Investment approaches you can use in the crypto asset markets – Inside Bitcoins – News, Price, Events
As the cryptocurrency asset market continues to mature into a viable alternative asset class, trading strategies – some hybrids to crypto and some traditional – continue to evolve in the investor space to take advantage of the assets’ volatility.
In this article, I will go through the most popular trading strategies in the cryptocurrency market and how they may be used to generate a profit.
The most popular investment strategy in crypto is known as “HODLing”. To “HODL” refers to buying and holding bitcoin or any other digital asset. The term stems from a 2013 BitcoinTalk forum post where a user misspelled the word “hold”. It also stands for “hold on for dear life”, which many cryptocurrency investors feel like they are doing when they are seeing 25 percent price drops in price in a single day.
Nonetheless, “HODLing” has become extremely popular among investors due to the historical price development of crypto assets, which many believe will continue in the coming years as cryptocurrencies gain more recognition from mainstream investors and as real-world cryptocurrency adoption continues to grow.
Dollar-cost averaging has emerged as another popular strategy in the cryptocurrency markets as it alleviates the challenge of trying to time the market and provides a solution to dealing with the high volatility.
Dollar-cost averaging refers to buying a fixed amount of an asset at regular intervals regardless of the price. That way the investor buys more of an asset when the price is low and less when the price is higher.
As most crypto investors believe in the future of the asset class, purchasing little by little every week or month provides an excellent approach to managing volatility while building positions in crypto assets.
A more sophisticated investment approach is to construct a market capitalization weighted portfolio of the top 10 or top 20 largest cryptocurrencies. This is how crypto index funds generally approach their investment strategy and how many passively-managed digital currency hedge funds build their portfolios.
This strategy allows investors to gain broad exposure to the overall cryptocurrency markets and lets the market decide how large the size of each portfolio holding should be.
This approach is similar to the Crypto Asset Basket Methodology outlined in Brave New Coin’s report ‘Building Investment Strategies With The General Taxonomy For Cryptographic Assets’.
In the report, BNC’s Head of Research, Rafael Delfin suggests that investors compose an investment portfolio made up of both leading General Cryptographic Assets (GCA) and Protocol Tokens (PT). However, instead of using market capitalization as a metric to determine the weight of portfolio constituents, Deflin uses a range of metrics premised on the free float market capitalization of digital assets (the value of tokens in public circulation, excluding those locked in by promoters or company insiders), including 24hr trading volume, liquidity to market cap ratio.
As an alternative to constructing a diversified digital asset portfolio based on specific metrics, some investors prefer to pick specific coins and digital tokens that they believe have the highest potential to increase in value.
This “coin picking” approach – much like stock picking in the equity markets – is reserved for experienced crypto traders and professional investors who spend a substantial amount of time researching the cryptocurrency projects that they will invest in. Once the crypto assets have been picked, they are usually held as medium to long-term investments.
Day trading using leverage
Full-time cryptocurrency traders tend to opt for day trading using leverage to amplify their returns. The majority of full-time cryptocurrency traders are either early adopters who have done well and are now looking to increase their wealth using their market and investment experience or day traders who have come from the online forex trading space and have been attracted to the crypto market because of its high earnings.
Day trading involves entering and exiting positions intra-day and usually involves the use of leverage. Using leverage most commonly through the use of contracts for difference (CFDs), traders can boost their returns (but also their losses) by borrowing money for a trade to enlarge their position. That way traders can benefit more from small movements in price.
Automated trading using bots
A step up from day trading manually is to trade using cryptocurrency trading bots, which automatically execute trading strategies based on predetermined settings.
Cryptocurrency trading bots are algorithmic software programs that use a range of technical indicators to recognize price trends and then automatically execute trades on behalf of the investor. This type of trading has been pioneered by hedge funds in the equity, currency and commodity markets but is now gaining popularity among cryptocurrency traders.
The benefit of trading bots is that they can execute predetermined trading strategies automatically and thus need no human involvement, which could slow down the process of entering and exiting positions. However, trading bots can also cause irrational market volatility, especially if they are being used in small-cap coin markets or on illiquid exchanges.
Perhaps the most frowned upon investment approach in the cryptocurrency market is so-called ICO “flipping”. Flipping, in the financial markets, refers to immediately selling a security that was purchased in the primary market once it starts to trade in the secondary market for a profit. This is actually quite common in the equity and corporate bond markets.
This trading strategy has also made its way into the cryptocurrency space where hedge funds have reportedly been selling their discounted ICO tokens, which were acquired during the pre-sale, immediately upon the token’s listing on an exchange for a quick profit. While this is not illegal, it is not something the wider investor base likes to see as it puts price pressure on newly listed tokens and those who bought at full price will potentially find their investment in the red in the early days of secondary market trading.
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