No matter whether you invest in or trade cryptos, it's vital to know how to predict the price direction, find entry points so as not to miss a good opportunity, and determine an exit level so as not to lose what you have gained. We gathered the most effective strategies that work on the volatile cryptocurrency market.
Maybe you think this will be a boring article like many others, covering widely used strategies based on technical indicators such as golden/death cross, RSI convergence/divergence, etc., with common tips on managing your funds and diversifying your portfolio. However, we want to share some unusual trading approaches, distinct from the basic knowledge you have already gained if you’ve traded on other financial markets.
Strategy #1: Dollar Cost Averaging
You may be surprised we talk about this strategy as dollar cost averaging is a traditional tool used in various financial markets. Surprisingly, it's not on the list of the most popular crypto trading strategies.
The DCA strategy aims for long-term results. The idea is straightforward: you should invest small sums into a particular cryptocurrency on a specific day and time, defined in advance, to avoid investing all your funds at once. Let's consider an example: if you had invested $5,000 in BTC on January 1, 2018, you would have got 0.362 BTC, as the price of Bitcoin was $13,800 that day. However, if you had invested $500 monthly for 10 months, you would have spent the same amount, $5,000, but would have got 0.61 BTC.
What Are the Advantages of This Strategy?
- Lower volatility. When buying crypto at regular intervals, you reduce the volatility effect. Thus, you can avoid losses you would bear investing the whole amount in a single session.
- Affordability. This strategy makes investing more affordable. It's easier to find $500 every month to buy some coins than put $5,000 at once.
- Available for beginners. Although newbies aren't limited in choosing strategies, there are some concepts which are too complicated if you just entered the market. The DCA approach can be automated using various bots. A beginner trader only needs to deposit money and set parameters for trading: the cryptocurrency and time of trades; the bot will do the rest. Still, if you want to try your skills and trade yourself, it's recommended to buy crypto when the price is lower than a day before.
Strategy #2: Value Averaging
This approach was introduced in 1988 by the Managing Director of Morgan Stanley and former Harvard professor Michael E. Edleson.
This concept has similarities with the dollar cost averaging strategy. As we have just explained, in DCA, you invest the same amount of money periodically, while value averaging assumes you invest larger sums in the bearish market and smaller funds in the bullish market.
This strategy has both pros and cons. On the one hand, it may provide higher returns, and the investments are more flexible. On the other hand, there is a higher risk of a money loss. Also, the strategy may seem more complicated for newbie investors.
Strategy #3: Invest in Just-Launched Projects
No, we don't recommend choosing an unknown project, investing your funds, and suffering losses as the project turns out to be a scam. The idea is to find a strong project and invest bef ore the token skyrockets.
There are numerous platforms that provide information on new projects. First, you can consider ICO platforms. They offer professional opinions that allow investors to make the right decisions. Next, you should follow leading crypto sources that provide news on newbie projects and tokens. Some of them also include real-time cryptocurrency rankings across multiple exchanges. The third type of informational source provides blockchain research using asset intelligence, analysis of the industry, and crypto economics.
Here are the key questions you should answer to choose a project to invest in:
- Is the idea unique? What can make this project successful? Here, the fundamental analysis will help you. You should consider reviews on the project and its fundamentals that explain the idea and aims clearly. Read a whitepaper, where you will find problems that the project is aimed at, its architecture, and a description of the product. The project should be transparent, and the CEO should have a reputable background. After you catch the idea, find similar projects to ensure it's worth investing in the one you chose.
- How many coins will be available? It's worth checking the fundamentals of distribution or smart contracts. There you will find out how many coins will be available, destroyed, and allocated to the team.
- Where can you buy cryptocurrency? If big exchange names say they would list the crypto, it's an additional confirmation of its reliability.
Strategy #4: Yield Earning
This strategy reminds us of a hodl style of investing. Both approaches aim for long-term income. The main difference relates to the process of getting a return. When hodling, you buy an asset and expect its price to rise to sell the crypto and gain profit. Meanwhile, when you use an earning a yield approach, you get passive income not when selling but holding the cryptocurrency. It's similar to the interest payments on your bank account.
It's worth mentioning that hodling is one of the most reliable investing approaches as it allows us to avoid market volatility. It's a long-term strategy that recommends you to forget about the purchased cryptocurrency for several years.
To keep your cryptocurrency, you can either buy them on an exchange and leave them there. So as not to forget at what cryptocurrency exchange your funds are kept, register at Single Broker as it provides single access to various cryptocurrency exchanges.
It’s also possible to open a cryptocurrency wallet to transfer your cryptos. Just remember about your crypto wallet security, and make sure you remember your private key.
Strategy #5: Value Investing
Warren Buffet widely uses this strategy in the stock market. His concept is well-known - he looks for undervalued assets to purchase before their price is fair for their characteristics. However, the value investing approach was introduced by Benjamin Graham.
Value investing is about finding an undervalued crypto asset. If you believe the cryptocurrency is too cheap but has a bright future, you should buy this asset to enter the market before others see its value and boost its price.
Value investing is about hodling as well. If you see an undervalued asset, it will take months or even years to reach a fair rate. Just remember that BTC skyrocketed years after it was introduced.
Not every cheap asset is undervalued, many of them are just scams, and other investors see that, that's why they avoid investing in them. Thus, you have to do proper research. Although technical indicators can determine when an asset is overbought and oversold, such signals are short-term and won't provide reliable signals.
Looking at the example of Bitcoin, you may think you need to invest thousands to become rich when your crypto increases in value.
However, if your assumption is wrong, you will lose everything. That's why you should invest wisely - only an amount you can afford, diversifying your portfolio, and staying up to date.
A Tip for Investors
Here, we could spell out the common tips that every article about trading strategies provides:
- choose your investing approach: timeframe, cryptocurrencies, and supportive tools such as technical indicators;
- decide whether you are an active or passive investor;
- don't buy cryptos just because others do;
- remember about risk management and don't invest more than you can afford;
- diversify and invest in various assets.
However, we are sure you have read all these many times. We will remind you of only one vital thing when investing in cryptocurrencies, especially in the long run.
Combine Fundamental and Technical Analysis
Everyone knows that there are two approaches to a price forecast - they are fundamental and technical analysis. Although it's widely accepted that investors and traders are divided into two groups, it's wiser to combine the approaches to get more reliable signals.
Although technical analysis allows traders to define signals based on indicators, tools, and chart patterns, it's rare when this approach provides signals for long-term trades. In this case, it's worth adding fundamental analysis.
Fundamental analysis is based on news, internal project factors, whitepapers, industry events, and data that reflect the strength of an asset. If you have noticed, all the mentioned strategies were based not on the technical indicators but on fundamental analysis, as fundamental research provides a more reliable outlook on a project.
There is a wide range of strategies you can apply when investing in the crypto market. Technical indicators are more efficient for short-term investments, while fundamental analysis is vital for long-term investing conceptions. It's important to test every strategy before investing real money.