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Investing in cryptocurrency is thrilling, enticing, and potentially very lucrative — if you know what you're doing. But it can also be risky, confusing, and frustrating.
As with any investment, there's no prescriptive, one-size-fits-all approach as markets move with an unpredictable capriciousness. However, there are some general strategies that investors can follow to help mitigate risk and increase the chances for success.
This guide will outline a few basic crypto investing strategies and how to implement them.
A digital or virtual asset that uses cryptography to secure its transactions and to control the creation of new units.
Some cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control.
Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Others have followed suit, adding their own improvements, capabilities, and use cases.
Before discussing investing strategy, reviewing and understanding key terms to help round out your crypto vocabulary is essential.
A digital ledger of cryptocurrency transactions that is public and distributed, meaning anyone can view and verify it.
Since it is constantly growing as "completed" blocks are added, it is often referred to as a "chain" of blocks.
Crypto protocols add blocks to the chain through mining or staking.
In mining, computers or specialized hardware compete to solve complex math problems, and the first to do so is rewarded with cryptocurrency.
Staking is a similar process, but instead of using computational power, crypto holders can stake their cryptocurrency to "vote" and help add blocks to the chain.
In any crypto protocol, the "block reward" incentivizes people to participate in mining or staking and helps ensure the blockchain's security.
A descriptor that informs on the degree of a currency’s limited supply.
Bitcoin is often referred to as digital gold because of its limited supply, i.e. its scarcity. Codified into its protocol is a rule that prescribes only 21 million bitcoins can ever be created.
However, many believe scarcity gives the asset its value, as investors believe that, like gold, it will become more valuable over time as demand increases relative to supply.
Bitcoin heralds its "hard cap" on monetary assets in its protocol as a critical advantage over fiat money, which central banks can print at will. And compared to other cryptocurrencies with no hard caps, Bitcoin's scarcity gives it an extra edge in some investors' eyes.
A shortened version of "alternate coins," altcoins describe any cryptocurrency other than Bitcoin (and Ethereum, depending on who you ask).
Developers create altcoins to solve different problems that Bitcoin does not address or believe Bitcoin's protocol cannot solve efficiently. There are thousands of altcoins, and more launch every day.
DeFi refers to the movement to create financial applications that mimic traditional financial products, but in a decentralized way, without intermediaries, red tape, or counterparty risk.
Lending and borrowing platforms, exchanges, and stablecoins are some of the most popular applications in the DeFi space.
DeFi unshackles crypto from traditional financial limitations and allows crypto investors to do more with their assets. As a result, everyday crypto users can now buy, sell, lend, borrow, and trade crypto with just a few clicks on their phone or computer.
DeFi is a revolution in the making, and its implications are only beginning to be understood.
A fork is a change to the protocol of a cryptocurrency that creates two separate versions of the blockchain with different rules.
Forks can happen on their own or as a coordinated hard fork event.
The most famous fork was the Bitcoin-Bitcoin Cash fork in August 2017. Bitcoin forked due to a disagreement among developers about how to best scale the network to accommodate more users.
The disagreement and subsequent hard fork created two Bitcoin blockchains with different rules: the original Bitcoin protocol and the new Bitcoin Cash protocol. Bitcoin holders at the time of the fork received an equal amount of Bitcoin Cash tokens. Some miners moved to the Bitcoin Cash blockchain, while others stayed on the Bitcoin blockchain.
Typically with forks, all you need to know is that you get a 1:1 ratio of the new asset for every unit of the old one you held at the time of the fork.
Gas is a value unit on the Ethereum network to price transactions and contract executions.
The amount of gas a transaction or contract uses generally depends on how congested the network is and how complex the transaction or contract is.
Imagine Ethereum like a giant computer where anyone can write code and create contracts to be executed. However, this computer needs to be fueled to function, and that fuel is gas — the transaction fee paid in ETH to miners that confirm and add transactions to the Ethereum blockchain.
Since there is only a limited amount of space on each block of the Ethereum blockchain, and there is significant demand to use this computer, gas prices can be high during network congestion.
Liquidity describes how easily an asset can be bought and sold without affecting the asset's price.
You can buy an asset with high liquidity quickly and easily and without much price movement. Conversely, an asset with low liquidity can be more difficult (and sometimes impossible) to buy, sell, and trade.
Depending on the crypto of interest or the exchange in question, you may need to move your crypto to a more liquid platform for trading.
Low liquidity complicates price discovery and can lead to wide spreads (the difference in price between the bid and ask price) and slippage (when an order is executed at a price significantly different from the quoted price).
While liquidity is essential for all assets, it is necessary for crypto because it can be challenging to unload an asset at the desired price.
While some opt for investing in cryptocurrencies through exchanges, buying on decentralized platforms, and self-custodying their assets, others prefer more hands-off approaches.
Instead of buying individual cryptoassets or investing in a single DeFi protocol, some investors choose to invest in crypto funds. Crypto funds are portfolios of digital assets managed by professional investors.
Investing in a crypto fund can get exposure to a basket of different assets, which can help mitigate some downside risks. And because professionals manage crypto funds, you can rest assured that the selected cryptoassets are high quality.
Ember Fund is just that, offering best-in-class diversified crypto index investing specifically curated and tended to by our team of crypto experts.
As a result, Ember makes it easy and convenient to invest in digital assets without having to worry about technical details.
The crypto terms above are just a few of the most important concepts before diving into crypto investing. In addition, understanding some of the more common jargon will help you better understand how the crypto world works and make more informed investment decisions.
Investing in crypto can employ various strategies to achieve your investment goals. Some common crypto investing strategies include the following.
This is a long-term strategy where you buy a basket of crypto assets and hold them for an extended period, periodically rebalancing your holdings to maintain the desired asset allocation.
Buying and holding is a relatively passive investing strategy that can be employed with any time horizon, requires the least amount of effort, and can be useful for investors with a low tolerance for risk.
By holding for long time periods, you can slowly assess how the underlying technology develops and whether it has real-world applications. These longer time frames give you the perspective to decide if buying and holding the same asset is still the best strategy, or if you should rebalance your holdings and take some profits off the table.
A recent entrant into the crypto investing space is the pursuit of returns on invested capital through providing liquidity to decentralized finance (DeFi) protocols.
By staking or otherwise providing liquidity to DeFi protocols, investors can earn a return from interest payments or transaction fees.
There are so many DeFi protocols, but it can be tough to determine which ones are worth investing in. In general, you want to look for protocols that have high liquidity, are well-funded, and have a solid team behind them. Some popular DeFi protocols include MakerDAO, AAVE, and Compound.
The more dependable DeFi protocols offer single-digit yields but can be upwards of 10 percent, a massive improvement over the measly interest rates offered by traditional banks. Other DeFi protocols tout hundreds of thousands of percentages, but they have low liquidity, are often under-capitalized, and have a higher risk of failure.
A general rule of thumb: The higher the yield, the higher the risk.
Never invest more than you're willing to lose; use extreme caution when getting involved in projects with extraordinarily high returns.
Don’t forget gas fees. You will have to pay gas fees when staking or otherwise providing liquidity to DeFi protocols. As mentioned, gas fees can be costly during times of high congestion. As such, you need to factor gas fees into any return calculations.
This is a strategy where you seek to buy assets that are undervalued by the market and hold them until their price reflects their true value.
Value investing is a fundamental investing approach that can be employed within any time horizon.
Cryptoassets can often be undervalued because the underlying technology is still in its early stages of development and has not been widely adopted. By buying these assets while they are still undervalued, you can generate significant returns when the market eventually catches up to their true value.
Value investing requires a dedicated effort to research and perform due diligence on potential investments. You will need to have a clear understanding of the asset's technology, use case, and competitive landscape to make an informed decision on whether it is undervalued.
The "set it and forget it" technique, DCAing into crypto is a simple but effective investing strategy.
By regularly buying small amounts of an asset, investors can smooth out the effects of volatility and mitigate some downside risks.
You can DCA manually every few days, months, or with dollar-cost averaging services through crypto companies.
At Ember Fund, you can dollar-cost average as little or as much money as you want into a portfolio of the top-performing digital assets. In addition, Ember Fund is unique because you can dollar-cost average into several assets at once, giving you instant portfolio diversification.
DCAing is a beneficial investing strategy for those new to crypto or those who don't want to deal with the hassle of actively managing their investments.
A degen is a gambler — a high-risk, high-reward strategy where you seek to generate returns from short-term price movements.
Degen trading can be employed within any time horizon but is most commonly used in strategies with very short holding periods, such as day trading or scalping.
Degen trading is a speculative approach that revolves around making frequent trades to capture small profits from short-term price movements. These strategies can be high risk because they often involve leveraged positions, margin trading, and require split-second timing to be successful.
Degen trading is not for everyone and can often result in significant losses if you are not careful. If you do choose to employ this strategy, be sure to use stop-loss orders and limit your position size to manage your risk.
A cryptocurrency's market capitalization is the total value of all coins or tokens in circulation. It's calculated by multiplying the price of a coin or token by the circulating supply.
For example, if there are 100 million units of a particular cryptocurrency in circulation and each unit is worth $1, then the market cap would be $100 million.
Market cap is a good indicator of a cryptocurrency's overall value and can be used to compare different cryptocurrencies. Generally speaking, a higher market cap indicates a more valuable or successful cryptocurrency.
A cryptocurrency's utility is its practical use case. In other words, it's the reason why a cryptocurrency exists and what it can be used for.
For example, Bitcoin was created as a peer-to-peer electronic cash system that can be used to send and receive payments. Ethereum, on the other hand, was designed as a decentralized platform that can run smart contracts and decentralized applications.
When assessing a cryptocurrency's utility, it's important to consider the problem that it's trying to solve. Is there a real need for the cryptocurrency? Does it have a competitive advantage over other cryptocurrencies? If so, then the cryptocurrency may have good utility and be worth investing in.
Crypto investing is a brave new world with plenty of opportunities for those willing to take on the risk. The strategies outlined in this article are just a few of the many that you can use to get involved in the space. Unfortunately, there's no one-size-fits-all solution, so finding a strategy that works for you and that you're comfortable with is essential.
Whether you're buying crypto for the first time or are a seasoned investor, be sure to do your research, stay up-to-date on the latest news, and always invest responsibly. But if you're looking for a simple but effective way to cover your bases, Ember Fund is the perfect option. Ember Fund makes it easy and convenient to invest in digital assets without worrying about technical details.
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