Cryptocurrency investments are always carried out with a plan. Investors can use various strategies to increase their profitability, decrease risk, or to minimize losses. The strategy can rely on an already established investment framework, or they can be customized and created according to the investor’s personal needs.
You can take two paths when approaching the market: technical or fundamental analysis.
Technical analysis is when you analyze an asset’s chart and predict future price movements. You find support levels (price levels at which you should buy) and resistance levels (price levels at which you should sell) to determine whether you should sell or buy. Traders oftentimes use leverage and rely heavily on the accuracy of charts.
Fundamental analysis completely ignores charts. The goal of fundamental analysis is to buy an asset based on its potential and utility. Speculation plays as big of a role in fundamental analysis as in technical analysis. However, the latter always focuses on the value of a network or project.
Strategies are always divided into passive and active ones. A passive strategy requires minimal to no input from the investor. An active strategy requires almost constant interaction and analysis.
In this article, I’ll talk about passive investing strategies. You’ll find out how to devise an investing strategy and learn more about the various types of passive strategies.
What Is an Investing Strategy?
An investing strategy represents an approach to financial markets where the investors purchase assets based on their long-term outlook. In crypto markets, assets with long-term outlooks are deemed to be projects that have the potential to dominate a certain use case. For example, a new project might appear which seeks to flip Aave and become the leading DeFi lending protocol.
Investingstrategies are the polar opposite of trading strategies, in the sense that investing requires almost no active buying and selling. An investor picks an asset that he’s bullish on and holds onto it until the asset increases in price. This means that investing requires long-term thinking and takes place on a much higher time frame.
The benefits of investing are that you are much less exposed to volatility and risk. You can’t face liquidation (as leveraged traders do) or suffer high intraday losses as a spot buyer.
The benefits of having a strategy means that your investing activity is done rationally. You invest in assets that pass your requirements – which you make by defining what makes an asset financially attractive. Additionally, you decide whether you want to simply hold the asset or manage them in any way.
For example, you might have a system that ranks cryptocurrencies based on metrics such as:
Potential in respect to competition
Once you spot enough assets that seem to have great potential, you create a portfolio and invest into these assets. The next step is to apply a strategy to your portfolio by deciding if and how you’re going to manage your assets, which brings us to the next section: passive investment strategies.
3 Passive Crypto Investing Strategies
A passive investment strategy entails minimal to no management by the investor. You’re not required to do much work from the moment you buy an asset to the moment you sell it. Passive investment strategies rely on good fundamental analysis and responsible passive investment strategies.
The section below contains a list of popular passive investment strategies.
Buy & Hold
Buy and hold (sometimes called HODLing) is a strategy in which you buy an asset and hold it for a certain amount of time. You hold onto the asset despite any market volatility that takes place. For example, you won’t be interested in selling just because the market lost momentum or the asset’s price decreased.
The idea is that you believe in the technology behind a cryptocurrency. You’re not interested in trading the asset or micromanaging it while you hold it. You’re always welcomed to buy more, but selling is usually avoided as it can lead to missing out on a price dip and having to buy back at a higher price.
Early crypto adopters have famously HODL’d onto Bitcoin believing that it will change the world. Those who believed in the technology behind Bitcoin were rewarded for keeping the asset as an investment for many years.
Buy and hold is a great passive investment strategy for inexperienced newcomers who are better off buying and forgetting about their investments than trying out complicated strategies that expose them to unnecessary risk.
Rebalancing is an act in which you rebalance the allocations of the assets that reside within your portfolio. One of your assets might dramatically increase in price, causing it to represent a large percentage of your portfolio in terms of dollar value.
Having a large chunk of your capital exposed to one asset is deemed risky because you can lose a lot of profits if the asset falls back down. The solution is to sell assets that drift away from their initial allocation and use that capital to reinvest into assets that haven’t moved yet. You’ll rebalance your portfolio and accumulate more tokens by doing so.
Rebalancing is usually an active investment strategy because it requires you to manually sell and buy assets, as well as monitor your portfolio for rebalancing opportunities. However, many crypto tools today offer to automate your portfolio and rebalance it.
Automated rebalancing comes in two forms:
Time-based rebalancing means that the platform will automatically rebalance your portfolio on a fixed time basis. This can occur every hour, every day, every week or month. Your portfolio won’t be rebalanced even if your assets deviate highly before the next rebalancing period.
Threshold rebalancing introduces a tolerance band. This band triggers rebalancing whenever an asset deviates a certain percentage from its allocation. For example, you can set a threshold of 5% and your entire portfolio will rebalance whenever your assets increase or decrease in value by 5%.
Shrimpy offers both time-based rebalancing and threshold rebalancing. If you want to learn more about rebalancing your portfolio via Shrimpy, I suggest watching the video below.
In traditional financial markets investors are often reluctant to invest their capital in only one stock. The company they invest in might fail, or might be outperformed by rival companies. That’s why many investors deploy their capital into index funds.
An index fund is a basket of assets that covers an entire market. The S&P 500 is the most popular example of an index fund. Rather than buying Apple, Amazon or Microsoft stocks, investors can simply buy SPX shares and expose themselves to the entire market.
Crypto index funds work by creating a token for a basket of cryptocurrencies that covers an entire sector or market. There’s the DeFi Pulse Index which offers a token that tracks the performance of the entire DeFi ecosystem.
Investing in index funds is similar to the buy and hold strategy. You buy a token and hold it for as long as you like. The only difference is that you expose yourself to a more diverse set of assets. And by introducing diversification, you reduce your risk exposure.
Are Passive Investment Strategies better than Active Ones?
The big question here is whether passive investment strategies are better than active investment strategies. But the answer depends entirely on the type of investor asking this question.
If you’re inexperienced and have never invested in cryptocurrencies before, it’s clear that passively investing is better suited for you. This is because you lower the chance of destroying your capital by taking any actions. Whether you make money or not depends entirely on the assets you choose to buy.
Active investment strategies are better for experienced investors who know what they’re doing. They make even more money through their superb judgment skills and knowledge. Plus, they eventually reach a point where constantly analyzing and swapping different assets takes less time, making their strategy less time consuming.
HODL is the way to go for a majority of people. However, the advent of automated portfolio management platforms have made it possible for beginners to invest like crypto veterans. Some degree of knowledge is still necessary, but the requirements threshold is lower than ever.
If you want to learn more about investing strategies, I recommend reading the following articles:
Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.