Not having an investment plan for cryptocurrency investing, or any other market for that matter, can result in heavy loss of your funds. A long-term investment approach is just one of the strategy you can choose to adopt. Find out the best cryptocurrency investment strategy here.
The crypto market is poised for another bull run as various institutional investors are eyeing the possibilities of adopting cryptocurrencies. As such crypto investors should fine-tune their crypto investment strategies in order to maximize profits. The crypto market has attracted more investors because at every turn, the market is rigged with opportunities.
However, we have come to realize that traders that solely rely on chance or emotions when investing in the crypto market often incur significant losses. The best approach is to have a game plan, stick to it, and avoid sentimental decisions. As such, we shall take you through some of the safest and effective ways to trade cryptocurrencies.
Key Elements Of A Diversified Crypto Portfolio
At the moment, there are about 2000 coins available for trading in the crypto market. As such, investors have the opportunity to diversify their portfolio and maximize profits. However, traders that do not strategically allocate their funds are at risk of incurring losses. As such, it is important that these following key fund allocation strategies are adhered to:
Know Your Risk Tolerance
Every investment comes with risks, however, the risks associated with trading cryptocurrencies are considered to be huge. As such, investors should always consider their risk tolerance level before allocating funds to cryptocurrencies.
For investors with low-risk tolerance levels, it is important that they adopt a more stable investment strategy by allocating a larger portion of their funds to established coins like bitcoin and ethereum.
On the other hand, traders with high-risk tolerance can capitalize on the volatility of new coins by allocating a large portion of their funds to unproven coins.
The Use Case Of The Coin
All cryptocurrencies have fundamental functionalities. However, it is left for the trader to research each coin to determine its purpose and importance. Coins that are not solving real-life issues are not likely to generate profit in the long run.
As such, a trader should allocate a large percentage of their funds to the coins that are innovative solutions to real-life problems.
In addition, the funds should be diversified across coins tackling different industries. In other words, don’t put all your eggs in one basket.
How Many Coins To Choose
One of the major issues traders face when diversifying their portfolio is deciding on the number of coins that should be added to their portfolio. Choosing a large range of coins is guaranteed to reduce the risks an investor is exposed to.
However, over-diversifying could also minimize the return on investments a trader generates. As such, traders are advised to find a balance when diversifying their portfolio.
A coin’s market cap is the total value of the circulating supply of the coin. Market cap is important to portfolio diversification because coins with high market caps tend to be more stable during bearish runs. As such, traders should dedicate a large percentage of their funds to coins with high market caps.
Allocate Funds To Coins You Believe In
At times, traders tend to be sentimental on the viability of certain coins. This could be as a result of the utility of the coin, the industry the coin is targeting, or the team or brands backing the coin.
However, it is important to ascertain that this sentiment is purely based on in-depth analysis and not on emotions. In addition, investors should consider the crypto community’s take on the viability of the coin before allocating their funds to the cryptocurrency.
We often find it hard to decide the perfect time to add a coin to our portfolio. The basic way to choose the right time to adopt a coin is to remain informed. Traders should have access to developments like upgrades, industrial adoption, partnership and endorsements achieved by a coin.
All these developments are known to increase the prospect of the cryptocurrency. The best way to access this information is to subscribe to forums and channels that are committed to offering its members up-to-date crypto news.
Fundamental analysis is one of the most common analytical mechanisms utilized by crypto traders. According to Investopedia, fundamental analysis is the evaluation of an asset in order to calculate its intrinsic value by examining related economic, financial and other qualitative factors. In simple terms, fundamental analysis is the act of analyzing a number of factors that could indicate the viability of an asset (cryptocurrency).
One of the key fundamental analysis tools is market capitalization.
I mentioned earlier that analyzing market capitalization is a good way of deciding which cryptocurrencies should get a bigger bite of your funds. In addition to this, market cap informs investors about the amount of a coin’s supply that is in use.
Also, comparing the coin market cap to daily volume metrics will help traders know the coin investors are actively interested in. however, fraudulent investors are known to manipulate these figures by inducing fake trading volumes.
Other fundamental analysis tools are: Whitepaper: you can research the whitepaper of new coins in order to understand the type of coins it is and its purpose.
Quantitative Methods: these are methods of calculating the value of cryptocurrencies.
Online Forums, Chat Apps, And Trading Channels: traders generally get first-hand information of a coin from these channels.
Technical analysis is the method of predicting price movements by studying past price patterns and volumes. As such, it involves the use of price charts and market data to forecast the future value of a coin.
Traders that utilize this concept purely use mathematics and statics to predict price patterns. In addition, hedge funds are known to use algorithms to forecast price movements. Some of the types of technical analysis include:
Moving Averages: this involves the calculation of the price average of a coin over a period of time. As such, a trader can gather price averages with respect to a fixed timeframe in order to understand the price movements of the coin.
Chart Patterns: This is one of the most common technical analysis traders utilize. Chart patterns involve the use of signals and price data to forecast price movements.
Momentum/Volatility Indication: Momentum indicators involve the use of complex mathematics to predict price patterns. As such, they are pre-coded into analysis tools for faster results. However, the interpretation of the output is the most important part of using this type of technical analysis.
Investment Style/Strategy Buy And Hold
This is a long-term investment strategy which requires investors to bet on the future price of a coin. As such, they either buy the amount of coin they intend to hold at once or steadily. In addition, they are generally not fazed by the momentary price dips of the coin as they are more interested in the long-term future price of the coin.
Also, long-term investors tend to perform fewer transactions, as such the amount spent on transaction fees is immensely reduced. However, the inability of the coin to meet the projected price means a loss since there could have been countless opportunities to cash out and generate ample profit.
Buy The Dip
Traders use this strategy by buying coins when they are considered to have slumped because their analysis has shown that the coin will recover. This is also banking on the future price of the coin, however, traders utilizing this strategy will cash out immediately the price surges.
As such, this strategy is not necessarily a long-term investment and it banks on the volatile nature of the prices of cryptocurrencies. However, things could go horribly wrong when utilizing this strategy, as traders could be wrong with their analysis.
As such, the price of a coin could continue to fall. In addition, traders that utilize this strategy are required to always monitor and analyze the price movements of cryptocurrencies.
All these strategies for allocating funds, analyzing prices, and trading cryptocurrencies are very important ways to safely maximize profits. Therefore, you should learn how to trade cryptocurrency the safely. And one of the best ways to achieve this is to sign up to Verified Crypto Traders’ telegram channels.