How to Find your Approach to Crypto Investing

Crypto. Bitcoin. Ethereum. Doge. Blockchain. Decentralized Finance. NFTs. For sure you have come across lots of these terms in recent times. The crypto space has really gained momentum in recent years and continues to excite people in 2022.

Everybody and his mum seem to be investing and making lots of money. From huge returns of dog coins to Bored Ape NFTs that reach sky-high valuations with VIPs from all over the world getting involved. Crypto is a spectacular sector.

And you? Do you feel pressured and get feared of missing out on this investment chance of a lifetime? “No“, you say. You won’t let that happen. And so you rush into the market at an all-time high, based on some YouTube expert’s opinion that Bitcoin will hit 100,000 dollars by the end of the year. Then the 30% drop. Oh sh… Next day +5% - thank god. And then another -20%. You panic-sell what’s left. The market recovers but you watch it from the sidelines just to get in at another high. Classical FOMO behavior - the way to not do it.

To be successful in crypto investing, joining the FOMO train is the last thing you need.

What you need is a STRATEGY that fits your profile and obviously lots of knowledge.

In this article, I will explain some concepts around developing your approach to crypto investing and what it takes to get involved.

Let’s start with your investment profile.

Define your Investment Profile

Based on a few factors you can derive your investment profile and deduct the approach you should be following. To make this pragmatic and beginner-friendly, there should not be too many factors for evaluation. For starters, I recommend time horizon, capital base, return expectations, attitude towards risk, time available and knowledge.

• Time Horizon: Defining your time horizon means defining the intervals in which you evaluate the performance of your crypto investments. If you want to include crypto into your long-term asset allocation your time horizon might be between 5 or 10 years. This means you really shouldn’t touch any of your coins, except if underlying assumptions, that you defined ahead of investing, change radically. If you want to ride the wave and make quick gains on hot crypto assets your time horizon is much shorter. It can be months, weeks, days or even minutes and seconds.

• Capital Base: One of the most important factors is your initial investment. Are you starting with 1,000 dollars or do you want to invest 5 million dollars? If you are entering the high stakes arena, what you might want to do is to go for a defensive/asset-protective strategy, because even low returns of 20% per year (yes, that’s low for crypto) leads to 1 million dollars in gains. As a rookie who’s trying to give it a shot, you might want to take on more risk with your 1,000 dollars and see it as play money. Even if the investment goes to zero you just burned 1,000 dollars, which hopefully shouldn’t move the needle too much for you. If you achieve your 10x over 100x: congrats!

• Return expectations: Defining your return expectations for crypto investing is a vital part of developing an investment profile. Are you in for the 10x, 100x, 1000x returns, maybe because the rest of your portfolio is geared towards defensive beta returns? Or do you expect a return just a bit north of the traditional 7-10% the MSCI World is averaging?

• Risk profile: Risk and return are tightly connected to each other. High return expectations require taking on larger amounts of risk. You have to decide how much risk you are willing to tolerate. Are you fine with your crypto investments experiencing high volatility or do you need to have some amount of stability? The risk appetite may also be connected to the amount of capital invested. With high amounts of capital you mostly see a tendency towards the more established crypto assets rather than huge investments on super volatile coins.

• Time available: Besides the time horizon, time also plays another role: the number of hours that you can put into crypto investing can determine the strategy that you can successfully go with. If you have almost no time for this, it’s close to impossible to become a successful trader. You then would probably go for the most established assets and just buy & hold them.

• Knowledge: Your current level of knowledge should play a significant role in your selected strategy. When you have no clue about technical analysis and other indicators you shouldn’t really be a trader. If you have no knowledge in crypto whatsoever, do not invest at all. Before getting involved, educate yourself about the blockchain and a couple of projects to understand the basics and evaluate if this is something for you.

Deciding for Long-term vs. Short-term Investing

One of the key decisions you should make in the beginning is going for long-term OR short-term investing based on your profile. As the underlying assumptions and actions are completely different these two investment styles should not be confused. You can indeed have two separate portfolios, where one can have a long-term and the other one a short-term orientation. You then have to be very strict in your thinking and actions for each of them.

The long-term strategy:Long-term strategy is mostly based on fundamental research about the market, macro trends and fundamentals about the projects. If you do research about bitcoin, you assess its complete history, technology, its competitors and many additional influencing factors. If you then make a decision to invest, you basically go to sleep and don’t care about the ups and downs of the market - unless one of your fundamental beliefs is proven wrong or a black swan event is happening.

The short-term strategy: When you invest in the short term you are basically a trader. There are lots of trading strategies out there. Many of them are based on technical analysis to make trades, for example, based on breakout patterns.

What you can look at is the momentum of a crypto asset. This is not so much about what happens in the distant future but more about what happens right now. This can be based on announcements for example related to the exchange listing of certain coins or product/project updates. Many traders run bots and software to check for announcements and make fast trades based on them. Further input factors for trading are on-chain analyses, macro news or social media analysis.

How to build a long-term strategy

To become successful in crypto investing you should set objectives and then look at a couple of factors to give you a higher chance of success.

• Proper due diligence: A proper due diligence for a crypto asset consists of reading the white paper and understanding the utility of the coin, checking if the owners/founders are legit, checking the website, trying to find its employees on LinkedIn, researching the project’s geographical presence, understanding the so-called tokenomics incl. who controls how many coins and who sold what so far. During the due diligence, you look for any red flags and contradictions that make it impossible for you to invest.

• Demand & supply: You should understand demand/supply factors related to the coin to assess the impact on future performance. This includes questions like: Why is the coin needed? What puts pressure on the asset? Are there special airdrop events or ICOs? How much of the coin is available to the public?

• Dollar cost averaging (DCA): Many long-term investors use DCA to commit capital on a regular basis leading to a solid average buy-in price. By doing DCA you are avoiding market timing, which fits the long-term strategy profile.

• Return expectation of 20-30%: Being a long-term crypto investor leaves you with return expectations of 20-30% per year, which is higher than most other asset classes buy rather on the lower end within the crypto space.

On the flip side you should avoid the following mistakes:

• Time the market: By dollar-cost averaging you avoid market timing.
• No panic sales: With a long-term investment horizon you should hold on to your investment unless the underlying assumptions change dramatically.
• No leverage: Investing with leverage is risky and should only be done with lots of experience. This is frequently used in trading.
• Emotional decisions: Even if the market tanks and FUD (fear, uncertainty & doubt) is high, stick to your strategy as long as the underlying assumptions still hold true.
• Being irrational: Acting in a disciplined way and sticking to the actions defined in your strategy is essential to successful long-term crypto investing.

How to build a short-term strategy (Trader):

In contrast to long-term investing the short-term oriented trader has to focus on other factors to be successful.

• Diversify: Take on multiple positions („bets“) because some of the high-risk positions can in fact go to zero.

• Skills with using leverage: Traders should be able to handle leverage to enter short positions and employ hedging strategies.

• Be ready to lose your whole position: A trader has to be mentally prepared to lose an entire position, which can easily happen in short-term oriented high-risk bets

• Take-profit and stop-loss mechanisms: To limit the downside or capture the upside of positions, traders use stop-loss or take-profit mechanisms. Thereby, you can define thresholds where positions are closed to automatically execute the trader’s strategy. As an example traders might set a stop loss at -3% from the current price level if they really expect a strong breakout. If the breakout does not come and the market moves in the opposite direction the stop-loss limits the downside of the trade to a loss of 3%.

• Look at many factors: Besides technical analysis traders look at various factors to assess the underlying rationale for a trade. This includes on-chain metrics, announcements and many more.

Based on the mentioned strategic considerations you should be able to develop an initial direction for your crypto investing journey. To accompany that you should set yourself a learning agenda for acquiring the needed knowledge to make qualified decisions.

Happy investing.

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