments by focusing on some basic foundations:
- team experience and background that shows expertise in the crypto sphere as well as the related technology and industry;
- full transparency that includes public whitepapers or business plans and third-party code audits; and
- an active, engaging, professional online presence, including a well-made, informative website, GitHub repositories, active social media, news stories, press releases, etc.
You also have to be on the lookout for certain red flags including:
- claims of guaranteed returns (though nice-sounding, totally a trap!);
- vague or buzzword-filled website content, whitepapers, and other media;
- initial coin offerings that provide outsized allocations to founders (this is very suspicious); and
- a lack of information on the team, its background and/or the history of the project.
Online crypto communities like those hosted on social media and other forums, as well as crypto-related YouTube channels, often provide insights into market trends and happenings. But we can’t stress it enough: Do your research to verify any claims and other information to ensure that you’re working with reliable data.
5. Invest Small Sums Consistently
Your daily five-dollar Starbucks run may seem totally harmless on your wallet, but over time adds up to an amount that makes you stop in your tracks. If you take that same idea but put a positive spin on it, investing small amounts in regular increments over time is a good way to make your initial entry into the market without risking your entire nest egg.
Practicing what’s known as “downward-biased dollar cost averaging” can further mitigate against loss. The name may be a mouthful, but the concept is simple: Use what’s known as limit orders to buy cryptocurrencies when the value of a coin declines. For example, an investor with $10,000 to invest can purchase $5,000 worth of cryptocurrency and then set limit orders to make additional buys of $2,500 when the price dips a certain percentage, say 10 percent. This not only decreases the average cost of acquisition but also protects against the loss of large amounts at one time. It’s important to note that consistent losses will definitely hurt the bottom line, so this strategy should be restricted to investments that are expected to bounce back from any losses.
6. Allocate Your Portfolio
The crypto market can be pretty finicky, and spreading investments across multiple industries creates a more diverse portfolio that can withstand dips in one industry. There are five main cryptocurrency segments. Don’t worry if these come off as gibberish; we just want to put these on your radar so you know that you have options:
- platform tokens, such as Ethereum, which work to build blockchain and cryptocurrency networks;
- privacy tokens, such as Monero and Zcash, which work to enhance and increase the security and privacy of data;
- finance-related tokens such as Ripple;
- enterprise blockchain tokens, such as VeChain and Factom, which provide large-scale business solutions; and
- promising tech tokens, such as Cardano and NANO/Raiblock, which work on the next generation of technology.
Another important component of a good portfolio is risk management. Cryptocurrencies such as Bitcoin, Ethereum and Litecoin have well-established histories and strong investor bases, making them less risky than newer coins, tokens, and ICOs that have yet to demonstrate consistent gains or long-term viability. Keeping a larger portion of an investment in the more well-known coins can help shield you from risk while the newer coins are still in the learning stages.
While any of these investment strategies can net considerable gains, they all carry substantial risks as well. If you’re completely new to the game, you’ll need a solid base of knowledge to avoid making mistakes that can lead to losses. Keeping the above tips in mind will help you make more informed strategic decisions. Ready for some risk-free, hands-on cryptocurrency investing experience? Check out TIOmarkets.com for more information on trade.io’s crypto exchange.