In this article, we will walk you through the steps of developing an investment strategy and provide a comprehensive overview of some of the key details you should be aware of before investing in cryptocurrency.
Determine what kind of crypto investor you are
Before investing in crypto, the very first question you should ask yourself is: What financial goals are you trying to achieve? How much experience do you have? What budget do you have for your investment?
There are numerous ways to invest in cryptocurrency, and none of them are completely correct or incorrect. So let’s take a look at some of the most popular types of investors:
These types of investors favor long-term investment strategies without cashing out any time soon. They are ready to face ups and downs, bear and bull market cycles. Both novice and seasoned investors can use this type of investment strategy; all it requires is a firm belief in the long-term success of the project you choose to put your money into.
The main issue with this strategy is that you might miss an opportunity to sell your “moon bag” for a maximum profit at the right time, believing that you have to hold it a little longer to hit the score.
Simply put, you regularly buy cryptocurrency at its lowest price and sell it at its highest price. But in practice, it is not that easy. First of all, this is a job that requires a full-time commitment, as you need to constantly watch and analyze the market to spot when it is the right time to buy and sell.
It’s crucial to research the market and previous price levels of the crypto asset you intend to invest in before opening any deal. One of the rules here is also to diversify your portfolio so you can make up a loss with a profitable trade, and the right strategy of your risk reward ratio is a key point here. We will cover the topic of diversification of your portfolio later on.
The early adopter
Investors who use this kind of approach invest their funds in a project when it is still in its early stages of development or right after it is launched. Some of them participate in pre-sales using such websites as Binance Launchpad or DXsale, where they invest their money with the potential to be among the first participants and holders of the currency.
This strategy is probably the most precarious one; it has the potential to be very profitable as well as extremely risky. Surely you can invest in some projects that will yield multiple Xs in the future, but you are also facing the risk of wasting your money because there is a higher risk the project could fail, be overpriced, or simply be a scam. So you should definitely do your research before signing up for an ICO or IDO: look at the team behind it and their background; determine whether they have previous projects and experience; study their tokenomics; and so forth.
Read the white-paper and decide for yourself whether you understand what the project is doing and whether you believe it is viable and in perspective. In other words, conducting fundamental research first is vital with this strategy.
Consider options from DeFi space
Who said that crypto investment always equals buying digital currencies only? There are quite a few different options from DeFi space that might look appealing to investors. Again, just like when mixing several types of crypto investing to max out your potential profit, you can also mix different available options from DeFi and traditional forms of investing like buying cryptocurrencies. So let’s take a look at them:
- Yield farming. Yield farming refers to earning interest on crypto by staking assets on dapps like DEXes. To earn interest or other cryptocurrencies through yield farming, investors must lock their digital assets for a set period of time and these assets act as liquidity for lending, borrowing and trading.
Yield farming shares a lot of similarities with staking, although there is a major difference – with staking you can become a validator, and with yield farming there is no such option.
- Staking. The process of staking, similarly to yield farming, refers to “locking up” your crypto assets so they can be used to confirm transactions and support a blockchain network, and in exchange for that you get rewards, or interest. Staking can be utilized only with those cryptocurrencies that use the proof-of-stake (PoS) method (e.g. Cardano or Solana).
Staking is perhaps the most accessible way of earning interest for crypto investors, since you can find this option on most of the major crypto exchanges.
- Liquidity mining. Liquidity mining should be seen as a form of yield farming where users supply liquidity to DeFi apps by staking their cryptocurrency into a pool to be used by other users and receive rewards for doing so. For instance, in terms of DEXes, liquidity mining refers to users (or Liquidity Providers) supplying both assets to a given trading pair market so that the protocol can execute trades. A pool typically consists of a trading pair (e.g. ETH/USDT). As a liquidity miner (or provider), an investor could opt to deposit either asset into the pool. The more liquidity providers contribute to a liquidity pool, the bigger the share of the rewards they will receive.
The major difference from yield farming is that liquidity providers are compensated with the platform’s own coin in addition to fee revenue, and unlike yield farming, users do not offer crypto assets into liquidity pools for lending or borrowing purposes.
Each of these options might share similarities, however, they do differ in terms of accessibility and entry barrier.
Staking, since it’s used as the core validating method for a big number of cryptocurrencies utilizing the PoS method, is available almost everywhere, from major centralized exchanges like Binance and Coinbase to numerous staking platforms like Quint, MyContainer, Zengo and so forth.
Since you do not need a vast amount of funds and you can stake on CEXes, staking is by far the most accessible and probably the simplest way of making passive income. However, in case you’re willing to become a validator, you must be ready to both invest a significant amount of funds (e.g. 32 ETH on Ethereum network) and to be accountable for handling technical issues, which investors will have to tackle themselves.
With yield farming, investors also stake their digital assets, however they can only do this on DeFi platforms, e.g. Sushi swap or Pancake swap.
Unlike staking, where you are sometimes obliged to lock your assets for a fixed amount of time, with yield farming, you are free to change pools on a weekly basis to truly maximize your potential profit.
As you can see, yield farming might be more profitable as it allows you to be more flexible with your investments; however, it has a higher barrier to entry than staking since you must be familiar with DeFi space and especially DEXs and how they work.
Moreover, since you can only do yield farming in DeFi space, you can face such risks as exit scams (e.g., rug pulls on new blockchains), smart contract exploits, security risks, and so forth.
As already mentioned above, liquidity mining resembles yield farming, and the major difference lies in rewarding: investors in general receive the native token of the blockchain as a reward, plus they have a chance to earn governance tokens, giving them a vote on any new legislature.
In general, most DeFi platforms reward their liquidity providers by the ratio of their contributions toward the liquidity pool. The providers with larger contributions are typically rewarded with more tokens, thus compensating them for the risk they have to bear. In addition, liquidity providers are commonly rewarded with governance tokens that can be used to vote on development proposals and crucial changes to the protocols.
Liquidity mining is no more complicated than staking, and investors can become LPs even with small amounts of funds. However, investors who choose to become liquidity providers face some significant risks in addition to those faced by yield farmers, namely the risk of temporary loss.
Because liquidity mining locks your funds for a set period of time, investors may face a significant loss if the price of their tokens falls dramatically while they are still locked up in the liquidity pool.Thus, the liquidity provided by the investor might become worthless at the time of withdrawal compared to when he or she put it in the pool. This situation is called an impermanent loss since it can only be realized at the moment when the liquidity miner decides to withdraw the tokens at lowered prices.
Diversify your portfolio
In other words, never put all your eggs in one basket. Currently, there are more than 9400 different coins listed on the CoinMarketCap website alone, not to mention dozens of coins that are still waiting to be listed or those projects that can be found only on DEXes like Pancake swap or Uni swap.
So it is a good idea to diversify your investments in several different projects, just in case one of them makes it better than the other. But how can you classify all these numerous crypto projects and create a well-balanced portfolio? Let’s take a look at some of the classifications that might help you out in that matter:
By use cases
Not all cryptocurrencies have real-life use cases, like Ripple or Telcoin, for instance. Moreover, even the reigning king of cryptocurrencies – Bitcoin – apart from serving as a value store, in fact, does not have any other use cases. However, Bitcoin was the very first one cryptocurrency on the market, and it has a long history of gaining investor’s trust and it literally and metaphorically fought its way towards acceptance from CeFi organizations and the general public. The chances that any other currency with no use case whatsoever has an opportunity of making it big like Bitcoin are slim to none. So that means you must look for digital assets with real-life applications.
First and foremost, take a look at blockchain tokens like Ether or Binance Coin. Blockchains like Ethereum or Binance Smart Chain offer smart-contract capabilities and thus are among the most popular platforms for building decentralized applications. Their popularity is constantly growing and it fuels the development of certain areas in DeFi space, so investing in these tokens might pay off in the future.
Secondly, search for projects that are already being used for different purposes: cross-border payments (Celo, Stellar), security and privacy (Monero, ZCash), stablecoins (USDT, USDC) and so forth. You might have already heard about some of them, and others might be unfamiliar to you, so study the market, learn about digital assets with purposes and use-cases and consider adding them in your portfolio.
By market capitalization
When looking for a coin to invest in, you should always keep in mind that there is a hierarchy of coins based on their market capitalization. In particular, we can highlight three main categories: large capitalization, mid capitalization, and small capitalization crypto. What do they all mean, then?
- Large-cap cryptocurrencies refer to those digital assets which have a market capitalization of more than 10 billion dollars. As an example of such coins, take a look at Bitcoin, Ethereum or Ripple. Such cryptocurrencies should be seen by investors as a lower risk, long-term investments: they have both high liquidity and trading volume, a long track-record of surviving through bear cycles and market fluctuations, plus a history of success. That leads us to the idea that large-cap cryptocurrencies can hold their ground even when the turbulence on the market comes in full force.
- Mid-cap cryptocurrencies are those digital assets whose market capitalization varies between 1 billion dollars to 10 billion dollars. For instance, Polygon, Litecoin and Chainlink fall into this category. Such cryptocurrencies represent more risk, and are less safer than cryptocurrencies with large capitalization. Nevertheless, they have the potential to provide more profit.
- Small-cap cryptocurrencies refer to those cryptocurrencies that have a market capitalization below one billion dollars. That being said, every crypto that goes after the CoinMarketCap’s Top 50 by market cap falls under this segment.
These coins are usually referred to as “high-risk, high-reward” cryptocurrencies, since they both can be demolished by price swings or, on the contrary, can deliver their investors a potential profit, since some of them might be undervalued or haven’t gained enough attention yet.
Depending on the goals you’re trying to achieve, diversifying your portfolio with several representatives of each of market cap level currencies can potentially get you covered, since you can store large-cap and mid-cap coins for a long period of time, and use small-cap currencies for day trading.
By risk levels
In general, the risk levels usually go hand in hand with the market capitalization. Certainly, this is not axiomatic, since even cryptocurrencies with significant market capitalization and history of success can vanish due to different circumstances – remember Terra’s Luna and UST case, right?
Still, to make your portfolio balanced, it is vital to divide your investments into high, medium and low-risk categories. Focusing too much on one side will make your portfolio somewhat unbalanced, so the best solution might be to add more stable cryptocurrencies like Bitcoin or Ethereum, several more riskier currencies from mid-cap projects, like Polkadot or Cronos, and leave some funds for currencies from “high risk, high reward” category.
You might even want to search projects that are only available on DEXes, since sometimes they can make it big when (and if) they become available on major centralized exchanges and gain attention of a broader public (Shiba Inu is a most vivid example here).
Start using crypto trading bots
Using trading bots might be helpful for any investment, whether it is a long-term or short-term one. Because of the notorious volatility, it could be challenging for investors to respond immediately when necessary, especially if they don’t have access to their wallet or account, let alone the time required for transactions. Trading bots — automated tools that can carry out transactions on the investors’ behalf — offer a solution for such situations.
Trading bots come in a variety of forms, such as Dollar-cost averaging (DCA) or arbitrage bots. For instance, the DCA bot makes small but consistent investments, so instead of making one large purchase, it makes smaller purchases every set period of time.
Arbitrage bot examines the price of the cryptocurrency you want to purchase across various exchanges and purchases it where the cost is the lowest.
There are quite a few strategies that can be utilized when using a trading bot, so they can help you to be more flexible with your investments.
Investors should remember that a bot is just a tool and won’t be much of an asset without market knowledge and a strategy. Trading bots may be very helpful, but investors should keep in mind that this market is still very new and underdeveloped, making it essential to use bots from reputable developers, such as TradeSanta, for instance. And in case you have never used a crypto bot before and not quite sure which strategy to use, you can always follow the steps of more experienced traders thanks to copy trading.
Copy trading is a form of crypto trading strategy with which you can take advantage of the most successful trading strategies without having to invest your own time and effort that is necessary when monitoring the crypto market. If we take TradeSanta, for instance, then the only thing you need to do is to sign up, visit the Marketplace page, filter all the bots depending on the parameters that are vital to you (exchange, pair, etc), then select the bots that have the desired return on investment, push the button “Follow/Copy”, and that’s it.
So in case you’ve never tried a trading bot before, you can start doing so now, since it has become much more accessible and simpler even to those investors who don’t have experience with automated trading.
Reinvest or put your profits away
Cryptocurrency investing and trading is not a casino, and going all-in will not get you anywhere. So every time you gain profit, you should always separate it from the invested funds, let the initial investment work for you, and cut all the surplus. Let’s make a hypothetical situation to make it more clear.
For instance, you’ve invested in Ethereum, and now you’ve turned your $3000 worth of Ethereum into $3500. The best thing to do here is send this 0.5 of Ethereum to a cold wallet or use these gains to invest in something else. So, in that case, all your initial funds will stay in the project you invested in earlier, plus some profit that you can either store in your wallet or put to work.
A cold wallet can provide you with additional levels of security; however, you won’t be able to quickly withdraw your funds from there in case you’d like to reinvest your coins, especially when a bull market suddenly starts again. So having both a hot and a cold wallet might come in handy here.
You might also consider swapping your surplus into stablecoins, since their prices are pegged and you won’t lose your money in case the market enters a bear cycle.
And, of course, never forget about the golden rule of crypto investment – “Only invest what you can afford to lose”. This principle holds true for all forms of investing, but it is indisputable in the cryptocurrency market. Certainly, every situation is different, and it is difficult to determine what can be regarded as a safe amount for investment. What can be said for sure is that taking a bank loan or selling your car to put all that money into crypto, even a very reliable one in your opinion, is definitely not a good idea.
Every investment, including a crypto one, is a risk; however, with proper knowledge, strategy, and risk management, losses can be reduced to a great extent.
Building the ultimate cryptocurrency strategy is not easy, and it won’t happen overnight, but as investors consider the nuances of the market, diversify their assets, utilize their resources, and use every available option, they can consistently develop this asset, which could deliver incredible returns for the diligent investor.
After all, by expanding your knowledge, you will be able to expand your portfolio and, ultimately, your wealth.