Cryptocurrency is one of the fastest-growing markets in the world. With millions of individuals all around the world participating in the financial system of the future, many people will be looking to get involved with crypto in the next 5 years.
Unfortunately, most people have never interacted with financial instruments. It is traditionally uncommon for the average consumer to interact with complex services like exchanges, but that is changing with cryptocurrency.
In the crypto world, people almost exclusively purchase assets through exchanges. That means the average person who holds cryptocurrency at least has a basic understanding of how exchanges function. At some point, many of these crypto investors might have also experimented with some form of trading or portfolio management.
In this article, we will discuss some of the most popular strategies for investing in cryptocurrency. Each of these strategies is simple to implement, even for novice investors, but that doesn’t mean these strategies aren’t used by professionals. Every one of these strategies is used by some of the largest institutions in the world and has stood the test of time.
If you're interested in trying out any of the strategies mentioned in this article, feel free to sign up for Shrimpy. Shrimpy is an automated portfolio management platform that helps you save time and invest more efficiently. Shrimpy allows you to rebalance your portfolio, create indexes, DCA into crypto, and more!
Selecting the assets that will go in your portfolio is a big decision. At the end of the day, the assets you hold will be the driving factor for how your investment will perform. Although there are ways to boost performance with strategic trading, it’s the assets you select that truly matter.
The two primary ways to select a portfolio is either through Index Investing or Selection Investing.
Index investing delegates the responsibility of selecting assets to a mathematical formula. Based on the output of the formula, the assets will be allocated in the portfolio.
The most popular indexing strategies typically involve selecting an asset category, a weighting for each asset, and a number of assets that will be included in the index.
An example of a popular index in the stock market would be the S&P 500. This index simply tracks the market cap of the top 500 companies and allocates a percentage of the portfolio value to each stock proportional to the market cap.
Interestingly, not all indices need to be inclusive of all markets. It would be possible to find an index that only includes biotechnology companies, internet companies, or retail companies. It’s useful to divide the market based on criteria that you believe will perform well in the foreseeable future.
The cryptocurrency market is no different. Similar to the traditional financial system, cryptocurrencies can be divided into different categories. There are utility tokens, platform coins, yield farming tokens, storage coins, and more. Each of these asset categories has their own unique attributes and purpose.
Before throwing your funds into the market, decide what category of cryptocurrencies you would like to purchase. By performing your own due diligence, identify the particular types of assets that will work the best for your portfolio strategy.
After identifying the specific category of asset that fits your strategy, pick how many cryptocurrencies you would like in your portfolio. The number could be anything from 1 to 100+. Since there are thousands of different cryptocurrencies with varying properties, selecting a specific number of assets to hold in a portfolio can be tricky.
Don’t forget to consider the management aspect of holding each asset. The more assets you own, the more complicated the process for purchasing and storing each of the assets. Ideally, a person who is investing for the first time would purchase a number of assets that they are comfortable managing.
The last aspect of our index that we must consider is the weighting of each asset. Essentially, how much do you want to purchase of each asset. Do you want to purchase the same amount of value in each asset, or will there be a weighting where you buy more of one asset than another?
Some of the most common weighting strategies include market cap weighting, square root market cap weighting, and equal weighting.
Rather than relying on a mathematical model to select the assets in a portfolio, some investors would rather handpick their investments. Although the process of studying very investment can be tedious, the results can be rewarding.
When selecting a custom allocation of cryptocurrencies, investors overwhelmingly recommend “Doing Your Own Research (DYOR)”. This phrase will be echoed down the halls of every crypto forum if an investor is ever caught asking for advice on which assets to purchase.
At the end of the day, the sentiment for DYOR is empowering. The idea that we each individually research the market and come to our own conclusions places the responsibility with ourselves and ourselves alone. If we miss something while doing due diligence that ends up coming back to bite us, that was a decision that we made ourselves, and we only have ourselves to blame.
Although we believe in doing your own research, we also believe in providing materials to get you started. In the article below, we share some ideas for how you can begin selecting the assets that go into your first portfolio.
After selecting allocations for a portfolio of assets, the next consideration for a complete investing strategy is determining how the allocations will be maintained or traded over time.
As previously discussed, the trading strategy won’t be the driving factor in determining the performance of a portfolio, but it does play an important role in reducing risk and creating a portfolio that can stand the test of time.
Portfolio rebalancing is a portfolio strategy that has been used by institutional investors for decades. Rebalancing a portfolio helps maintain the desired set of allocations. Since cryptocurrencies are known to fluctuate wildly over short periods of time, rebalancing can reduce risk by taking profits from assets performing well and distributing those profits to the rest of the portfolio.
Likewise, when an asset performs poorly, additional funds can be injected into the asset to bring it back up to the desired percent allocation. Due to the nature of the crypto markets, we often see assets that pumped one day are dumped soon after or vice versa. Rebalancing can help capture the value of these fluctuations.
Rebalancing to reach the desired percent allocation means each asset in the portfolio should have a target percent weight for the portfolio. One example could be if Bitcoin has a weight of 30% in a portfolio. That would mean by the end of the rebalance, the portfolio should consist of 30% Bitcoin in terms of value.
Notice: Percent allocations are calculated based on value, not based on amount. Since the price of cryptocurrencies can vary widely, it would be impractical to allocate a portfolio based on the number of an asset. For example, trying to buy 1 Bitcoin for every 1 XRP you hold would mean your portfolio would hold value almost exclusively in Bitcoin since the price of Bitcoin is over 10,000x higher than XRP.
Time-based rebalancing is a strategy to re-align a portfolio with its target allocations on a set time interval. In cryptocurrency, this time period could be anything from hourly to monthly, based on the volatility of the market and the liquidity of an exchange.
We can break down the process into 4 different steps.
READ THE GUIDE TO PERIODIC REBALANCING
Threshold-based rebalancing uses deviation bands to determine when a rebalance should be executed for the portfolio. The deviation bands provide a maximum and minimum allocation that each asset can hold in a portfolio. Once the threshold is crossed, the entire portfolio will be rebalanced to re-align each asset with the target allocations.
Similar to periodic rebalancing, we can break down the steps for threshold rebalancing into the following 5 steps.
READ MORE ABOUT THRESHOLD REBALANCING
Dollar-cost averaging (DCA) is the process of periodically injecting new capital into a portfolio. Instead of trying to time the market by reading charts and executing precise trades, DCA follows a philosophy of continuous investment.
A portfolio that uses dollar-cost averaging can distribute new funds to each asset in the portfolio based on the target allocations. In that way, a portfolio can reach its target allocations without ever needing to rebalance the portfolio. This can ultimately reduce fees and taxable events.
Using a DCA strategy for your portfolio can be broken down into the following set of steps.
LEARN MORE ABOUT DOLLAR-COST AVERAGING
A portfolio stop-loss is a strategy for investors to prevent down-side risk. In volatile markets like cryptocurrency, it’s not uncommon for a portfolio of assets to drop 10% in value over a single day. Using a portfolio stop-loss can limit the amount of loss a portfolio can experience before the entire portfolio is sold to fiat.
Once the portfolio has been converted to a stablecoin, it will stop losing value from a plunging crypto market. The idea is that once the market has stopped falling, assets in the portfolio can be purchased at lower prices.
Portfolio stop-losses are executed in 4 primary steps.
LEARN MORE ABOUT PORTFOLIO STOP-LOSS
The last major strategy employed by cryptocurrency investors is also the most simple. In crypto, the “buy and hold” strategy is also called “HODL”. HODLing is the act of buying an asset and then holding it for a prolonged period of time. In the HODL strategy, there is no trading.
If you don’t plan on selling any of your assets for years, then the HODL strategy might be a good choice for you.
The process for utilizing the HODL strategy therefore follows these steps:
Investing in cryptocurrency doesn’t need to involve complex trading strategies. Each of the portfolio management strategies discussed in the above article can be implemented with a few clicks in Shrimpy. Each of these strategies has stood the test of time. Many of the biggest institutions and smartest investors in the world leverage these strategies for their own portfolios.
Each day Shrimpy executes over 200,000 automated trades on behalf of our investor community. And joining them is easy.
After you sign up and connect your first exchange account, you’ll deploy an investment-maximizing strategy in as few as 5-minutes.
Whether you create your own rebalancing strategy or completely custom automation, the ability to walk your own path belongs in the hands of every crypto investor.
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