Originally posted this on my blog, which you can read here.
Introduction
From my observations on Reddit, lots of people seem to have undefined or vague goals/investment strategy when it comes to their cryptocurrency investments. I've drawn up this post (quickly) as an attempt to help others devise reasoned and thought out goals and subsequently improve decision-making. I'll cover the characteristics of the long-term (i.e., the hodl) and short-term (i.e., trading) investment strategies, then outline what I personally do.
Long-term Strategy
First off, you have the long-term strategy, which is sometimes referred to as 'hodling' (for origins, see here and here. This is where you:
- Invest in one-off or regular sums of bitcoin, or other favoured cryptocurrencies.
- Secure and hold the investment for a long-term period (e.g., 1+ year), or until another condition is met.
This is the lowest effort and easiest strategy to adopt and is based on the assumption that the price of bitcoin (or your other favoured cryptocurrency) will see a rise in real-value over long-term time periods, for whatever reason. This is despite all the volatility which plagues the marketplace in the short-term. Once you've set yourself up, this is a passive investment strategy.
Despite its simplicity, it shouldn't be goal-less. Consider:
- What cryptocurrencies are long-term winners? Amongst these winners, how do you want to allocate your investment(s)?
- How are you going to invest? Will it be at specific times (e.g., payday) or when the value of target currencies hits certain boundaries which you consider 'cheap' or 'reasonable'?
- What are your conditions for pulling gains out? Is it time-based, or value-based? What percentage, or what fiat value, would you draw out? Or are you intending to hold all of your capital in these cryptocurrencies indefinitely?
- Are you prepared to lose all of your investment? If not, what conditions would you force yourself to sell-out (some, or all, of your position)?
- Once you answer these questions, you have some semblance of a plan. Great!
You might choose this because you:
- Just want to invest in the space in the easiest and simplest manner.
- Don't have the time or motivation to invest actively.
- Aren't confident in your technical analysis ability (or don't have any).
- Have confidence that your investment choices are long-term winners.
Short-term Strategy
Then, you have the short-term (i.e., trading) position where you:
- Invest sums in bitcoin, or other cryptocurrencies.
- Hold the investment for short to medium-term periods (e.g., anything between minutes, hours, or months).
This is the highest effort approach which embraces the volatility of the marketplace, as it offers the opportunity to profit from drastic changes in prices over short to medium time periods. This is the opposite of the long-term strategy I defined above, which looks to evade the short-term volatility.
Some key characteristics (negative first) of this strategy are:
- It can require a significant time investment.
- It can be stressful if price movements go against your expectations/plans.
- Requires some level of technical analysis ability.
- Offers an opportunity for high percentage gains quickly.
The primary advantage is, as noted above, the potential for high percentage gains on your investments over short-term periods due to price movements. But, this is at the cost of a higher time investment and (probably) more stress.
If you're taking this approach, goals become even more important. Consider:
- What cryptocurrencies have short and medium-term potential? Are there specific criteria which you'll set for any investment you make (e.g., volume, market cap., coin purposes, etc.,)?
- What are your conditions for pulling gains out? What percentage of return do you desire when making your investments? Is that realistic?
- What are your conditions for accepting losses?
- Do you have a daily, weekly, or monthly target for profits? Is this worth your time compared to passive investment?
- Defining these ahead of time gives you general guidelines, which you might break or bend under certain circumstances if you see an opportunity.
You might choose this because you:
- Are confident in your technical analysis ability.
- Want to generate returns quickly.
- Have time which you're willing and able to invest - consistently.
- Have a decent amount of capital which can be leveraged to generate sizable gains from percentage movements (which make your time-investment worthwhile).
Last Word
I don't think either approach is wrong. What is right depends on your circumstances, motivations, and goals. What's right for one person is the exact opposite of what another should do.
With that said, what's my approach? Put short, I hold about 70% of all my investments passively in currencies that I think, from my own research, have long-term potential and are 'safe' bets. Whatever happens for the next 1-2 years, I won't touch it. With the other 30%, I make short to medium-term bets on coins which are undervalued or volatile. If I think the market is overvalued, I might take everything out and keep it liquid - so that I can take advantage if/when the market corrects. Some people might actively trade all of their assets, but I don't have the inclination or time for that.
I personally follow these tenants:
- I don't invest more than I'm willing to completely lose.
- I write down my goals, plans, strategies, and targets. This helped me a lot.
- I track everything, especially the performance of my active trading against bitcoin's passive performance. If I can't beat the passive performance of bitcoin, then I should just go 100% passive instead. What's the point in getting less reward for more work?
- I don't always pull my profits out of winning cryptocurrencies. Instead, I mentally move the profits to my passive allocation and just pull out the initial investment.
- I'm willing to adapt my strategy, but only after substantial thought and a mandatory cooling-off period.
Please do share your thoughts, as well as anything I might have missed!
Additional Notes
I strongly recommend that you use a hardware wallet such as the Ledger Nano S or a Trezor for long-term storage of the most popular cryptocurrencies, such as bitcoin. I personally use a Ledger Nano S and think it's 100% worth the money for peace of mind.
DISCLAIMER
I am not a financial adviser and anything on this website is not intended as financial advice. Read my full disclaimer here.