Every investor knows the importance of a diversified portfolio. But not only traditional investment options such as stocks, precious metals, and bonds are part of investors' portfolios these days. Investing in cryptocurrencies is an important addition for more and more investors every day. The world of cryptocurrencies, as well as the underlying technologies, have experienced explosive growth in recent years. While investing in crypto was tricky in the early years, and required some technical knowledge, today that is not necessary at all. Investing in crypto has become very easy and can be done in a variety of ways. But where to start?
Determine the amount of the investment
One of the first steps when investing in Bitcoin or other cryptocurrencies, is to determine the amount of the investment. The main principle here is the same as with other investment classes such as stocks: invest only with money that you can afford to miss.
Like other assets, crypto can experience volatility. When someone invests money that is needed in the short term and the price is low at the time it is needed, it is very annoying. For example, when someone wants to buy a house within a year.
It is advised to choose an amount that can be missed for the middle to long term. Never put your financial stability at risk for an investment, because every investment, in whatever asset class, also has the risk of losing value.
Determining the term
After the amount is determined, the term must be determined. For example, there are day traders in crypto, who are actively trading daily. But many others are in it for a longer term. This is because profiting from short-term price fluctuations is very difficult, requires a lot of time and effort, and also costs a lot of trading costs which takes away profits.
In general, for most crypto investors, a longer term is preferred. This can be a year, or a few years. So far, the crypto market has generally proven to be cyclical. As a result, it can experience a lot of growth in a few years - provided you choose a proven currency. However, do not expect every day to have only gains: markets can move in all directions and experience outside influences such as news events.
What strategy should I pick for investing in crypto?
A good strategy is indispensable. A strategy performs best when a person sticks to it. With investing in crypto, there are numerous possible strategies, appropriate to the term and amount chosen. We will highlight a few better-known strategies:
- HODL: With this strategy, a person buys an amount of crypto once, which is held for the long term.
- DCA: Instead of one or more randomly timed purchases, the crypto is bought on a fixed schedule (such as every month). Again, the approach is a long-term investment.
- Day trading: buying and selling within the same day, hoping to profit from daily price fluctuations. These traders often rely on tools and use technical and fundamental analysis.
- Swing trading: Similar to day trading, but with a slightly longer time frame: crypto are held for a few days or weeks before being sold again.
- Arbitrage trading: These active traders try to make profits from the price differences between different trading exchanges: they buy it somewhere at a low price and sell it on an exchange where it is more expensive, often within seconds. The margins on this are very thin and as a person, you are often too slow - so this is often done with bots.
- Sector rotation: While crypto doesn't have traditional sectors as the stock market does, there are "related crypto" which can be seen as small sectors. For example, consider crypto focused on the metaverse, or crypto that focus on AI (artificial intelligence). Investors who follow sector rotation adjust their portfolio based on which sector they think will do well in the coming period.
It is also possible to follow the strategy of an experienced crypto trader, for example with our crypto asset management. Whatever strategy an investor chooses: it is advisable to write the strategy out somewhere and evaluate it regularly so that it is still in line with the economic situation and personal goals.
What risk profile do I choose?
The risk profile is entirely related to budget, time frame, and strategy. In the past, cryptocurrencies have usually not kept up with general market movements. As a result, it has proven to be a good diversification in previous years.
However, their price fluctuations often show more volatility than stocks. And that can turn out to be good or bad. Therefore, it is wise to invest only part of a total portfolio into crypto. The allocation depends entirely on personal risk appetite.
It is also possible to diversify within crypto itself, by holding a variety of coins, such as Bitcoin and Ethereum. Or go for (usually) less volatility by choosing a stablecoin, which follows the rate of a currency such as the dollar or euro.
How to store your crypto
Before purchasing crypto, it is important to think about a big challenge: how do I store my crypto? It is possible to store the crypto yourself (self-custody) or outsource it to a third party. Even if someone chooses self-custody, there will always be a third party involved left or right, such as the developer of the software or hardware one uses.
Storing crypto is done in a wallet. There are different types of wallets, such as software wallets, hardware wallets, and exchange-hosted wallets. All have their advantages and disadvantages.
What are the options for investing in Bitcoin?
The most well-known option to invest in Bitcoin is, of course, to buy BTC, such as through a broker or crypto exchange. One can exchange fiat money such as euros for cryptocurrency at well-known platforms - preferably one registered with the Dutch Central Bank. However, an account must first be created for the purchase.
Other options for investing in crypto are:
- Bitcoin ETF: although a spot Bitcoin ETF is not yet available in all countries, it is expected to become increasingly popular among investors who want to invest in Bitcoin without having to buy and store Bitcoin themselves.
- Investing in blockchain technology: it is also possible to invest in the underlying technology rather than crypto-currencies themselves. This does give a portfolio exposure to the technological advances involved in crypto, without having the crypto directly in the portfolio.
- Investing in crypto companies: some investors choose to invest in companies with high dependence or exposure to Bitcoin. Think mining companies or companies like MicroStrategy, which has more than 140,000 BTC on their balance sheet.
- Investing in a crypto investment fund, such as the Grayscale Bitcoin Trust offers investors an easy way to gain exposure to crypto without managing the digital currency themselves.
- Crypto asset management: this does not require an investor to make purchases and track prices themselves, but instead outsources this to a trusted party, such as Blockrise.
Tips for investing in crypto and Bitcoin
Now you have thought carefully about where and how to start investing in crypto, it is time to get started. Of course, no one has a crystal ball and therefore we will in no way give advice on prices or investments, but here are concrete tips to help invest safely and wisely:
- Do thorough research into any cryptocurrency before buying. Knowledge is key. How long has the coin been around? What percentage does the founder still own? Are there any pending lawsuits?
- Invest at least one hour a year in securing accounts and crypto. Make sure 2FA is always on, read security articles regularly, and learn to recognize phishing and scams.
- Get a good night's sleep. When daily prices cause you to experience anxiety, it is better to look at portfolio performance less often. For example, delete all apps from your phone. Or perhaps crypto asset management is better suited - where a third party monitors performance.
The benefits of investing with Blockrise
At Blockrise, we understand the challenges and opportunities of investing in crypto. Investing in crypto with us means ultra-secure crypto storage. Count on our active support and full transparency.
Nowadays, any diverse portfolio could benefit from including cryptocurrency. Whether someone is buying crypto themselves, or otherwise has crypto exposure, it is essential to be well-informed beforehand.
The information provided in our articles is intended solely for general informational purposes and does not constitute (financial) advice.