The crypto space is plausibly appealing for those with some money set aside, who want to hedge funds and profit from a return-making investment opportunity. Crypto is all over the news, so chances are that even the inexperienced ones will, at some point, explore potential investments or test the waters. There are many strategies known to work in reducing risk and boosting a portfolio’s potential, such as monitoring the fear and greed index, which is crucial to keep a finger on the pulse of the market and know whether the general investor sentiment is bullish or bearish. What you will do in short is choose a reliable exchange, pick one or several strategies, and monitor your crypto’s evolution. Say you invest in XRP, then you’ll have to keep an eye on the general XRP price prediction – and the same works for any other crypto you may see fit. That being said, let’s see what strategies can help you make better decisions when you decide to break into crypto.
Dollar-cost averaging to even out your cost basis
Suppose you have $200; by investing in stages – allocating a fraction at a time – you can balance out the market’s price swings and reduce the need to time the market. For instance, you could invest $40 per week over five weeks, starting now and ending after the fifth purchase. If the price of your targeted crypto decreases after the first purchase, your second one could be cheaper and leave more room for returns. Dollar-cost averaging (DCA) spreads purchases over time and reduces timing risk, in time allowing you to leverage a lower cost per unit on average.
This is particularly advantageous in crypto given how volatile the market can be, and allows you to develop healthy investing habits as you’ll be constantly reserving funds in order to reinvest. Commonly, exchanges allow investors to automate recurring purchases on a daily, weekly, and monthly basis. Determine the sum of money you’d be comfortable maintaining over time without compromising important funds or stretching finances.
The downside
Reasonably, there’s no strategy that can win on all aspects. Here, DCA’s main disadvantage is that by not keeping an eye on the market, or engaging in short-term trading, you might miss out on opportunities to spend when a price drops significantly, or close positions when the price is particularly good. It’s also important to consider the transaction costs triggered by recurring transactions. In this respect, you might be tempted to go with the exchange that has the lowest possible fees. Make sure not to compromise on things like security, because cheap entry costs aren’t everything.
Diversify based on your available capital
Diversification is a viable method to reduce loss risks when investing. But when it comes to a small portfolio, overdiversification can dilute returns. That’s why you want to strike a balance.
Generally, it’s recommended to begin modestly, spreading your capital on two or three cryptos, depending on the budget – or one crypto if your portfolio contains other assets, too, like NFTs, stocks, and so on. You’ll diversify enough without ending up with insignificant holdings. For instance, $400 can be split 60/40 between assets (say you allocate $240 to one asset and $160 to the other). It makes more sense financially than directing, say, forty dollars to ten separate coins.
When a crypto is down, you’ll have another one to protect your portfolio’s value. You can open more positions step by step as its value increases. Here, you can consider investing gradually over time. You could start by buying one coin consistently, then shift new funds to another once you’re more confident in your research.
The disadvantage
Diversification helps reduce risk, but it, too, is not without drawbacks. One reason why it might sound intimidating is that diversification can increase complexity and management effort. The more positions you hold, the more research, monitoring, decision-making you’ll need to do. There’s also the potential for higher cumulative transaction fees, especially if you rebalance frequently or make recurring purchases across many assets.
Reinvest, compound
Reinvesting means taking any profits, dividends, or returns you earn from your investment and putting them back into the same investment instead of cashing them out. For instance, if you own a crypto that makes $10 in gains, instead of taking the $10 as cash, you increase your exposure with it. On the other hand, compounding is when your investment earns returns on both your original money and the reinvested profits. Balancing these two leads to an “interest on interest” effect that can considerably increase your portfolio’s total value. Some cryptos also allow investors to earn staking rewards or interest (yield) by locking up their holdings in specific platforms or wallets. The absolute earnings on a small investment might not be life-changing, but they’re still profits. Just pay attention to not fall for absurd promises. Too high-yield opportunities can be risky, so only use reliable alternatives, like staking Ethereum (ETH) for that approximate 5% yield it may offer per year.
With modest funds, it’s a great opportunity to learn how to compound rather than pursue high, unsustainable returns.
The drawback
Focusing on compounding is a powerful long-term strategy, but it has its limitations. First, it requires patience, for compounding brings gradual growth, so don’t expect to see large short-term gains. Second, the strategy will only work as expected if you consistently reinvest and maintain discipline. Interruptions in reinvestment, withdrawals, or high fees can reduce the compounding effect and decelerate growth.
Commit to ongoing learning
Crypto is a fast-moving market, and what was valid three months ago may not hold now. You need to constantly monitor news with impact for crypto, for those regarding the coin you invest in to those about macroeconomic factors, from high-impact financial events to changing laws and regulations. This will also help you avoid buying into peaks or hype. A healthy dose of skepticism will get you a long way. For this, you need to do some research to discover the news sources worth following. Official project blogs, trusted analysts, big news outlets, you name it. In crypto, perhaps more than in other markets, education can be the greatest investment you make.
The less pleasant part
With constantly emerging info and news, it’s easy to encounter information overload and fatigue – or analysis paralysis. Obsessing over every market move is counterproductive and may prevent you from taking action when opportunities arise. That’s why setting limits on research time, using summaries and alerts, and focusing on high-impact information is the best you can do to not get bogged down in every market move.
Focusing on building knowledge, developing discipline and a sharp eye, and establishing some rules when investing in crypto can instill discipline – the ace up your sleeve in such unpredictable, fast-moving markets.